On Mondays, we answer a question from a reader in this space. If you'd like to ask a question, post it in the comments or send it to us on Twitter @family_finances.
QUESTION: I’ve heard you mention that there’s good debt and bad debt. So, what do you consider to be good debt, and what’s bad debt?
ANSWER: “Neither a borrower or lender be,” Shakespeare wrote in Hamlet more than four centuries ago. And it’s become a sort of holy middle-class mantra. But there are different kinds of debt, and not all debt is bad. Borrowing for consumer goods is almost always bad. Borrowing to buy a nice house in a nice neighborhood is almost always good.
Debt should be used sparingly and conservatively, and only for items that keep or add value over time. Most of us need to borrow for houses and cars, at the very least. Both of these items have such large price tags that few families can pay cash. It's not so bad, though, because both retain value over time. Houses more than cars, of course, but even cars will hold some value - with proper maintenance - after the loans are paid. Most other items - furniture, electronics, boats, motorcycles, and consumer goods - lose most of their value as soon as you buy them. Having a big loan outstanding against things lacking resale value is the absolute worst-case scenario in personal finance. Use debt wisely!
Many quality wealth advisors recommend against paying off a mortgage early, and there is documented evidence supporting this approach. Nevertheless, many middle class folks want to “pay off the house” as quickly as possible. They think they’re doing the right thing. But, money for paying down a mortgage comes from somewhere, and it’s no longer available to invest. That can be counterproductive to long-term growth. Our wealthy friends understand the difference between good debt and bad debt.
Monday, March 30, 2009
Leveling the playing field
I am posting here a terrific article from today's Wall Street Journal about the key differences between how brokerages and fee-only financial planners are regulated. I was very much heartened to read this. Mary Schapiro was head of FINRA (Financial Industry Regulatory Authority) and, in that capacity, had been an advocate for traditional brokers and regulations. There was a lot of concern when she was tapped to head the Securities and Exchange Commission (SEC) because she represented the traditional way of doing things; that is, traditional brokers and the "suitability" standard for serving clients. In this column, Jason Zweig does a great job of explaining the difference between suitability and fiduciary standards, and - importantly - indicates that Mary Schapiro is coming around on the issue. In truth, no client who understands the differences between these two standards would knowingly choose the lesser. Registered Investment Advisors have a higher duty to their clients and that's a good thing. The traditional brokerage world is tumbling a tiny bit at a time.
http://tinyurl.com/d5neqd
http://tinyurl.com/d5neqd
529 plans still a good bet
My local paper, the St. Joseph News-Press, did a story looking at Missouri's 529 plan, which, for the uninitiated, is a plan to help parent save for their kids' college expenses. I was quoted in the story. Nice piece that points out that Missouri's plan has done much better than most. Link below.
http://www.stjoenews.net/news/2009/mar/30/college-savings-mostly-fine/?business
http://www.stjoenews.net/news/2009/mar/30/college-savings-mostly-fine/?business
Friday, March 27, 2009
When legislation is helpful
In this space on Thursday, we discussed the morality of money, and made reference to the Uniform Prudent Investor Act. Below, you will find more detailed information about this act and my thoughts on the act.
Uniform Prudent Investor Act
(Summary of basic provisions enacted by many states)
A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall strategy having risk and return objectives reasonably suited to the trust.
Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:
• General economic conditions,
• The possible effect of inflation or deflation,
• The expected tax consequences of investment decisions or strategies,
• The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property,
• The expected total return from income and the appreciation of capital,
• Other resources of the beneficiaries,
• Need for liquidity, regularity of income, and preservation of appreciation of capital, and
• An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
A trustee shall make reasonable effort to verify facts relevant to the investment and management of trust assets.
A trustee may invest in any kind of property or type of investment consistent with the standards of this Act.
A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has the duty to use those special skills or expertise.
My comments
This Act has been adopted by most states, and is the legal rule for fiduciary investing. In simple terms, for trusts or situations where investments are being managed on another's behalf, these are the rules. It's important to note that these rules come into play when someone alleges mismanagement. Then, the trustee or other responsible party, must defend their actions against this measure. Like it or not, these are the legal rules.
Personally, I love these laws. The national group that created model legislation (which was them adopted by the different states) used Modern Portfolio science as the basis. This Nobel Prize-winning body of knowledge recognizes the value of broad diversification and asset allocation as the building blocks for long-term investment success. The legal test under these rules isn't absolute investment performance, but whether or not the trustee did the right things. Did they build a portfolio appropriate for the age and circumstance of the beneficiary? How will inflation affect the future buying power of investments? Did the trustee choose investment options that had reasonable expenses and fees? Various other factors are explained in the Act.
The truth is that nobody knows what the short-term future holds, so the best way to prosper with investments is to engage in solid, long-term, diversified, and thoughtful behavior. The Act mandates that approach, and measures success or failure by these rules. Actually, though the Act deals with fiduciary duties, most individuals will prosper under these same rules. It's how we manage our client accounts.
Uniform Prudent Investor Act
(Summary of basic provisions enacted by many states)
A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall strategy having risk and return objectives reasonably suited to the trust.
Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:
• General economic conditions,
• The possible effect of inflation or deflation,
• The expected tax consequences of investment decisions or strategies,
• The role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property,
• The expected total return from income and the appreciation of capital,
• Other resources of the beneficiaries,
• Need for liquidity, regularity of income, and preservation of appreciation of capital, and
• An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
A trustee shall make reasonable effort to verify facts relevant to the investment and management of trust assets.
A trustee may invest in any kind of property or type of investment consistent with the standards of this Act.
A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has the duty to use those special skills or expertise.
My comments
This Act has been adopted by most states, and is the legal rule for fiduciary investing. In simple terms, for trusts or situations where investments are being managed on another's behalf, these are the rules. It's important to note that these rules come into play when someone alleges mismanagement. Then, the trustee or other responsible party, must defend their actions against this measure. Like it or not, these are the legal rules.
Personally, I love these laws. The national group that created model legislation (which was them adopted by the different states) used Modern Portfolio science as the basis. This Nobel Prize-winning body of knowledge recognizes the value of broad diversification and asset allocation as the building blocks for long-term investment success. The legal test under these rules isn't absolute investment performance, but whether or not the trustee did the right things. Did they build a portfolio appropriate for the age and circumstance of the beneficiary? How will inflation affect the future buying power of investments? Did the trustee choose investment options that had reasonable expenses and fees? Various other factors are explained in the Act.
The truth is that nobody knows what the short-term future holds, so the best way to prosper with investments is to engage in solid, long-term, diversified, and thoughtful behavior. The Act mandates that approach, and measures success or failure by these rules. Actually, though the Act deals with fiduciary duties, most individuals will prosper under these same rules. It's how we manage our client accounts.
Thursday, March 26, 2009
The morality of money
Money is central to our living, but with it come several questions about the relationship between money and faith. As a lifelong Disciple of Christ, I have wrestled with issues of faith, and have grown in my own faith. For nearly two decades, I have been a professional financial advisor in the fields of trust and investments. During that time, I have dealt repeatedly with faithful people who wrestle with some of the same questions I’ve considered. Is it possible to be financially successful, and still be faithful? Is money a force – does it have its own morality? How should a Christian view money?
Over the years, the same basic questions have come up repeatedly, and as I’ve grown both in my faith and understanding of finance, my answers have grown as well. What I offer here is the way I answer those frequently-asked questions today.
Is there a morality of money? There’s no question about it. Money is a tool that can be used for good or evil. But, money isn’t the root of all evil. Paul tells us in Timothy that the love of money is the root of evil. In the hands of the wrong people, money can be very destructive.
Jesus told a parable about the rich young man. His point about being rich seems pretty clear. It’s clear that money can be a huge distraction in a Christian life. But, Jesus didn’t say that it’s impossible for a rich person to enter heaven. He said that it’s hard for a rich person to enter heaven. Actually, as I recall, he said it was easier to pass through the eye of a needle.
