Why Beating The Market Is An Uphill Skate

It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates.

It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit.

After 16 years in the financial industry and seeing countless great investors eventually humbled by market forces they could not control, I’ve finally relinquished my skates.

Know Your Greek

First, we must define what it means to actually “beat the market.” We’re not talking about simply outperforming one of the major stock or bond market indices, like the S&P 500 or the Barclays U.S. Aggregate Bond.

Investors who take more risk than these benchmarks in years when taking risk is rewarded could—even should—have a higher expected rate of return. But doing so does not equate to a feat of investing brilliance. No, in order to claim dominance over the market, an investor must achieve a higher risk-adjusted rate of return—the prized, yet elusive, alpha.

Beta, in investing parlance, is the market. The market equals the number one. An investment with a beta of 1.5 is taking on more risk than the market and should enjoy a proportionately higher reward when the market has an upward trajectory, but you should also expect to lose more on the downside. An investment with a beta of less than one should respond to market stimuli with less gusto, or volatility, than the market.

Beta is all around us, but alpha is more like a shrouded ghost investors occasionally glimpse, but rarely capture. When the alpha ghost is captured, it does what those of us who regularly interact with ghosts already know—it slips through our grasp.

Depending on the year, you’ll find statistics confirming that the majority of actively managed funds—mutual funds and hedge funds, whose very existence is justified only by clinging to the hope of attaining alpha—underperform appropriate benchmarks. In any given year, 50% to 90% fail to beat the market.

An even more colossal failing is shown in active managers’ ability to beat the market over an extended period of time, or even a few years consecutively. A Vanguard study, which confirmed previous research, found that only 18% of active managers were able to outperform their benchmark over the 15-year period from 1998 through 2012.

Fully 97% of them underperformed in at least five of those years and “two-thirds of them experienced at least three consecutive years of underperformance during that span.”

Ivy League Investing

It’s always been hard to beat the market, but now it’s become “nearly impossible” according to Julie Segal at Institutional Investor magazine.

And Segal is speaking for the realm considered to be the last bastion of alpha—institutional investors, like Ivy League endowments.

Why has alpha been slipping away from even the brightest investment minds in the business? Charles Ellis, who served on Yale University’s investment committee from 1992 until 2008, tells Segal that volume on the New York Stock Exchange has increased more than 2,000 times in the past 50 years. Ellis also states that during the same time, the balance of trading in the U.S. has swung from 90 percent individuals to roughly 90 percent institutions.

In 1987, there were 15,000 people holding the coveted Chartered Financial Analyst (CFA) designation, the gold standard for money managers. Today, there are more than 110,000 CFAs worldwide.

It’s called the “paradox of skill.” As everyone’s skill increases, relative outperformance diminishes. Investors are smarter and more competitive than ever, and as a result, they’re unable to profitably exploit a dwindling number of market inefficiencies. The market has gone from being pretty darn efficient to ridiculously so.

Sadly, investors lose an awful lot of beta in their quest for alpha.

You have a choice: You can keep trying to climb Mt. Everest with a storm moving in and roller skates for footwear, or you can position probability in your favor and join the movement toward low-frequency trading and evidence-based investing.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

Embrace Low-Frequency Trading

I love Michael Lewis’ writing, but I have some surprisingly good news to share about the high-frequency trading scandal revealed in his new book:

High-frequency trading is not likely to hurt disciplined, long-term, low-frequency-trading investors. In fact, it might even help.  bondpit

Yes, it is almost impressive that Wall Street has managed to produce yet another scandal, even under the ever more watchful eye of regulators and the media since the financial industry imploded in 2008.

And no, I don’t favor high-frequency trading or especially its less-sophisticated cousin, day trading. I thought former hedge fund manager James Altucher put it best when answering the question, “Should I day trade?”

“Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.”

However, high-frequency trading, this scandal du jour, seems to actually push trading costs and bid/ask spreads (effectively, the net cost of purchasing a security) down for investors. High-frequency traders aren’t doing it out of the kindness of their heart, mind you, but it’s the large number of medium-frequency active managers who are losing out, not disciplined low-frequency investors. Wall Street’s movement toward high-frequency trading is only making a stronger case for passive asset class management—a major component of which is low-frequency trading.

The primary benefits of low-frequency trading are the reduction of trading costs, the minimization of taxable events and, especially, the avoidance of falling prey to what financial writer and artist Carl Richards calls “the behavior gap”—the difference between what the average investment returned and what the average investor earned. Sadly, investors have earned meaningfully less than the investments they buy simply because they don’t hold them.

I’m not talking about pure indexing, although you could do much worse than establishing a diversified portfolio with Vanguard index funds and/or exchange-traded funds.

I’m also not talking about pure white-knuckle passivity.

I’m talking about combining the art and science of investing in the form of evidence-based investing—creating a portfolio that is broadly diversified, combining the asset classes that have historically given you the most return for your risk with the asset classes that have tempered portfolio volatility enough to stick with your plan.

Evidence-Based Investing: 101

The fundamental aim of investing is not to actually make money--but to have a better life.

The primary objective of investing in stocks, however, is to make money. The point of investing in bonds, then, is to help you stay invested in stocks when the waters get choppy. The net effect should be adding value to your life, in accordance with your values and working toward your goals.