Why? What makes wealth such a destructive force? It’s not wealth per se. It’s power. Our society – most societies, really – reward great power to people of wealth. Look around. Who are the celebrities of our age? In large part, celebrity belongs to people of power. Power belongs to people of wealth. Wealth has always allowed people to engage in bad behavior without serious consequences. That’s why money can be such a distraction.
Is it better – holier -- to be poor? I don’t think it’s that simple. There are good people who have money and good people who don’t. I think maybe there’s a feeling among some people that being rich is bad. Some of that may come from Christian tradition, or maybe it’s a way of rationalizing our own lack of money. Anyway, I can’t remember any direct endorsement of poverty in the Scriptures.
A different way of looking at things is that having more allows us to give more. I mean that. Many hospitals, colleges, and museums owe their existence to a wealthy family or families. The same goes with church buildings and outreach ministries.
We can be even more philosophic about this; perhaps people have more because God gave them a gift for commerce. Why is making money different from singing, or painting, or other personal gifts? And, shouldn’t we use all gifts and the powers they grant for good purpose?
So, let’s agree that we should stay focused on matters of good purpose. Are there special problem areas or challenges? A huge area is the extra responsibility that comes with having extra money. In my business, I’ve been blessed with clients who understand this and take stewardship seriously. Yet, I’ve also seen horrible examples of waste that make me sick. Of course, people have a legal right to use their own money any way they choose. Yet, it bothers me to watch them squander it or use it on ridiculous excess. It bothers me in the same way it would bother me to watch someone burn hundred dollar bills. That money might have been used for good purpose.
What kind of financial things offend you? On a large scale, I hate watching people waste an inheritance. With rare exceptions, wealth was created by somebody’s discipline and hard work. I think there’s a certain respect owed to the wealth’s creator, even if we didn’t particularly care for them or some of the things they did. Most times, the money can now be used for good things, say college expenses or to do something worthwhile in the world. I’m not against enjoying money, it just bothers me to watch it shrink through waste, abuse, or neglect.
This may not seem such a big issue, but it is. Baby-boomers stand to inherit trillions of dollars over coming decades. This huge transfer of wealth has already started. What we do with those dollars can have a huge impact on our collective lives.
What do you mean when you say that you hate watching money shrink through “abuse and neglect?” There really are well-known principles for managing money. Investing isn’t that complicated, and anyone wanting to learn the rules can read some good books or attend a college finance class. It’s an in-exact science, though – like predicting the weather, perhaps – where the principles have great value even when they aren’t absolutely accurate every single time.
Most people investing outside these principles fall into two basic categories. One group tries to avoid all risks; the other group seems to seek them out. Both groups take a serious chance of abusing or neglecting their money.
Start with the latter. Some people are drawn to high risk investing for the same reasons that they love roller coasters or high-stakes gambling. They love the thrill. They may be investment hobbyists, or they may rely on outside advisors, but they seek extraordinary investment returns by taking on extraordinary risks.
By risk, you mean the short-term chance of losing money. Surely, an aggressive approach would seem to have some merit under the economic laws of risk and reward. Of course it does. There’s a strong case for owning some speculative investments as part of a diversified portfolio. Higher-risk opportunities can boost overall returns and lower volatility. But, they should be part, not all, of an investment portfolio.
Jack Bogle, founder of Vanguard Mutual funds, summarized this in an interview I once saw. He was asked whether a certain undervalued fund might offer high future returns. “I think that’s a good bet,” responded Bogle. “I just don’t think you ought to be betting with your retirement money.”
Isn’t that true of most family investing? Remember, any investment which offers the prospect of high returns also offers the reverse – that is, high potential losses. Should high potential losses be the right choice for your entire family investment account? Again and again, I see people chase absurdly high risks for entertainment purposes or as some personal adventure. Family resources are far too important for that.
So, you’re saying that people should avoid risks with family money. No, not at all. I think people should avoid unreasonable risks with family money. There are many good ways to document and reduce certain investment risks. Investors should take time to learn and understand potential risks and rewards, or find someone knowledgeable to help. When you skip this step, you’re gambling. And, in my opinion, gambling has no place in family finance.
You say that too little risk is also an abuse. What do you mean by that? There’s a powerful psychological tilt away from risk. Risk aversion, it’s called. Yet, a corollary to what I said earlier is that family investors should accept reasonable risks. Risk and reward are absolutely related, and investors who accept reasonable risks enjoy good long-term returns.
There’s more to it than that, though. There’s another parable in Matthew speaking exactly to this point. It’s called the Parable of the Talents and it recognizes our human tendency to avoid risk. Three servants are entrusted with a master’s money. Two of the three invest the money wisely, and earn the master’s praise. The third, fearing loss and recrimination, buries the money and returns it without interest. The master is furious at the servant for not trying to do better.
Though the illustration is about money, the point is much broader than that. Generally, most people agree that the story is about using personal gifts to the glory of God, and about taking risks when using those gifts. Whatever the gift, we risk the Master’s wrath when fear keeps us from trying to reach our full potential.
As families, we face many options with our money. But, options offering the lowest risk also provide the lowest potential rewards. Choose them, and you’ll have less money for college, retirement, or charity. Unnecessarily less money. Less than our full potential.
Since some options offer reasonable risks and reasonable returns, choosing not to use them is neglectful, too. I make similar points with nonprofit boards or churches. Ignorance of investment principles isn’t mentioned in the parable as a good defense.
You’re saying that since we can learn better, we should learn better. Is that it? Sure. Most of us agree that it’s wrong to skip child safety restraints in a car; in fact, it’s illegal in most states. The seat belt isn’t a guarantee against injury, but it statistically reduces risk for the child, and increases chances for survival in an accident. Why shouldn’t we use the same statistical standards when investing a college account? Or a church endowment fund, for that matter.
It’s a stewardship issue. Most states have enacted the Uniform Prudent Investor Act (summary will follow here in this space Friday) as law governing proper guidelines for investing someone else’s money. These rules are based on statistical principles of investing. It’s ridiculous – and irresponsible -- to ignore the evidence simply because it makes us uncomfortable.
Millions of people do have fun managing their money. Yet, you’ve just implied that family investing is too serious for that. Can you elaborate? One day last fall, a local stockbroker jumped on the adjoining machine at our YMCA. We talked about a variety of things, including the college personal finance classes I teach. Eventually, we got to the semester-long investment project where I have students choose and follow one common stock and a separate mutual fund. “Well, the stock sounds like fun,” he said, “but mutual funds are boring.”
I’ve pondered his comment since that day. Maybe mutual funds are boring, but they’re still the right choice for many investors. Chances are good that a college student will own mutual funds long before they own a common stock. Truly, the most important issue isn’t how much fun a choice is, but how effective it will be in helping to meet financial goals.
Investing isn’t recreation. Choices made today necessarily change our personal future. They help determine our future living standard and our long-term ability to do something for others. And, considering all that, bad choices are simply more critical than good choices.
Look at it this way; a very good investment may mean the difference between driving a Buick or Mercedes in retirement. The Mercedes is a nice bonus, perhaps, but it’s just a marginal increase in living standards. Maybe you’ll be able to buy a newer condo or live in warmer climates a few weeks longer each winter. Hardly life-changing.
But, bad investment choices can have devastating results. No college fund for the kids. No retirement account to augment Social Security or Medicare. No extra money for the little things that keep life meaningful or – even – fun. Where do most people adjust the budget when they end up short – the monthly rent, or gifts to charity? Obviously, the downside of making investment choices is more important than the upside.
It’s not that investing can’t be fun. It’s that it isn’t necessarily fun. There’s a huge difference. It’s serious because choices made today have far-reaching consequences for our families and how we use the financial gifts we have. Are we doing all we can financially to meet our full potential? I just want people to give financial choices the respect they deserve.
If you'd like to read more on this subject, you can purchase Dan Danford's book, Million Dollar Management, on Amazon.com or through Barnes and Noble.