Evidence-based investing forces us to submit all of our opinions and informed guesses to actual peer-reviewed evidence. The evidence shows, after all, that it is nearly impossible to “beat the market.”

There is adequate evidence, however, that certain asset classes—slices of the market—have outperformed others. For example, you already know that stocks have historically outperformed bonds. Additionally, small-cap stocks have outperformed large-cap stocks and value stocks have historically outperformed growth stocks.

Of course, those asset classes that have historically produced outsized returns have also required an iron stomach at times in order to reap your reward. Their highs are higher, but their lows are also lower.

The objective, then, is to orchestrate a portfolio that accepts the risk you can withstand, and then blend that risk with the proper stabilizing agents to lessen the volatility, helping ensure that you stick with the plan.

Can You Expect More Return With Less Risk?

In short—yes, because a truly diversified portfolio is indeed greater than the sum of its parts . There are two ways to reduce overall portfolio volatility:

1)   Own less volatile asset classes.

2)   Own less correlated asset classes.

The foremost portfolio stabilizing agent is fixed income, and since the primary reason we hold fixed income is to stabilize, it only makes sense to hold the most stable of the stable—FDIC-insured CDs, Treasuries, agencies and, only if you’re in a high tax bracket, AAA-rated municipal bonds.

Yes, I omitted corporate bonds from that list as well as high-yield “junk” bonds, because these varietals tend to exhibit more equity-like risk characteristics. If you’re going to take risk, you may as well do it in an asset class that rewards you better—stocks.

But as Larry Swedroe, author of Think, Act, and Invest Like Warren Buffett, shows, it’s possible to add an equally or more volatile asset class and see the overall volatility go down .

He compares the traditional 60/40 portfolio—60% S&P 500 (stocks) and 40% five-year Treasury notes (fixed income)—to a flip-flopped portfolio with 60% in Treasuries, but a vastly more diversified 40% in equities, skewed in the small, value and international directions (and away from the broader market).  The results?

In short, the 40/60 portfolio with diversified equity holdings outperformed the 60/40 portfolio with substantially less risk. (By the way, I’m not recommending that you should have a 40/60 portfolio—I’m simply demonstrating the benefits of thoughtful diversification.)

The only way this works is if you join the low-frequency trading club. Don’t set it and forget it. Set it, calibrate it when necessary through rebalancing, and only make more meaningful changes when your ability, willingness or need to take risk changes.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

 

Why I Gave Away My Company To Charity

A Guest Post From Derek Sivers

Tim's Note: In last week’s post, “It’s About You, Not Me,” I announced that to celebrate the release of my new book co-authored with Jim Stovall, The Ultimate Financial Plan, I’d be featuring four consecutive guest posts from some of the most compelling authors and bloggers you’ll read today.  I can’t tell you how honored I am that any of them—much less all four—would’ve accepted my invitation, and we get kicked off today with a post that will blow your mind from entrepreneur and best-selling author, Derek Sivers.

In short, Derek is a musician with enough technical ingenuity, passion and vision to have truly changed the way music is delivered today.  (You’ve probably benefited from his work without even knowing it!) 

Frustrated that there were no online outlets on which independent musicians (most of the musicians out there who haven’t received a big record contract), could sell their music, Derek created one, simply to sell his own music.  After a few other bands asked if he could replicate the trick on their websites, he realized he may be able to create a company that would provide this and other services to independent musicians.  Years later, Apple’s famous leader, Steve Jobs, was knocking on Derek’s door asking him to make his extensive online library of independent music available on iTunes.[i][ii] 

At the peak of his success, Derek felt the call to leave his baby—CD Baby—in the qualified hands of others and he sold the company.  For $22 million! (Not bad for a “struggling musician.”)  But get this—he had already placed CD Baby in a trust that would irrevocably give the proceeds to charity.  Here’s a piece of his story:

Two friends were at a party held at the mansion of a billionaire. One said, “Wow! Look at this place! This guy has everything!” The other said, “Yes, but I have something he'll never have: enough.

When I decided to sell my company in 2008, I already had enough.

I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime.

Having too much money can be harmful. It throws off perspective. It makes people do stupid things like buy “extra” cars or houses they don't use - or upgrade to first class for “only” $10,000 so they can be a little more comfortable for a few hours.

So I didn't need or even want the money from the sale of the company. I just wanted to make sure I had enough for a simple comfortable life. The rest should go to music education, since that's what made such a difference in my life.

So I found a great way to do this. I created a charitable trust called the “Independent Musicians Charitable Remainder Unitrust.” When I die, all of its assets will go to music education. But while I'm alive, it pays out 5% of its value per year to me.

(Note: 5% is the minimum allowed by law. It's still too much. I would have preferred 1%, but oh well. I'm free to use it to start new businesses to help people, or whatever.)

A few months before the sale, I transferred the ownership of CD Baby and HostBaby, all the intellectual property like trademarks and software, into the trust.

It was irreversibly and irrevokably gone. It was no longer mine. It all belonged to the charitable trust.

Then, when Disc Makers bought it, they bought it not from me but from the trust, turning it into $22 million cash to benefit music education.

So instead of me selling the company - (getting taxed on the income, and giving what's left to charity) - that move of giving away the company to charity then having the charity sell it saved about $5 million in taxes. (That means $5 million more going to music education.)

Also, the move of giving it away into a trust now - instead of holding on to it until I die - means its investments get to grow and compound tax-free for life, which again means more goes to musicians in the end.

I'm only writing this article because many people have asked why I gave it away, so I thought I'd write my long explanation once and for all.

It's not that I'm altruistic. I'm sacrificing nothing. I've just learned what makes me happy. And doing it this way made me the happiest.

I get the deeper happiness of knowing the lucky streak I've had in my life will benefit tons of people - not just me.

I get the pride of knowing I did something irreversibly smart before I could change my mind.

I get the safety of knowing I won't be the target of a frivolous lawsuit, since I have very little net worth.

I get the unburdened freedom of having it out of my hands so I can't do something stupid.

But most of all, I get the constant priceless reminder that I have enough.

I have not seen anyone more personify “The Gift of Enough,” as Jim and I discuss it in The Ultimate Financial Plan.  I encourage you to indulge in more of Derek’s story outlined in his book, Anything You Want.  The surprises don’t end with his massive gift, and whether you’re a successful business owner or a starving artist, you’ll find a ton of money-and-life wisdom in his book and his blog.

Thanks for sharing part of your story with us, Derek!


[i] Since when does Steve Jobs have to ask for ANYTHING??  (Except, of course, for rights to the Beatles library…which he eventually got.)

[ii] Interestingly, I’ve had the privilege to see Derek’s brainchild at work.  Outside of personal finance, my foremost hobby is music, and as the drummer for my brother’s band—The Jon Maurer Band—we were recently able to release our debut EP through the company Derek created, CD Baby.  For little more than peanuts, here’s what our profile page looks like on the CD Baby site: http://www.cdbaby.com/cd/thejonmaurerband.

It’s About You, Not Me

I announced a few weeks ago that my second book, a co-authored project with best-selling author, Jim Stovall, would be coming out shortly.  Upon release of that news and the book’s title—The Ultimate Financial Plan—a few of my closest friends gave me some good-natured ribbing for a title that could be presumed a dubious self-proclamation of preeminence.  So although I know they were only kidding, I’d like to use this as an opportunity to explain the origin and meaning of the title and make an exciting announcement about TimMaurer.com blog posts in the month of September.

Jim Stovall and I believe with every fiber of our beings that contained in this book is, indeed, the ultimate financial plan.  However, it’s not about us.  We don’t claim to be the brightest financial minds in the universe.  We don’t purport this book to be the number one source of all facts and numbers pertaining to the discipline of personal finance (thank goodness, because it would be too long and boring).  Nor do we allege it to contain the most cutting edge thinking that will revolutionize the business or practice of financial planning — with an advisor or on your own.

Personal finance is more personal than it is finance.

The reason we believe this to be the ultimate offering in its genre is quite the opposite.  It’s not so much about us, but more about YOU.  This book is strenuously focused on you, your values and your plans for the present and future.  We may appear to represent a financial industry, which, even after a timeless humbling through the financial crisis, still seems to muster a condescending tone.  Even some of my favorite personal finance gurus are famous for calling out the stupidity of their followers.  But we’re not.  We’re not talking down to you from the pulpit, but instead across the table.  We’re not sharing insight about concepts we’ve ginned up to sell a book.  We’re sharing personal narratives and experiences we’ve gained from employing these concepts—both in our own lives and in the lives of those we advise and influence.

Let’s also not forget this book is another in a series of books Jim has written that began with The Ultimate Gift.  Selling more than four million copies and seeing it turned into a movie starring James Garner, Brian Dennehy and Abigail Breslin was affirmation enough that the heart of Jim’s novel, a story about a wayward young man learning to earn his inheritance, impacted people deeply.   It was followed by The Ultimate Life (also soon to be released as a movie).  Frankly, when I approached Jim about co-authoring a book that would allow the timeless wisdom of The Ultimate Gift to be translated through a personal finance guidebook, he hesitated, having maintained a personal policy of not co-authoring.  But then Jim realized this could be his contribution to a world ever increasingly in need of applicable wisdom facing the big climb out of the financial crisis crater.

Simply put, we believe personal finance is more personal than it is finance, so our stories and advice and practical applications are skewed heavily in that direction.