Over the years, the same basic questions have come up repeatedly, and as I’ve grown both in my faith and understanding of finance, my answers have grown as well. What I offer here is the way I answer those frequently-asked questions today.
Is there a morality of money? There’s no question about it. Money is a tool that can be used for good or evil. But, money isn’t the root of all evil. Paul tells us in Timothy that the love of money is the root of evil. In the hands of the wrong people, money can be very destructive.
Jesus told a parable about the rich young man. His point about being rich seems pretty clear. It’s clear that money can be a huge distraction in a Christian life. But, Jesus didn’t say that it’s impossible for a rich person to enter heaven. He said that it’s hard for a rich person to enter heaven. Actually, as I recall, he said it was easier to pass through the eye of a needle.
Why? What makes wealth such a destructive force? It’s not wealth per se. It’s power. Our society – most societies, really – reward great power to people of wealth. Look around. Who are the celebrities of our age? In large part, celebrity belongs to people of power. Power belongs to people of wealth. Wealth has always allowed people to engage in bad behavior without serious consequences. That’s why money can be such a distraction.
Is it better – holier -- to be poor? I don’t think it’s that simple. There are good people who have money and good people who don’t. I think maybe there’s a feeling among some people that being rich is bad. Some of that may come from Christian tradition, or maybe it’s a way of rationalizing our own lack of money. Anyway, I can’t remember any direct endorsement of poverty in the Scriptures.
A different way of looking at things is that having more allows us to give more. I mean that. Many hospitals, colleges, and museums owe their existence to a wealthy family or families. The same goes with church buildings and outreach ministries.
We can be even more philosophic about this; perhaps people have more because God gave them a gift for commerce. Why is making money different from singing, or painting, or other personal gifts? And, shouldn’t we use all gifts and the powers they grant for good purpose?
So, let’s agree that we should stay focused on matters of good purpose. Are there special problem areas or challenges? A huge area is the extra responsibility that comes with having extra money. In my business, I’ve been blessed with clients who understand this and take stewardship seriously. Yet, I’ve also seen horrible examples of waste that make me sick. Of course, people have a legal right to use their own money any way they choose. Yet, it bothers me to watch them squander it or use it on ridiculous excess. It bothers me in the same way it would bother me to watch someone burn hundred dollar bills. That money might have been used for good purpose.
What kind of financial things offend you? On a large scale, I hate watching people waste an inheritance. With rare exceptions, wealth was created by somebody’s discipline and hard work. I think there’s a certain respect owed to the wealth’s creator, even if we didn’t particularly care for them or some of the things they did. Most times, the money can now be used for good things, say college expenses or to do something worthwhile in the world. I’m not against enjoying money, it just bothers me to watch it shrink through waste, abuse, or neglect.
This may not seem such a big issue, but it is. Baby-boomers stand to inherit trillions of dollars over coming decades. This huge transfer of wealth has already started. What we do with those dollars can have a huge impact on our collective lives.
What do you mean when you say that you hate watching money shrink through “abuse and neglect?” There really are well-known principles for managing money. Investing isn’t that complicated, and anyone wanting to learn the rules can read some good books or attend a college finance class. It’s an in-exact science, though – like predicting the weather, perhaps – where the principles have great value even when they aren’t absolutely accurate every single time.
Most people investing outside these principles fall into two basic categories. One group tries to avoid all risks; the other group seems to seek them out. Both groups take a serious chance of abusing or neglecting their money.
Start with the latter. Some people are drawn to high risk investing for the same reasons that they love roller coasters or high-stakes gambling. They love the thrill. They may be investment hobbyists, or they may rely on outside advisors, but they seek extraordinary investment returns by taking on extraordinary risks.
By risk, you mean the short-term chance of losing money. Surely, an aggressive approach would seem to have some merit under the economic laws of risk and reward. Of course it does. There’s a strong case for owning some speculative investments as part of a diversified portfolio. Higher-risk opportunities can boost overall returns and lower volatility. But, they should be part, not all, of an investment portfolio.
Jack Bogle, founder of Vanguard Mutual funds, summarized this in an interview I once saw. He was asked whether a certain undervalued fund might offer high future returns. “I think that’s a good bet,” responded Bogle. “I just don’t think you ought to be betting with your retirement money.”
Isn’t that true of most family investing? Remember, any investment which offers the prospect of high returns also offers the reverse – that is, high potential losses. Should high potential losses be the right choice for your entire family investment account? Again and again, I see people chase absurdly high risks for entertainment purposes or as some personal adventure. Family resources are far too important for that.
So, you’re saying that people should avoid risks with family money. No, not at all. I think people should avoid unreasonable risks with family money. There are many good ways to document and reduce certain investment risks. Investors should take time to learn and understand potential risks and rewards, or find someone knowledgeable to help. When you skip this step, you’re gambling. And, in my opinion, gambling has no place in family finance.
You say that too little risk is also an abuse. What do you mean by that? There’s a powerful psychological tilt away from risk. Risk aversion, it’s called. Yet, a corollary to what I said earlier is that family investors should accept reasonable risks. Risk and reward are absolutely related, and investors who accept reasonable risks enjoy good long-term returns.
There’s more to it than that, though. There’s another parable in Matthew speaking exactly to this point. It’s called the Parable of the Talents and it recognizes our human tendency to avoid risk. Three servants are entrusted with a master’s money. Two of the three invest the money wisely, and earn the master’s praise. The third, fearing loss and recrimination, buries the money and returns it without interest. The master is furious at the servant for not trying to do better.
Though the illustration is about money, the point is much broader than that. Generally, most people agree that the story is about using personal gifts to the glory of God, and about taking risks when using those gifts. Whatever the gift, we risk the Master’s wrath when fear keeps us from trying to reach our full potential.
As families, we face many options with our money. But, options offering the lowest risk also provide the lowest potential rewards. Choose them, and you’ll have less money for college, retirement, or charity. Unnecessarily less money. Less than our full potential.
Since some options offer reasonable risks and reasonable returns, choosing not to use them is neglectful, too. I make similar points with nonprofit boards or churches. Ignorance of investment principles isn’t mentioned in the parable as a good defense.
You’re saying that since we can learn better, we should learn better. Is that it? Sure. Most of us agree that it’s wrong to skip child safety restraints in a car; in fact, it’s illegal in most states. The seat belt isn’t a guarantee against injury, but it statistically reduces risk for the child, and increases chances for survival in an accident. Why shouldn’t we use the same statistical standards when investing a college account? Or a church endowment fund, for that matter.
It’s a stewardship issue. Most states have enacted the Uniform Prudent Investor Act (summary will follow here in this space Friday) as law governing proper guidelines for investing someone else’s money. These rules are based on statistical principles of investing. It’s ridiculous – and irresponsible -- to ignore the evidence simply because it makes us uncomfortable.
Millions of people do have fun managing their money. Yet, you’ve just implied that family investing is too serious for that. Can you elaborate? One day last fall, a local stockbroker jumped on the adjoining machine at our YMCA. We talked about a variety of things, including the college personal finance classes I teach. Eventually, we got to the semester-long investment project where I have students choose and follow one common stock and a separate mutual fund. “Well, the stock sounds like fun,” he said, “but mutual funds are boring.”
I’ve pondered his comment since that day. Maybe mutual funds are boring, but they’re still the right choice for many investors. Chances are good that a college student will own mutual funds long before they own a common stock. Truly, the most important issue isn’t how much fun a choice is, but how effective it will be in helping to meet financial goals.
Investing isn’t recreation. Choices made today necessarily change our personal future. They help determine our future living standard and our long-term ability to do something for others. And, considering all that, bad choices are simply more critical than good choices.
Look at it this way; a very good investment may mean the difference between driving a Buick or Mercedes in retirement. The Mercedes is a nice bonus, perhaps, but it’s just a marginal increase in living standards. Maybe you’ll be able to buy a newer condo or live in warmer climates a few weeks longer each winter. Hardly life-changing.