A very special September

We’re going to commit a cardinal marketing sin and take the focus further off of us just as this week marks our official promotional kick-off of the book’s release.  Over the next four weeks, I’ll be featuring guest posts from four world-class authors and bloggers that have been an inspiration to me and millions of others through their work.  I’m honored and humbled that they’ve each shown a willingness to engage you, personally, on this blog.  You’ll surely not want to miss them:

  • Thursday, September 8th, you’ll enjoy a post from entrepreneur and the best-selling author of Anything You Want, Derek Sivers, explaining why he, after building a company that revolutionized the music sales industry (CD Baby), gave the $22 million proceeds from its sale to charity.  (Yes, you read that correctly.)
  • Thursday, September 15th, I’ll share a post from Chris Guillebeau, a travel and career author and blogger whose every move is followed by over 150,000 online readers.  Chris took the time to entertain and educate us on “The $30 Hotel and the Battleship Slumber Party.”
  • Thursday, September 22nd, our guest post will come from J.D. Roth.  J.D. is a blogging pioneer in the realm of personal finance who started the uber-successful blog, “Get Rich Slowly,” voted as one of Time magazine’s “Best Blogs of 2011.”  J.D. will be sharing his take on the intensely personal elements of personal finance.
  • Finally, on Thursday, September 29, I’m excited to see what Carl Richards has drawn up for us.  Carl is the cutting edge financial planner who has worked his way into the hearts of so many through his Behavior Gap blog featured in the New York Times, employing little more than a sharp wit and a Sharpie pen in his exploration of the relationship between money and values.

I look forward to bringing you these world class writers through TimMaurer.com.

Oh, and by the way…

The Ultimate Financial Plan IS now available for purchase on Amazon.com and Barnesandnoble.com.  You can also purchase it on your Kindle  and you should see it available on your Nook and in bookstores everywhere within a week.  Thanks for passing the word if you’re so inclined!

Twitter—A resource, not a popularity contest

If you live in the MidAtlantic, how did you confirm it was an earthquake that shook the ground on Tuesday, the 23rd[i]?  You probably asked someone in your office if they felt that or picked up the phone to ask another scantily qualified source the same question.  That’s what my wife did, and the phones didn’t work, only further exacerbating her fear.  I looked at my phone and checked Twitter. 

In last week’s post, I referenced a pot-stirring discussion I started within the financial planning community via the no-longer-new-fangled communication medium known as Twitter, and I promised to devote this week’s post to this phenomenon-turned-convention that, after a couple years of stumbling and bumbling through, I’m finally learning how to use effectively.

I am not one of the early adopters, embracing every technological innovation.  For example,  I scoffed at the notion of reading a book on anything other than paper pages, and only became a Kindle convert after my well-read mother showed her own willingness to embrace an e-reader (in her case, a Nook).  I also tried Twitter for the first time about two years ago, prodded by a well-intended arm twister encouraging me, “You’ve gotta be on Twitter!”  The first time, I gave up on it in spirit after about two days.  The Twitter canvas was too broad for me to understand and appeared to lack any depth or genuine import.  I struggled to know why I should care what anyone is doing multiple times throughout the day.  I cancelled my first account after only weeks.

But as the medium started to become more ubiquitous, most of those who I respected as communicators in more traditional veins began to embrace Twitter.  I started to explore the concept more and read how others I respected were using it effectively.  The second time I approached Twitter, then, I came willingly, not out of compulsion.

The result?  Twitter has become my number one source for quality information intake.

For starters, let’s explore what Twitter actually is.  It’s a communication medium in which messages are sent and read—the catch is that these messages are limited to no more than 140 characters.  They’re not captured, like an email, but instead they scroll as they are submitted.  Like me, you might wonder what of much value can be said in little more than a short sentence, but among those 140 characters can (and often is) a link to an external URL—a web address that takes you to a particular article or blog post.  Now, when each of my favorite reporters at institutions like the Wall Street Journal, Forbes, Money, Kiplinger’s Personal Finance or the New York Times, or online outlets like TheStreet.com, writes an article they send a Twitter notification to all of their followers.

The revelation I had about Twitter was that although it can be a very effective tool for sending a message, it’s an even better mechanism for scanning and receiving information—quality information, not just where B celebrities are having lunch.  So, even if you don’t care to say anything on Twitter, you’re welcome to open an account and just start following the people whose writing and preferences interest you.  And, if they start sharing too much information for your taste, you simply stop following them.

If I’ve tempted you to consider Twitter, let me bring you up to speed on the vital Twitter terminology you’ll want to understand to make yours a beneficial experience:

  • Handle:  A handle is the actual string of letters and numbers preceded by an @ sign, with which you’re identified on Twitter.  You can keep it simple, like me, and use some variant of your name—@TimMaurer—or you might use something more creative and clever, like the personal finance blogger I follow, @feedthepig.  Twitter sign-up is free and can be done at www.twitter.com.
  • Tweets:  Tweets are the 140 character messages you create and read.  (I guess that makes those of us utilizing the medium either a Tweeter or a Twit!)
  • Retweets:  When you read something you like or support (or disagree with), you can retweet the original message, as-is or with your comments.
  • Followers:  Whether you’re on Facebook or not, you’re no doubt familiar with their terminology by now.  On Facebook, you collect “friends.”  On Twitter, they’re called “followers.”  When you search a particular person or information outlet, you are given the option to follow them; if you do so, you become their follower.  If you’re broadcasting information, those you attract will be your followers.  Unlike Facebook, however, you don’t need permission to follow someone; but they’re under no compulsion to follow you back unless they choose to do so.  Initially, I was taught to just start following people for the purpose of attracting followers—and indeed, you’ll see a lot of people out there who have thousands of followers, but who follow almost exactly the same number.  I don’t have the time or desire to follow thousands of people, sorting the wheat from the chaff, so I follow only those whom I want to follow.  I view Twitter not as a popularity contest (a conviction more likely to fall on Facebook), but as a resource.
  • Stream:  Your stream is the running commentary of those you follow viewed on your computer or mobile device.
  • Lists: Lists are the way to make Twitter work for you.  Undoubtedly, you have various interests in life—vocational, financial, recreational, spiritual and beyond—and the creation of lists will help you hone what it is you want to read.  For example, create your own newspaper list; a list with reporters from all of your favorite traditional and online news outlets.  Each morning, wake up and see what they’re reporting. For example, I enjoy the Wall Street Journal reporter, Jason Zweig’s, market commentary, so I’m following @jasonzweigwsj.  (Recognize, though, if you follow an entire media outlet, you’re going to get ALL the news they’re sending and that may clutter your Twitter stream.)  Some of the lists I’ve created are “Best of,” “Personal (and other) Finance,” “Writing & Publishing,” “News,” “Music & Art” and “Life & Faith.”  Your lists can be public or private, and you can subscribe to the lists of those you follow and respect.
  • Twitter Terminology:  There is a lot of Twitter code out there, most of which I probably don’t know or understand, but the most common and powerful is no doubt the hash tag—#.  Hash tags can be created by anyone and they are ways for people to track particular discussion threads or trends.  The best example I can give you is that when I attended a recent financial planning conference, many of the attendees were using a common hash tag tweeting out great quotes from various sessions.  The hash tag was a way for all of the attendees to track the conference, even if we weren’t following each other.  This works for everything from #financialplanning to #mozart to #bacon.

Twitter may not be something in which you’ve been able to find value, so I’m not twisting your arm, telling you you’ve got to get involved with Twitter.  You don’t.  But I do think it could bring value to your pursuit of topics relating to money and life.  Enjoy!

By the way, if you’re new to Twitter and have any difficulty applying any of the above mentioned advice, please use the comments section of this post to ask any questions you have.  And some of you are far more adept in the art of Twitter—if that’s you, please feel free to correct or add to anything I’ve said in the comments section!


[i] A very important note here is that earthquakes are not covered under most homeowner’s insurance policies.  We don’t think about earthquakes much on the east coast, but we were reminded yet again recently that we DO actually live on a fault line.  For more information on the importance of adding earthquake coverage to your homeowner’s policy, read this past blog post: “Would your homeowner’s policy cover an earthquake?”

Chasing Tomorrow

A couple days ago, I tweeted[i] a question that received some interesting responses:

“Is it possible that financial advisors’ bent towards long-term saving strips clients of joy today?”

The responses I got were vociferous, both in support and opposition of the implied comment in my question.  Interestingly, all of these responses were from financial advisors.  Here was the first grenade lobbed back in my direction:

“It’s just not possible; it’s a fact. We’re in the business of selling deferred gratification.”

That comment came from a good person who is no doubt an excellent financial advisor.[ii]  But, this faulty mindset is, without a doubt, the majority opinion of the estimated 500,000 plus who refer to themselves as some form of financial advisor or professional in the lower 48.  So, financial advisors are in the business of selling deferred gratification, knowingly stripping our clients—YOU—of joy today?  How do you feel about that?  Does that make you want to run out to hire a financial advisor?

This faulty premise leads to a number of mistaken presumptions and results.  First, many financial advisors DO see themselves as the protectors of their clients’ futures, an ostensibly noble mission until we’re reminded most financial advisors also just happen to get paid more when you defer more.  There’s no way around this blatant conflict-of-interest, and any advisor caught obscuring this truth behind a veil of self-righteousness is deluding himself or herself.

There is no question that the job—even the duty—of a financial advisor in almost every case is to encourage clients to consider and establish a reasonable plan for deferring some of today for tomorrow, and to occasionally protest an attempted withdrawal spurred by a temporary urge in spite of better judgment (like the time a 20-something client wanted to take an early withdrawal from his Roth IRA to buy a jet ski).  But I believe financial planning focused too heavily on the future is little better than planning encouraging an “eat, drink and be merry, for tomorrow we die” approach.

While I absolutely believe we, as humans, do have a tendency to overvalue that which is seen or imminent over that which is unseen and seemingly distant, there is no denying the “one-in-the-hand-two-in-the-bush” adage either.   We must repel the urge to make a comprehensive financial plan the protector of only the future—stripping funding from today for a tomorrow not promised.  The ideal financial plan (some might say, The Ultimate Financial Plan…ha, ha, ha…that wasn’t planned…) helps manage the short-, mid- and long-term, balancing money and life.

Encouragingly, I believe there is a movement among financial planners awakening to the reality that in order for a plan to be relevant, it must positively impact more of life’s timeline.  In response to my tweet, Nathan Gehring, a Wisconsin cheesehead (and financial planner and blogger), called for balance and Dr. Carolyn McClanahan, a physician-turned-planner in Florida, noted she feels a duty to provide a plan more relevant to today.  Interestingly, Dr. McClanahan and I both share near brushes with death, personally, that likely impact our insistence on this issue.  But it doesn’t take a near-death experience to grasp this important truth.

(By the way, the biggest mistakes planners and clients make regarding deferred gratification are not in our saving and investing patterns, but in our choices of vocation…how we choose to spend the estimated 101,568 working hours in our lifetime.)