But, bad investment choices can have devastating results. No college fund for the kids. No retirement account to augment Social Security or Medicare. No extra money for the little things that keep life meaningful or – even – fun. Where do most people adjust the budget when they end up short – the monthly rent, or gifts to charity? Obviously, the downside of making investment choices is more important than the upside.
It’s not that investing can’t be fun. It’s that it isn’t necessarily fun. There’s a huge difference. It’s serious because choices made today have far-reaching consequences for our families and how we use the financial gifts we have. Are we doing all we can financially to meet our full potential? I just want people to give financial choices the respect they deserve.
If you'd like to read more on this subject, you can purchase Dan Danford's book, Million Dollar Management, on Amazon.com or through Barnes and Noble.
Monday, March 23, 2009
Saving for college
This question came from @creditgoddess on Twitter. Are you following us on Twitter? We give out a financial tip every day and respond to questions. @family_finances
Q: Investing in 529 plan, but not happy with the results. Because of the current economy, should I put it somewhere else?
A: It sounds like this is a performance issue, not really related to the account type. A 529 Plan allows tax-free growth for educational purposes. Some states offer a tax deduction for contributions, and many parents and grandparent use 529 accounts to help build funds for future education. Generally, withdrawals used to pay college, vocational, or professional schools, or related expenses (including housing and books) are free of state or federal income taxes. Though many plans are administered by state governments, students can use the money for schools anywhere.
Originally, these plans had to be offered through a state government, and each state established the investment options and fee structure. States negotiated separately with fund and investment professionals, so some plans are better than others. Some states offer more and better investment choices. Similarly, some states offer better tax incentives to contribute. Basically, each person should review the plan where they live, and see if the incentives and investment options are strong. If not, they can choose a differing state (although non-residents wouldn't enjoy a state tax benefit). Also, regulations have changed to allow mutual fund and other companies to offer 529 plans. Be wary of plans offered through brokers or banks, though, because they feature expensive sales commissions that you can avoid by buying directly through a state.
With those background explanations, no one recently has been thrilled with any investment performance. Stock funds are down by half in the past few years, and bond or money market funds pay ridiculously low interest. It really hasn't mattered if we're talking 529 plans, or IRAs, or 401(k)s, or general brokerage accounts. This is just a very tough time for investing, and the type of account likely doesn't matter very much.
My 529 plan review would start with the plan offered through the state where I live. I'd carefully review the plan fees and investment options. If satisfactory, that's where I'd invest. If not, I'd compare nearby states using these same criteria. Internet sites and personal finance magazines offer comparative 529 plan data. Last, I wouldn't abandon a good plan just because investment returns are bad - virtually everything is bad right now. There will be better days coming, and good plans, like any good investments, will prosper again. That's your best bet for funding future education costs. Good luck.
Q: Investing in 529 plan, but not happy with the results. Because of the current economy, should I put it somewhere else?
A: It sounds like this is a performance issue, not really related to the account type. A 529 Plan allows tax-free growth for educational purposes. Some states offer a tax deduction for contributions, and many parents and grandparent use 529 accounts to help build funds for future education. Generally, withdrawals used to pay college, vocational, or professional schools, or related expenses (including housing and books) are free of state or federal income taxes. Though many plans are administered by state governments, students can use the money for schools anywhere.
Originally, these plans had to be offered through a state government, and each state established the investment options and fee structure. States negotiated separately with fund and investment professionals, so some plans are better than others. Some states offer more and better investment choices. Similarly, some states offer better tax incentives to contribute. Basically, each person should review the plan where they live, and see if the incentives and investment options are strong. If not, they can choose a differing state (although non-residents wouldn't enjoy a state tax benefit). Also, regulations have changed to allow mutual fund and other companies to offer 529 plans. Be wary of plans offered through brokers or banks, though, because they feature expensive sales commissions that you can avoid by buying directly through a state.
With those background explanations, no one recently has been thrilled with any investment performance. Stock funds are down by half in the past few years, and bond or money market funds pay ridiculously low interest. It really hasn't mattered if we're talking 529 plans, or IRAs, or 401(k)s, or general brokerage accounts. This is just a very tough time for investing, and the type of account likely doesn't matter very much.
My 529 plan review would start with the plan offered through the state where I live. I'd carefully review the plan fees and investment options. If satisfactory, that's where I'd invest. If not, I'd compare nearby states using these same criteria. Internet sites and personal finance magazines offer comparative 529 plan data. Last, I wouldn't abandon a good plan just because investment returns are bad - virtually everything is bad right now. There will be better days coming, and good plans, like any good investments, will prosper again. That's your best bet for funding future education costs. Good luck.
Health insurance is vital
On Mondays, we answer a question from a reader. If you have a question, please leave it in the comments section.
Q: If I lose my job, should I keep the health insurance through COBRA? It seems expensive.
A: COBRA is a continuation of the employer's health plan after termination. The reason it's so high is because the terminated employee is now paying the entire premium cost whereas before that the employer paid some portion. Under the Stimulus Plan, for a limited period of time, the government will pay 65 percent of COBRA premium costs for most terminated employees. Actually, as I understand it, the employer pays the 65 percent and then gets reimbursed by our government. Of course, health plans differ from employer to employer, so exact cost, terms, and benefits for one person are often different than another.
Whether to use the COBRA provisions from your former employer should be decided based on your circumstances. People who are young and in good health may be able to find an individual of family health policy cheaper than the COBRA costs. Older workers may not be able to find better or cheaper coverage, especially with the 65 percent reimbursement. Whatever your circumstance, it's probably wise to check into buying another policy, just for comparison's sake.
In all circumstances, it's very hazardous to run without health coverage. The cost of even minor accidents or illnesses is enough to sink most family boats. At the very least, find a high deductible policy that protects against catastrophic events. Without one, a lifetime of savings could disappear in a moment. The risk is too high to go without.
Q: If I lose my job, should I keep the health insurance through COBRA? It seems expensive.
A: COBRA is a continuation of the employer's health plan after termination. The reason it's so high is because the terminated employee is now paying the entire premium cost whereas before that the employer paid some portion. Under the Stimulus Plan, for a limited period of time, the government will pay 65 percent of COBRA premium costs for most terminated employees. Actually, as I understand it, the employer pays the 65 percent and then gets reimbursed by our government. Of course, health plans differ from employer to employer, so exact cost, terms, and benefits for one person are often different than another.
Whether to use the COBRA provisions from your former employer should be decided based on your circumstances. People who are young and in good health may be able to find an individual of family health policy cheaper than the COBRA costs. Older workers may not be able to find better or cheaper coverage, especially with the 65 percent reimbursement. Whatever your circumstance, it's probably wise to check into buying another policy, just for comparison's sake.
In all circumstances, it's very hazardous to run without health coverage. The cost of even minor accidents or illnesses is enough to sink most family boats. At the very least, find a high deductible policy that protects against catastrophic events. Without one, a lifetime of savings could disappear in a moment. The risk is too high to go without.
Friday, March 20, 2009
It's time to act
Fear is everywhere. There’s no question that we’ve lived through some pretty awful investment times. These past 10 years have been as volatile as any on record. Investors are still frightened, with plenty of good reason.
There are degrees of fright, though. Any stock market can be a frightening place. Peter Lynch often points out that the stock market – on average – has a twenty-five percent setback every five years. That magnitude, alone, is enough to keep many people in bank certificates. And the 2000 to 2002 Bear Market was recorded as one of the worst ever, now followed by the 2008-2009 meltdown. We’ve lived through them both, but it’s no wonder some people are terrified.
Perhaps the worst manifestation of fear is paralysis. This is the “deer in the headlights” syndrome that is so well-documented in nature (in fact, using bright lights to hunt is so predictably easy that it’s illegal). Sometimes, like with wild deer, things just seem so frightening to us that we choose not to do anything. Paralyzed by our own fear, we can become statue-like spectators to our own destruction.
Now is the right time to take positive action. True, restructuring a portfolio now can involve acknowledging some earlier mistakes. It might require changing how you do business or how you research investment decisions. It may mean that it’s time to dump the broker or other adviser responsible for those disasters. These aren’t easy decisions, but they are necessary considerations for future success.
Now is a unique point of opportunity. First, some of those earlier catastrophes could actually save a few dollars in taxes next April. Harvest some losses today and you’ll feel better when 2009 tax time rolls around.
Let an old proverb work for you. Shifting “all your eggs out of one basket” works even better when you can buy both eggs and baskets at bargain prices! If you’ve been devastated by losses, you probably lacked good diversity in the first place. Almost every sector is down again right now and this could be a terrific time, maybe the best in our lifetimes, to build a superbly diversified portfolio.
Now is the perfect time to hook up with a quality investment advisor. Marginal people have already left the investment business, and others will soon join them. The truth is that a sustained Bull Market like the 1990s attracted lots of friendly faces. Tougher times require professional diligence, skill, persistence, and – above all – a genuine desire to help clients. Good people survive, and now’s a great time to find one.
Above all else, remember this: Unlike the deer, we have the power to learn from our mistakes. Many mistakes are correctable, but to correct them, we must act. The sooner the better. Now is the perfect time to get started.
There are degrees of fright, though. Any stock market can be a frightening place. Peter Lynch often points out that the stock market – on average – has a twenty-five percent setback every five years. That magnitude, alone, is enough to keep many people in bank certificates. And the 2000 to 2002 Bear Market was recorded as one of the worst ever, now followed by the 2008-2009 meltdown. We’ve lived through them both, but it’s no wonder some people are terrified.
Perhaps the worst manifestation of fear is paralysis. This is the “deer in the headlights” syndrome that is so well-documented in nature (in fact, using bright lights to hunt is so predictably easy that it’s illegal). Sometimes, like with wild deer, things just seem so frightening to us that we choose not to do anything. Paralyzed by our own fear, we can become statue-like spectators to our own destruction.
Now is the right time to take positive action. True, restructuring a portfolio now can involve acknowledging some earlier mistakes. It might require changing how you do business or how you research investment decisions. It may mean that it’s time to dump the broker or other adviser responsible for those disasters. These aren’t easy decisions, but they are necessary considerations for future success.
Now is a unique point of opportunity. First, some of those earlier catastrophes could actually save a few dollars in taxes next April. Harvest some losses today and you’ll feel better when 2009 tax time rolls around.
Let an old proverb work for you. Shifting “all your eggs out of one basket” works even better when you can buy both eggs and baskets at bargain prices! If you’ve been devastated by losses, you probably lacked good diversity in the first place. Almost every sector is down again right now and this could be a terrific time, maybe the best in our lifetimes, to build a superbly diversified portfolio.
Now is the perfect time to hook up with a quality investment advisor. Marginal people have already left the investment business, and others will soon join them. The truth is that a sustained Bull Market like the 1990s attracted lots of friendly faces. Tougher times require professional diligence, skill, persistence, and – above all – a genuine desire to help clients. Good people survive, and now’s a great time to find one.
Above all else, remember this: Unlike the deer, we have the power to learn from our mistakes. Many mistakes are correctable, but to correct them, we must act. The sooner the better. Now is the perfect time to get started.
Tuesday, March 17, 2009
Life insurance explained
One of the most basic things you can do to protect your family is buy life insurance. If you don’t have it, you need to consider getting it, and the sooner the better. It can be confusing, though, so here’s a basic guide on the types of insurance and what to consider before you buy.
There are three basic types of life insurance. Death proceeds paid to beneficiaries are income tax free, but the policy value is part of the decedent’s estate. If the estate is large enough, there could be estate tax implications.
Value within a policy, in whole or universal life, accumulates tax-free until it is surrendered, when the gain – if any - is subject to income taxes.
Term Life is a simple contract where an insurance company pays your named beneficiary a specified dollar amount if you die during the covered period. It typically runs year to year, and can be purchased with guaranteed renewal options. Term life is the cheapest form of life insurance and often recommended for young families.
Whole Life operates much like term life, but the policy accumulates a cash value, which can be withdrawn or borrowed against in the future. Because there’s a “savings” component to the policy, premiums cost more. Advocates point out that term life only pays if you die, whereas whole life can build value for other purposes. There is often a low minimum rate of interest guaranteed to the cash value each year, with some promise of higher rates if the insurance company earns more. Death benefits are paid to a named beneficiary for as long as the policy is in force.
Universal Life combines the cash accumulation features of whole life with a palette of mutual-fund-like investment options. Here, the accumulation fund can be invested in stock or bond markets via managed funds. Over time, this more sophisticated investment approach could result in higher policy cash values. Like other policies, death benefits are paid to a named beneficiary for as long as the policy is in force.
There are hundreds of variations on each type of policy, and most can be customized to a family’s unique situation. It’s important to choose an agent with comprehensive knowledge and experience. The quality of insurance companies can vary widely, too, so conduct some due diligence at the library or on the Internet before signing anything.
Commissioned agents sell most life insurance, so it is important to understand exactly what you are buying and all fees and expenses involved. Reputable professionals won’t be offended by your questions. Avoid sales pressure and vagueness about terms or conditions.
The sole reason to buy life insurance is to protect family members who would suffer without your income. Be wary of complicated schemes or outsized promises.
There are three basic types of life insurance. Death proceeds paid to beneficiaries are income tax free, but the policy value is part of the decedent’s estate. If the estate is large enough, there could be estate tax implications.
Value within a policy, in whole or universal life, accumulates tax-free until it is surrendered, when the gain – if any - is subject to income taxes.
Term Life is a simple contract where an insurance company pays your named beneficiary a specified dollar amount if you die during the covered period. It typically runs year to year, and can be purchased with guaranteed renewal options. Term life is the cheapest form of life insurance and often recommended for young families.
Whole Life operates much like term life, but the policy accumulates a cash value, which can be withdrawn or borrowed against in the future. Because there’s a “savings” component to the policy, premiums cost more. Advocates point out that term life only pays if you die, whereas whole life can build value for other purposes. There is often a low minimum rate of interest guaranteed to the cash value each year, with some promise of higher rates if the insurance company earns more. Death benefits are paid to a named beneficiary for as long as the policy is in force.
Universal Life combines the cash accumulation features of whole life with a palette of mutual-fund-like investment options. Here, the accumulation fund can be invested in stock or bond markets via managed funds. Over time, this more sophisticated investment approach could result in higher policy cash values. Like other policies, death benefits are paid to a named beneficiary for as long as the policy is in force.
There are hundreds of variations on each type of policy, and most can be customized to a family’s unique situation. It’s important to choose an agent with comprehensive knowledge and experience. The quality of insurance companies can vary widely, too, so conduct some due diligence at the library or on the Internet before signing anything.
Commissioned agents sell most life insurance, so it is important to understand exactly what you are buying and all fees and expenses involved. Reputable professionals won’t be offended by your questions. Avoid sales pressure and vagueness about terms or conditions.
The sole reason to buy life insurance is to protect family members who would suffer without your income. Be wary of complicated schemes or outsized promises.
Monday, March 16, 2009
How much emergency savings is enough?
Every Monday in this space we’ll take a question from a reader. Today, we’re talking about cash and how much you need. If you have a question, feel free to post in the comments section and we’ll answer it on a Monday.
Question: I’d like to save up money for an emergency, but I read different estimates of how much a person should have on hand. How much emergency savings should a family have? And where should that money be kept?
Answer from Dan Danford: Right now, cash is valuable because of principal protection, not because of earnings potential. Many savings, checking, or money market accounts pay less than one percent annually, so it's not a lucrative investment. Still, the notion of ready cash has value and every family should have some emergency reserve.
The amount differs by situation. A lot of advisors recommend six months of income, and that has merit for many folks. It's also a problem because some families simply can't accumulate that much in brief time. Dave Ramsey suggests that you start with a $1,000 emergency reserve and I like that idea because it's attainable. Once you reach $1,000, it's easier to keep adding until you have all you need.