In 1902, Alice Morse Earle wrote, “The clock is running. Make the most of today. Time waits for no man. Yesterday is history. Tomorrow is a mystery. Today is a gift. That's why it is called the present.”

How much of life do you spend chasing tomorrow?


[i] Yes, it’s true.  I’ve embraced the social medium that took me the longest time to “figure out” or in which to find any redeeming value.  I’m officially a tweeter…or twit, if you will.  If you’re into that sort of thing, you can follow me via @TimMaurer.  And, if you’re like me, reluctant to see the value in Twitter, in next week’s post I’ll be sharing how Twitter has become my #1 source for financial news—if you can believe that—and why I think it could really benefit you too.

[ii] Please also be mindful, if you’re not a Twitter aficionado, that the medium restricts questions and comments to no more than 140 characters (as my regular readers gasp in amazement that I’m capable of articulating anything in so few letters!).  As a result, tweeters often do take short-cuts to get right to the point, sacrificing context that may help substantiate a point.

What the #@$% is going on?

Unless you live under a rock (check out this Geico commercial referencing under-rock living if you haven’t seen it), you have picked up the message that volatile markets and bumbling economies have again captured the global consciousness.  If you looked at the headlines any of the last several days, you may very well have concluded that the sky is falling and the financial crisis of 2008 is returning.  A great article in the Wall Street Journal explained “Why This Crisis Differs From the 2008 Version,” but that still leaves us with the nagging question, “What the #@$% IS going on?”  (I’m not promoting profanity, only acknowledging that times like these have a tendency to inspire it.)

Strangely, the majority of the talking heads on television render their contrary opinions on what’s going to happen in the future—tomorrow, next week or next month—spending very little time educating us on what the underlying reasons are for our current crisis.  In the spirit of the Freakonomics team, who, in a recent podcast demonstrated “Why we are so bad at predicting the future,” I’ll avoid attempts at prognostication and seek instead to explain what IS and what ISN’T going on in the global economy at present, followed by a couple suggested action steps:

Debt ceiling?  S&P downgrade?

The big news of the last few weeks has been debate over the debt ceiling and the seemingly corresponding S&P downgrade of the United States government.  The market has been expecting this downgrade, regardless of what happened with the debt ceiling, for quite some time now—it wasn’t a surprise.  Besides, S&P’s ineptitude regarding the accuracy of their ratings, most notably demonstrated by their maintenance of top ratings on the junk that helped cause our financial collapse in 2008, has justifiably rendered their guidance nearly impotent.  It was suggested that if the debt ceiling was not raised, the U.S. would not be able to pay its bills for the first time in history and that could lead to a financial collapse.  Well, the debt ceiling WAS lifted, but the market responded by crashing.  How do we explain that?  The problem we’re experiencing now has little to do with the debt ceiling, but a lot to do with debt, in general.

So what is happening?

The U.S. certainly has its own debt problems to contend with, but while the U.S. media got narcissistically wrapped up in our own debt ceiling and S&P downgrade, it obscured the more imminent problem—major European countries threatening default.  We’ve all heard about the financial troubles of Greece, Ireland and Iceland—each of which required financial assistance to stay afloat—but following those three countries are Italy and Spain.  They’re much bigger economies, and their failure may not be sustained by the European Union (EU) and the International Monetary Fund (IMF).  And just within the last couple days, one of the stronger European countries’ banks, France, is sending warning signs pointing to another potential crisis there.

Deja vu?  (Not really)

In the Great Depression, we basically allowed the natural free-market system to run its course.  That resulted in the pain of 25% unemployment and a stock market decline of over 90%. The silver lining, however, was that after the economy recovered from its sickness, we got back on the path towards financial health and prosperity.  This time around, the government took unprecedented action to keep us from experiencing Depression-like immediate pain, but many suggest they just deferred the problem and that we’ll be dealing with it for many years into the future.

So the United States and other countries around the world started “printing money” to create growth in their economies, in the hope that increased money supply would pull us out of a recession headed towards depression.  But while it can’t (yet) be said that the U.S. is again dipping back into a recession (the dreaded “double dip”), some major European countries are headed quickly in that direction, and that contagion could spread around the world.  Again.  Governments have already started responded with measures similar to those utilized in the 2008/2009 financial crisis; doing whatever they can to create monetary liquidity they hope will spur growth.  This could result in a boost for economies and markets in the coming weeks and months, but it’s certainly no guarantee.

So, what can you do?

You shouldn’t make wholesale buying or selling decisions in your investments based on what a market does in a day or a week, but this current calamity should prompt you to return to your portfolio and take a long, hard look at what you own and why.  Whether you are a strict buy-and-hold asset allocator or an active investor, your strategy must recognize and contend with the possibility of times like these.  You—and your financial advisor—must be accountable to articulate why you own what you own and how you intend to react depending on further developments in this scary story.  I’m not recommending you buy, sell or “stay the course;” I’m recommending you educate yourself and then act accordingly, not out of impulse.  There is no bliss in ignorance.

*This post will also be featured on TheStreet.com.

Stay the course? Whose course?