Not every family needs six months, however. If your family has great credit and solid professional prospects (superb job skills or desirable expertise), short-term borrowing could ease any emergency situation. I'm not certain six months of cash earning one percent a year is the most productive use of resources. For these lucky folks, two months might be plenty adequate.
One of my most fervent beliefs as an advisor is that flexibility reigns king. In other words, the ability to adjust is one of life's critical financial needs. Cash - liquidity - creates that ability and has value for that reason, too. But liquidity doesn't necessarily mean bank accounts or money market funds. It can also mean other investments which might be liquidated on short notice, like mutual funds. Sometimes life changes very quickly and we need to respond quickly, too. Both challenges and opportunities happen fast and being able to put our hands on some quick cash might make a huge difference for the future. So, even among permanent investments, structuring them for easy access is important.
My Boy Scout advice is to be prepared. That may be money in the bank but it also may mean borrowing, or in some instances, tapping a longer-term portfolio. Live each day as if a lay-off is right around the corner and you'll be in great shape no matter what comes.
Question: I’d like to save up money for an emergency, but I read different estimates of how much a person should have on hand. How much emergency savings should a family have? And where should that money be kept?
Answer from Dan Danford: Right now, cash is valuable because of principal protection, not because of earnings potential. Many savings, checking, or money market accounts pay less than one percent annually, so it's not a lucrative investment. Still, the notion of ready cash has value and every family should have some emergency reserve.
The amount differs by situation. A lot of advisors recommend six months of income, and that has merit for many folks. It's also a problem because some families simply can't accumulate that much in brief time. Dave Ramsey suggests that you start with a $1,000 emergency reserve and I like that idea because it's attainable. Once you reach $1,000, it's easier to keep adding until you have all you need.
Not every family needs six months, however. If your family has great credit and solid professional prospects (superb job skills or desirable expertise), short-term borrowing could ease any emergency situation. I'm not certain six months of cash earning one percent a year is the most productive use of resources. For these lucky folks, two months might be plenty adequate.
One of my most fervent beliefs as an advisor is that flexibility reigns king. In other words, the ability to adjust is one of life's critical financial needs. Cash - liquidity - creates that ability and has value for that reason, too. But liquidity doesn't necessarily mean bank accounts or money market funds. It can also mean other investments which might be liquidated on short notice, like mutual funds. Sometimes life changes very quickly and we need to respond quickly, too. Both challenges and opportunities happen fast and being able to put our hands on some quick cash might make a huge difference for the future. So, even among permanent investments, structuring them for easy access is important.
My Boy Scout advice is to be prepared. That may be money in the bank but it also may mean borrowing, or in some instances, tapping a longer-term portfolio. Live each day as if a lay-off is right around the corner and you'll be in great shape no matter what comes.
Sunday, March 15, 2009
How the stimulus package affects you
Medical Economics magazine, one of the top publications for physicians, named the Family Investment Center to its list of top financial planners for doctors. This is at least in part because of our fee-only structure that is more customer-friendly, and doesn't bias us in favor of any one company or product. Dan was recently asked to write a column for the magazine explaining how the stimulus package affects individuals, his second column for the magazine this year. We've excerpted part of that column below, and linked to the full article on the Medical Economics home page if you'd like to read the entire article. It applies far beyond physicians. Read on below.
When the government starts throwing around billions of dollars, everyone has the same questions: What’s in it for me? How will it affect my family? How do I get some of that fiscal stimulation in my life?
Some provisions of the American Recovery and Reinvestment Act of 2009, signed by President Barack Obama in February, are still a bit sketchy, but there are things that we already know. And though the middle class has been targeted, there’s some good news here for almost every American. Some of the most notable provisions include:
Tax breaks for family spending. There are tax incentives for sending children to college, buying a first home, buying a new car, or upgrading inefficient heating/cooling at your existing home. Many of these are expenses that families encounter as a matter of everyday life, so taking on those expenses now could put dollars back into your pocket.
You’ll get to deduct state and local sales taxes on a new car (priced up to $49,500) through the end of 2009, and first-time home buyers can get an $8,000 tax credit if they, too, buy in 2009. You’ll have to keep the house for three years, however, or give back the $8,000.
Read on here:
http://tinyurl.com/cxu34p
When the government starts throwing around billions of dollars, everyone has the same questions: What’s in it for me? How will it affect my family? How do I get some of that fiscal stimulation in my life?
Some provisions of the American Recovery and Reinvestment Act of 2009, signed by President Barack Obama in February, are still a bit sketchy, but there are things that we already know. And though the middle class has been targeted, there’s some good news here for almost every American. Some of the most notable provisions include:
Tax breaks for family spending. There are tax incentives for sending children to college, buying a first home, buying a new car, or upgrading inefficient heating/cooling at your existing home. Many of these are expenses that families encounter as a matter of everyday life, so taking on those expenses now could put dollars back into your pocket.
You’ll get to deduct state and local sales taxes on a new car (priced up to $49,500) through the end of 2009, and first-time home buyers can get an $8,000 tax credit if they, too, buy in 2009. You’ll have to keep the house for three years, however, or give back the $8,000.
Read on here:
http://tinyurl.com/cxu34p
Friday, March 13, 2009
Jack Welch's comments on shareholder value ring true
You can always count on Jack Welch, the author and former GE chairman, to have something interesting to say. Today, his comments on shareholder value are making waves on the Net, ahd his words ring true. Welch maintains that shareholder value is a result of good management, and not a strategy. The notion of managing a corporation for shareholder value is mother to financial engineering. Too many executives expend too many resources in trying to "make numbers" that support a higher share price. Long-term, share prices rise from growth and profits, not accounting practices. Drop the fancy finances and focus on serving customers. That alone creates shareholder value.
Read Welch’s comment’s here:
http://tinyurl.com/ao5b2u
Read Welch’s comment’s here:
http://tinyurl.com/ao5b2u
Thursday, March 12, 2009
Spring break shouldn't break the bank
We spend a lot of time on Twitter, giving out a daily financial tip. If you’d like to follow us, please do. We’re @family_finances. Here’s a series of tips we’ve given out on Twitter that all center around getting a good bargain on spring break. The tips began March 2 and are all marked with #springbreak.
1. If you’re planning a spring break trip, pay for as much as possible with debit versus credit. Most hotels will accept debit.
2. Ask hotels for a better rate when booking your spring break trip. Remember your AARP, AAA memberships.
3. Rental car prices are competitive. Comparison shop. Ask for discounts. Remember your AARP, AAA memberships.
4. Consider sharing a condo with friends rather than a single hotel room on spring break. Might be cheaper.
5. Your kids don’t need a fancy spring break trip to have fun. Simple joys work well for small kids.
6. Don’t even consider buying a timeshare. They’re almost impossible to sell and chances are, you won’t use it.
7. Choose flights at unusual times to save on airfare. Check both online and by phone for good prices and compare.
8. Trip insurance usually isn’t worth it. If you can’t afford to lose what you’re spending on the trip, you shouldn’t go.
1. If you’re planning a spring break trip, pay for as much as possible with debit versus credit. Most hotels will accept debit.
2. Ask hotels for a better rate when booking your spring break trip. Remember your AARP, AAA memberships.
3. Rental car prices are competitive. Comparison shop. Ask for discounts. Remember your AARP, AAA memberships.
4. Consider sharing a condo with friends rather than a single hotel room on spring break. Might be cheaper.
5. Your kids don’t need a fancy spring break trip to have fun. Simple joys work well for small kids.
6. Don’t even consider buying a timeshare. They’re almost impossible to sell and chances are, you won’t use it.
7. Choose flights at unusual times to save on airfare. Check both online and by phone for good prices and compare.
8. Trip insurance usually isn’t worth it. If you can’t afford to lose what you’re spending on the trip, you shouldn’t go.