In times of economic and market turbulence, the defensive posture taken on by the broader financial services industry falling under the scrutiny of client apprehension could be summed up in three words too often spoken: STAY THE COURSE.  Umm…whose course?

The financial industry has done a better job setting its own course than seeking to understand yours.  A brokerage firm, for example, sets its own course—its goal for customer acquisition and retention that will meet its revenue goals and appease shareholders.  This, then, becomes the course they train into their brokers, who in turn aim to convince their customers (you) that it should also be your course.  It’s not all their fault, but much like politicians, the financial services industry has oft proven its penchant for self-congratulation is eclipsed only by its instinct for self-preservation.

“Selling” your advisor

Of course, if you line-up silently in accordance with the prescribed course, you’re almost implicit in this crime of inattention. My foremost mentor in the realm of personal finance, Drew Tignanelli, taught me that because of rampant economic bias in the financial services realm (and just about everywhere else too), you as the consumer will often be forced to “sell” the practitioner seeking to serve you on your personal belief—your personal course.

The example Drew uses most often is that of a real estate agent: a good real estate agent is priceless, but because they’re compensated only if you buy or sell, it’s very important that you convince them—up-front—where you stand on the matter.  If your realtor is convinced that you’re not willing to budge on paying more than [this much] for a house, the realtor will be less inclined to succumb to the wooing of the selling agent when he or she says, “So, do you think your client is going to budge?  If we could get them up to [here] I think we’ll have a deal.”

Articulating your course is especially important when dealing with a financial planner or investment advisor.  Most financial advisors are “Type-A” folks who don’t shy away from rendering an opinion on a prospective course and laying out the process for implementation.  And, no matter how the advisor is compensated (fee-only, fee-based or commission-only)[i], they’re likely not going to be paid until your course is set (see more on how financial advisors are compensated by clicking HERE).  Thus, they have a tendency to get there in a hurry.

Setting your own course

Of course, you’re unable to properly articulate your course if you have yet to determine it!  Our lives are so busy, we often forget what we’re living for.  I’ve created two exercises to help us stay focused on the most important stuff in life—you’ll find both by clicking HERE (or going to the Timely Apps tab entitled “Timely Apps from Chapters 1 – 4”).  Take a look at the exercises entitled “Personal Money Story” and “Personal Principles and Goals.”

If you’d like to go deeper, I love having discussions about setting a deliberate course in life and would be happy to spend 30 minutes discussing yours. You can reach me individually by email at tmaurer@financialnconsulate.com; or call my office at 410-823-7283 and an associate of mine will set a time for a meeting in person or over the phone. No money talk; just life.[ii]

Then, the next time someone tells you to “Stay the course,” you can respond, “Whose course?”


[i] I’m not implying here that the method of compensation is irrelevant.  To the contrary, it is very important.  I believe the fee-only model, while imperfect, is the compensation model that reduces the conflict-of-interest (always present) to the lowest level.  For more, visit the National Association of Personal Financial Advisors (NAPFA).

[ii] For a big step toward setting a more intentional personal course, check out Michael Hyatt’s blog post on the topic with an invitation to download his e-book, “Creating Your Personal Life Plan.”  Michael is the Chairman of Thomas Nelson, one of the world’s largest publishers and a well-respected authority on living life on purpose.

ANNOUNCING…

I am very excited to announce the release of The Ultimate Financial Plan, a book I’ve been privileged to co-author with the best-selling author of The Ultimate Gift, Jim Stovall.  The book will be released in early September, 2011 and is being published by John Wiley and Sons (Wiley), one of the world’s largest and most esteemed publishers.  The amazing story of The Ultimate Gift has continued to expand its reach both in the United States and abroad.  More than ever, the life-altering money lessons Jason Stevens learned in The Ultimate Gift beg to be reiterated.  So if you were one of the millions touched by Jim’s book or movie, you’ll find this book intuitively translates the heart of The Ultimate Gift into a personal strategy reflecting its timeless truths.  And if you’ve never been exposed to The Ultimate Gift, you’ll not be left behind in The Ultimate Financial Plan, but will instead be warmed by this more narrative approach to what can be the cold, do-this-don’t-do-that manner of most financial planning handbooks.

Spending some time with Jim and me in The Ultimate Financial Plan is sure to have a significant impact on the way you think about money. Examining the connection between actions, thoughts and feelings when it comes to all things financial, the book makes a revolutionary argument: that the key to getting the most out of personal wealth comes from the contentment found in balancing the influence of money in our lives with personal values and goals.  Through its own irresponsible actions, the behemoth financial industry has lost its centuries old claim to having the answers to our personal finances; this book only claims to be the ultimate financial plan because it’s focused intently on you.  Personal finance, after all, is more personal than it is finance.

Financial tools—like budgets, bank accounts, 401(k)s, IRAs, education savings plans and real estate—can play a major role in helping us generate the money we want, but real value comes from investments in our knowledge and understanding, which lead to purpose-filled careers, sleep-at-night security, artistic endeavors, creative philanthropy, fulfilled retirements and meaningful legacies.

And as you’ve probably noticed, the backdrop of TimMaurer.com has received a major upgrade.  The site not only looks better, but also has more to offer.  All previous TimMaurer.com posts, including the “90 Second Finance” video series, have been transferred to the new site and can be accessed by using the search bar or glancing through the “Find Your Topic” tool.  But additionally, we’re bringing the best of The Ultimate Financial Plan to TimMaurer.com.  The Timely Applications, found at the end of each chapter to aid you in the process of everything from articulating your values and goals to determining the appropriateness of a mutual fund or life insurance policy, are housed here on the site.  They’re free for you to download and available to all TimMaurer.com readers, and you can find them by clicking the Timely Apps tab.  And as an added bonus, my co-author, Jim Stovall, is contributing his weekly syndicated column, Winner’s Wisdom, and sharing some classic videos from his speaking engagements.

If you’re interested in pre-ordering the book, you can do so by clicking HERE, or you’ll find it available at book stores, online retailers and even as an e-book for Kindle and Nook the first week of September.

Or, if you’d like to do some more research, click below:

The Seamless Life

If you noticed my conspicuous silence over the past couple weeks, it was because I went on a family vacation that was largely "unplugged."  Just prior, I contributed a short post including a handful of facts regarding the amount of time we spend working during our lifetimes (101,568 hours, to be exact) with an equal number of questions posed to you.  Through the blog comments, Tweets, Facebook mentions and emails in response, a number of very interesting thoughts were raised.

You better like what you do!

Work_life_balance_sign2 One reader summed it up simply saying, “Work hard and play hard!”  Another, Greg Rittler, quoted a wise mentor of his: “You spend 50% of your time and 80% of your energy at work—you better like what you do!” 

Indeed, it seems many people with options at their disposal deem the pursuit of a vocation about which they are passionate (the advice of another reader, Nathan Gehring) either a myth or an unworthy aim.  Why is that?  Do we rank stability or comfort or perceived safety above a path more meaningful to us?  In short, yes.  Even my college students—around 40 accounting majors each semester—rank job security as the number one reason for their chosen professions in an informal survey I conduct each semester.  They haven’t even graduated yet, and they’ve already shelved their dream job for job security!?

One thoughtful reader, Brian, described my initial post as depressing; and rightly so if we view our time working only as a facilitator of those moments spent outside of work.  Interestingly, he described his current job (online trading) as something separate from the path of a “real job,” already lamenting the time when he may be forced to re-enter in the “rat race.” 

We live a life with too many seams.

And herein lies the fundamental dilemma at the core of this discussion of purpose and passion in our vocations—we live a life with too many seams.  Work vs. Life.  Work vs. Family.  Work vs. Faith.  Family vs. Friends.  Family vs. Service.  (You get the idea.)

I recently conducted a client meeting in which I may have received more wisdom than I was able to impart.  I met with a married couple, each spouse in their 70s.  When broached with the topic of retirement, they both viewed it as an unattractive, if not foreign, concept.  This is not because they absolutely need the money (although it doesn’t hurt, of course), but because their vocations are simply an extension of who they are.  Mrs. Client is an educator—both by personality and profession—endowing generations of college students with her wealth of knowledge and life experience.  Mr. Client leads an entity providing an incredibly valuable community service to the city he calls home.  What greater purpose could they serve retiring, prior to health forcing an occupational retreat?

There was a time in my life when I was acting as many different people.  At home, I was one person.  At school, I was another, and at work, yet another.  With friends from school, I acted a certain way and with friends from church I was different, and so on.  This was followed by an extended period of rebellion, during which I practically sought to disappoint or offend each various crowd with actions contrary to their standards or expectations (I “can’t wait” for my boys to go through that stage!). 

Reconciliation

The last 12 (or so) years, I’ve been attempting to reconcile who I am with what I do, what I say, and how I do it and say it.  Yes, that means I’ve walked away from several different companies and career paths—some because they changed or I became more aware, but also because I changed.  Of course, after 12 years of that daily pursuit, I’m still a green novice, but I’m buoyed by those who live an unabashed life and inspire others to do the same.  (Check out Chris Guillebeau, Michael Hyatt, Seth Godin, Gary Vaynerchuk, Donald Miller, Leo Babauta, Derek Sivers, Tim Ferriss, Carl Richards, Rob Bell , Pat Goodman, and Jim Stovall, among MANY others, all focused from their own unique perspective on the truth that life is best lived honestly and deliberately.)

Mine is a biased perspective and I have an unfair advantage—my boss, Drew Tignanelli, is also a friend and mentor who is a student of personality distinctions.  He understands me so well that he expects and welcomes my unpredictable evolution.  He’s created an environment in which both employees and our company benefit when circumstances or people change.  If you’re an employer, I urge you to foster such an environment, and if you’re an employee, I encourage you to seek an employer that rewards (and not stifles) creativity and growth…or create it yourself. 

But one friend reminded me that while many people may have the choice of diverging from their original career plans for something more fulfilling, others don’t have that option available, due to a lack of means or ability.  What should they do? To those unable to take that genuine leap of faith in a revelatory moment, I recommend taking just one step in the direction of that which draws you closer to a seamless life, and then follow it with another…and another…      

Announcement coming next week!

In next week’s post, I’ll be making a big announcement that will coincide with an entirely new look for TimMaurer.com.  I hope you’ll check in!