Tuesday, March 10, 2009
Our economy is the best in the world
Sick of the negative headlines? The blathering on and on about how terrible the economy is? So are we. We know that there are still positive things happening in the business world out there. We want to connect with those who believe likewise, and invite you to join our group on Facebook that will celebrate those happy news stories. Come and join our group - and give us some positive news! We could use it. Couldn't you?
Here's the group:
http://www.facebook.com/group.php?gid=55116179662&ref=mf
And while you're at it, friend us. We love to meet new people.
Here's the group:
http://www.facebook.com/group.php?gid=55116179662&ref=mf
And while you're at it, friend us. We love to meet new people.
Success in this market? Strategy plus behavior equals long-term success
We know you've been watching the markets, as we have been, too. We thought this was a good time to discuss our strategies with you, giving you a glimpse into how we think and how that strategy affects buying, holding, and selling. If you have questions about what you read here, please don't hesitate to contact us. We're always happy to talk with you, particularly when times are tough.
From Jason T. White, Ph.D. Principal/Director of Investments:
With those of us who practice a long-term strategy, it's easy to think that we spend our time monitoring the market, but not much buying or selling. I want to take some time to address this idea because that's the furthest thing from the truth. At Family Investment Center, we regularly review our mutual funds, stocks and other holdings on behalf of our clients and make changes whenever necessary. The managers of the funds that we own also do their own buying and selling. There's nothing passive about our strategy.
With the March Morningstar updates, I am reviewing detailed reports of common managers who manage mutual funds held by many of our clients. I'm betting that I find 50 percent or more annual turnover rates in domestic and international stock funds, and a smaller but still significant level of turnover within bond funds. While we may hold a fund for a long time, within the fund, there is often plenty of movement, with the concept being to make sure the fund continues to meet its objectives. So what sometimes appears to be a passive buy-and-hold strategy really is not, with the notable exception of index funds, which are built to simply mirror the market.
We screen funds and managers, making long-term investment decisions, and adjust those holdings when tenure, expenses, performance or other factors warrant. Within the funds, active management, including buying and selling, is taking place every single day. It just is not immediately transparent to our clients. Some taxable clients may intuit this is going on when they receive their capital gain/loss 1099s, but probably most of these folks don't either.
At the core of our strategy is a long-term, buy-and-hold, low-cost commitment to indexing large- and mid-cap stocks. Our belief is that in most cases, with a few notable exceptions, there is little reason to trade mid-to-large companies, since they are widely followed and the markets are so efficient. But, in the case of smaller, international, bond and other mutual funds, our managers are very active in the markets everyday, working hard to achieve positive alpha, solid returns with acceptable risk, and 4- or 5-star Morningstar ratings. We hire and fire firms with the long-term big picture in mind. When an occasional fund crisis happens, we react swiftly and with certitude.
Plagued by a financial and banking crisis, a sea-change in political norms, and an uncertain global economy, I award high marks to UMB Scout, PIMCO, Dreyfus, Schwab, Sit, Oppenheimer, and other families and funds we own. We have stayed the course, continuing to keep long-term objectives in mind for our clients. I believe this to be a virtue of our system. If I didn't, I would change our "starting lineup" immediately.
From Dan Danford, MBA, CRSP Principal/Chief Executive Officer:
In our marketplace, there is an urgent need for professional advisory services. But it's not totally performance-oriented. People tend to dismiss performance claims as rubbish, anyway (with good reason). Noted author Nick Murray says that more than 80 percent of financial success is behavioral. Saving, investing, and spending are at least four times as productive as choosing the "right" funds or (for that matter) CDs. His argument is that people usually make bad choices when left to their own devices, and those bad choices can't be offset by stellar investment performance. Human nature often responds to greed and fear, unless someone (us!) interrupts it.
We get paid for managing client money - but Murray would argue that our other services are far more valuable. This is a bad time to evaluate, but five or ten years from now, I'm betting that our clients still in the market today will be much better off than the few folks who liquidated, simply because many of those folks will never enter the markets again and, if they do, it will be long after the rally has started.
Now, a few people who got out of the market over the past year might argue that they are much better off today because they ignored our advice. And, that's true. But it's still the wrong measure because their overall financial success isn't properly determined over 2008-2009; it's measured over their entire lifetime. And, if we continue to believe what we have in the past, future bull markets will more than make up for this (horrendous) bear. But you have to be there to recover.
The challenge is to help our current and prospective clients weather this market and come out the other side ready for the future that they wanted. We want to help our clients continue towards their financial goals. We'd love feedback from you on how we can help you meet your goals. What would you like from us? How can we help? If it's a one-on-one consultation, that's why we're here.
We love to see comments from folks we know and are open to answering questions in this space. Our readers benefit from seeing questions answered - many others may have the same questions you do.
Remember, you've got friends with expertise in the market. And when this is all said and done, we'll still be here, still in the market and still someone you can count on for solid, bias-free advice. When you can't count on much else, count on that.
So what are your thoughts? What are your questions? How can we help?
Monday, March 9, 2009
Knowing when to fold 'em
On Mondays, we post a question and a response relating to finances. This week, we’re tackling a question that a great number of investors are pondering.
How do you know when it is time to divest of a particular stock or mutual fund and put your money in something else?
Make a change when something else offers genuinely better prospects. That's not an easy thing to know, especially for an amateur. With some 25,000 mutual funds or share classes, there is always something that might look better at a single point in time. People always flock to "safe" investments in a bear market, because they look good against the alternatives. But that's the wrong choice. The critical question isn't what looks better right now. The critical question is what looks better going forward. And Treasury Bills or bank certificates never compare better as we look forward for five or 10 years.
Others throw money at the hottest stocks or funds, as featured on the cover of Money magazine or other similar publications, but that rarely works, either. In truth, a fund or stock is called hot because it's recent performance is good. The best time to buy something is before it becomes hot. This is also true of much historical performance. Things always look good after they've done well. Research shows that there is little evidence that past performance indicates much about the future (language the Securities and Exchange Commission requires in prospectus documents). Even the best funds in the world suffer occasional bad years. Is that necessarily a reason to change?
Everyone hates taking losses, but that's a bad reason to hold on to something. If you always take profits on your good things, and hold onto the bad to avoid losses, eventually you'll have an entire portfolio of bad investments. Focus on the future, not the past. Keep or buy things with good prospects, and dump the ones without. Take your losses like a grown-up, and move on.
Remember , too, that much investment news we encounter was crafted by public relations or sales professionals. So those great ideas we see were usually planted by someone. I've always rejected the notion that individual investors - including the typical stockbroker - can "out-think" the pros at Fidelity or Vanguard or American Century, with their legions of analysts. Did you know that 80 percent of trades on the NYSE are placed by institutional investors? That means that when you buy or sell something, the trade's other side is taken by a professional. Let that sink in for a minute. This is one of the best arguments for using mutual funds, and why so many professional advisors choose that approach.
This is another reason why we use Morningstar or other independent research firms in building client portfolios. We take responsibility for our decisions, and work on behalf of our clients. No one is going to "talk us into" making a trade or exchanging one investment for another. We'll make those decisions when, and only when, they make sense for clients. It's a huge benefit.
Got a question for us? Post it in the comments or DM us on Twitter @family_finances. We always love to hear from our readers.
How do you know when it is time to divest of a particular stock or mutual fund and put your money in something else?
Make a change when something else offers genuinely better prospects. That's not an easy thing to know, especially for an amateur. With some 25,000 mutual funds or share classes, there is always something that might look better at a single point in time. People always flock to "safe" investments in a bear market, because they look good against the alternatives. But that's the wrong choice. The critical question isn't what looks better right now. The critical question is what looks better going forward. And Treasury Bills or bank certificates never compare better as we look forward for five or 10 years.
Others throw money at the hottest stocks or funds, as featured on the cover of Money magazine or other similar publications, but that rarely works, either. In truth, a fund or stock is called hot because it's recent performance is good. The best time to buy something is before it becomes hot. This is also true of much historical performance. Things always look good after they've done well. Research shows that there is little evidence that past performance indicates much about the future (language the Securities and Exchange Commission requires in prospectus documents). Even the best funds in the world suffer occasional bad years. Is that necessarily a reason to change?
Everyone hates taking losses, but that's a bad reason to hold on to something. If you always take profits on your good things, and hold onto the bad to avoid losses, eventually you'll have an entire portfolio of bad investments. Focus on the future, not the past. Keep or buy things with good prospects, and dump the ones without. Take your losses like a grown-up, and move on.
Remember , too, that much investment news we encounter was crafted by public relations or sales professionals. So those great ideas we see were usually planted by someone. I've always rejected the notion that individual investors - including the typical stockbroker - can "out-think" the pros at Fidelity or Vanguard or American Century, with their legions of analysts. Did you know that 80 percent of trades on the NYSE are placed by institutional investors? That means that when you buy or sell something, the trade's other side is taken by a professional. Let that sink in for a minute. This is one of the best arguments for using mutual funds, and why so many professional advisors choose that approach.
This is another reason why we use Morningstar or other independent research firms in building client portfolios. We take responsibility for our decisions, and work on behalf of our clients. No one is going to "talk us into" making a trade or exchanging one investment for another. We'll make those decisions when, and only when, they make sense for clients. It's a huge benefit.
Got a question for us? Post it in the comments or DM us on Twitter @family_finances. We always love to hear from our readers.
Friday, March 6, 2009
A great sale on equities
If you could buy today’s car at prices from 23 years ago, would you do it? Absolutely, you’d answer, if it was the same car with today’s options for a much cheaper price. Who wouldn’t want that discount?
That’s exactly the type of sale we’re experiencing in the stock market. The market’s downward slide doesn’t mean that some of the companies aren’t solid, or that they are bad investments. Terrific companies are getting hammered by the guilt-by-association prevalent in the market right now. It’s driving down prices to what they were almost a quarter of a century ago.
The pack mentality makes this a great time to buy solid companies with strong track records. You’d be hard-pressed to find another time in recent history that equals the steep discount we’re seeing in the market, particularly this week.
At the Family Investment Center, we recently had the opportunity to host B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
I know this market continues to challenge all of us - our sanity, our philosophy, our fears, our concern for friends and ourselves. But I believe economic fundamental forces of good are gathering. If I had a chunk of money to put to work, I would do it in equities without hesitation.
A recent biography of Warren Buffet called “The Snowball” has captured the our attention right now. There are lots of pearls of wisdom there. Buffet maintains that the stock market is like a voting machine in the short-run, and a weighing machine in the long run. Clearly, Wall Street is highly skeptical of our new President Barack Obama, the Democrats, the stimulus and bailouts in general. The stock market is voting its skepticism, not necessarily on real facts about our economy.
The current forward price to earnings ratio of the S&P 500 is at 1986 levels. If you can weigh this dispassionately, it doesn't take long to see that you can buy 2009 companies at 23 year discounts. What a value play! Looking back in a few years, we will recognize this as the great buying opportunity of our generation.
That’s exactly the type of sale we’re experiencing in the stock market. The market’s downward slide doesn’t mean that some of the companies aren’t solid, or that they are bad investments. Terrific companies are getting hammered by the guilt-by-association prevalent in the market right now. It’s driving down prices to what they were almost a quarter of a century ago.
The pack mentality makes this a great time to buy solid companies with strong track records. You’d be hard-pressed to find another time in recent history that equals the steep discount we’re seeing in the market, particularly this week.
At the Family Investment Center, we recently had the opportunity to host B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
I know this market continues to challenge all of us - our sanity, our philosophy, our fears, our concern for friends and ourselves. But I believe economic fundamental forces of good are gathering. If I had a chunk of money to put to work, I would do it in equities without hesitation.
A recent biography of Warren Buffet called “The Snowball” has captured the our attention right now. There are lots of pearls of wisdom there. Buffet maintains that the stock market is like a voting machine in the short-run, and a weighing machine in the long run. Clearly, Wall Street is highly skeptical of our new President Barack Obama, the Democrats, the stimulus and bailouts in general. The stock market is voting its skepticism, not necessarily on real facts about our economy.
The current forward price to earnings ratio of the S&P 500 is at 1986 levels. If you can weigh this dispassionately, it doesn't take long to see that you can buy 2009 companies at 23 year discounts. What a value play! Looking back in a few years, we will recognize this as the great buying opportunity of our generation.
Sunday, March 1, 2009
Re-negotiate debt for long-term gain
More than anything else I do, I love to answer questions from folks I meet in person and online. This is a question from a reader, and we'd love to start doing this more. If you have a question, leave it in the comments section and I’ll post response here. Keep the questions coming!
Question from a reader:
I have a loan against my minivan for about $9,000. I also have a home mortgage and a second mortgage. The car loan is at 9 percent, and the second mortgage is at about 7 percent. We do not have any credit card debt. We save for our kids’ college funds and for our own retirement at modest but not aggressive rates.
I am self-employed, and my husband works for a non-profit. Both of us feel secure in our employment and income, but we also are aware that many, many people who thought they were secure are now unemployed. We want to take our extra income and pay off debt as well as save. In what order should we proceed with the following three objectives:
1. Create a savings fund of three to six months of expenses.
2. Pay off our minivan.
3. Pay off the second mortgage.
Answer from Dan Danford
Actually, this is an interesting family finance query. In the scheme of things, none of this debt is "really bad" debt. It's pretty hard to live today without borrowing for houses and cars, so the pertinent question for most people is how to arrange the best terms and conditions. Generally, you'd eliminate the highest-cost debts first, so pay off the car loan. I'm not keen on paying off mortgage debt for multiple reasons, but especially not if you sacrifice retirement savings to do so (the Chicago Federal Reserve Bank released a study on this very subject last year). My first question for your situation is this: can you refinance your mortgage(s) at today's low rates? If you can, it's possible that you could combine all three of these loans into a single mortgage at 5 percent or less.
Some might find this an odd recommendation from a financial advisor, but your income stability and lack of (really bad) credit card debt makes it feasible. And, if you can secure a loan at 5 percent or less, why be in a hurry to pay it off? Your retirement or college savings will likely grow at higher rates for the entire mortgage term, so why move money from higher rates to pay off lower ones? Really, having good income and credit creates the flexibility to secure good terms and conditions. Use it to good benefit for your family.
Question from a reader:
I have a loan against my minivan for about $9,000. I also have a home mortgage and a second mortgage. The car loan is at 9 percent, and the second mortgage is at about 7 percent. We do not have any credit card debt. We save for our kids’ college funds and for our own retirement at modest but not aggressive rates.
I am self-employed, and my husband works for a non-profit. Both of us feel secure in our employment and income, but we also are aware that many, many people who thought they were secure are now unemployed. We want to take our extra income and pay off debt as well as save. In what order should we proceed with the following three objectives:
1. Create a savings fund of three to six months of expenses.
2. Pay off our minivan.
3. Pay off the second mortgage.
Answer from Dan Danford
Actually, this is an interesting family finance query. In the scheme of things, none of this debt is "really bad" debt. It's pretty hard to live today without borrowing for houses and cars, so the pertinent question for most people is how to arrange the best terms and conditions. Generally, you'd eliminate the highest-cost debts first, so pay off the car loan. I'm not keen on paying off mortgage debt for multiple reasons, but especially not if you sacrifice retirement savings to do so (the Chicago Federal Reserve Bank released a study on this very subject last year). My first question for your situation is this: can you refinance your mortgage(s) at today's low rates? If you can, it's possible that you could combine all three of these loans into a single mortgage at 5 percent or less.
Some might find this an odd recommendation from a financial advisor, but your income stability and lack of (really bad) credit card debt makes it feasible. And, if you can secure a loan at 5 percent or less, why be in a hurry to pay it off? Your retirement or college savings will likely grow at higher rates for the entire mortgage term, so why move money from higher rates to pay off lower ones? Really, having good income and credit creates the flexibility to secure good terms and conditions. Use it to good benefit for your family.
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