Even if you get your daily news from one of those celebrity tabloid shows, you have probably still heard that the market has been more than a little crazy in recent weeks.
Indeed, the typically overstated “surge” and “plunge” headlines have been less hyperbolic of late, as the Dow Jones Industrial Average burps out daily gains and losses in the hundreds of points. But over the past several trading days, the results have been all red, and since Sept. 18, the market has taken back more than 6% of what it’s given so far this year.
Is this volatility the precursor to another market gutting? Or perhaps it’s just a momentary ebb in advance of a continued upward flow?
The answer is yes.
The market is in the business of rising and falling, and of making fools of those who attempt to predict which it will do next. But be sure that we will feel both the pain of another big drop—perhaps sooner rather than later—and the euphoria of another unprecedented gain.
Whether this very recent pullback happens to be the beginning or the end of something, most investors have already lost enough to benefit from it.
Benefit? Yes, you did read that correctly. Here are three ways to gain from market losses:
Exchange-traded funds—commonly referred to as ETFs—are all the rage. While there are several excellent reasons to use an ETF over the seemingly archaic traditional mutual fund, they are not a universally preferable solution.
First, to be fair, let’s review a few reasons why ETFs can be a better solution than mutual funds.
ETFs generally have lower associated costs than comparable mutual funds. This isn’t news, I know, but since costs are one of the few variables over which we have control as investors, I don’t mind flogging this deceased ungulate.
The expense ratio is the most obvious cost reduction. For example, the legendarily inexpensive Vanguard 500 Index Fund has an expense ratio of 0.17 percent, while Vanguard’s S&P 500 ETF has a barely noticeable expense ratio of 0.05 percent. This makes ETFs an ideal choice for investors making a sizable, broadly-based, one-and-done purchase.
My son gave me a present. To be fair, I don’t think it was until after he realized the gift was monetarily worthless, but I appreciated it nonetheless. It’s a big hunk of the mineral pyrite, also known as fool’s gold. My son’s gift has value to me far beyond its function as an excellent paperweight. And, ironically, its worth to me is continually rising. It’s become a constant reminder to orient my life away from that which only appears valuable and towards that which truly is.
We all have our own versions of fool’s gold. It’s generally the stuff that, while largely worthless, receives an undue amount of our time, attention and investment. What’s yours?
Here are three ways to spot it:
1) Fool’s gold consumes time you’ve dedicated to other things. Not more than one paragraph into writing this post (on this topic, no less!) I found myself entering this Google search—“what is the best banjo ukulele”—and then navigating to this page, then this one.
As if PIMCO needed any more bad press, The Wall Street Journal reported this week that the Securities and Exchange Commission is investigating whether the bond giant “artificially boosted the returns of a popular fund aimed at small investors.” While we should all be attentive to the results of this probe—because I’d bet my lunch money that its implications will be felt beyond just PIMCO—there is an even deeper issue to consider. And this issue has a more direct impact on our individual portfolios and money management choices. The real danger in overstating returns, and indeed the root of most financial missteps, is self-deception.
“How’s your portfolio?”
Who among us wants to feel like a failure? We’ll generally avoid experiencing this sensation at all costs. So, absent conspicuous success, we permit ourselves to believe that we’ve at least not failed, frequently through self-deception.
As kids head back to school, adults spanning several generations set their sites on getting their financial house back in order. What are the most important financial planning considerations in three major demographics—Millennials, Generation X and Empty Nesters?
Millennials: First things first – Before making any big financial commitments, like buying a house, figure out what you want life to look like.
- Are you in a relationship and looking to “settle down,” or do you highly value freedom and flexibility? If the latter, you shouldn’t be buying a house or committing to a job that is geographically tethered.
- If you’re in your twenties, the primary factor that will influence your financial success is how well you establish yourself in a career. Invest in yourself, and that will likely help you invest more money in the future.
- Save as much as you can in tax-qualified retirement accounts at this phase of life, because once you get settled down and have kids, your expenses will rise dramatically.
- Don’t default to 100% equity portfolios just because you’re young. After getting burned by the market crash of 2008, many Millennials got scared away and didn’t benefit from the subsequent market rise. Your portfolio should likely be predominantly stocks at this age, but consider some fixed income exposure to keep from losing your shirt (and abandoning your strategy) in a downturn.
To really help people, financial planners have to delve into the the feelings and emotions that drive their clients’ financial decisions. One planner explains why that’s so hard.
While most of us financial advisers want to do the best for our clients, we often struggle at the task.
The main problem, as I recently wrote: We don’t know our clients well enough. We may say that a client’s values and goals are important, but most of us don’t adequately explore these more personal (a.k.a. “touchy-feely”) parts of a client’s life.
Why is this?
One reason we avoid deeper discovery with clients: No matter how we’re paid—whether by commissions or fees—most of us don’t get compensated until the financial planning process has neared its end.
Last month I attended a presentation that explored, in depth, the notable differences and financial tendencies of several generations, from the silent generation through the millennials.
The presentation described certain representative traits perceived as common among each generation and what financial advisors should consider when communicating with members of them as prospects and clients.
When discussion of the younger generations came up, I noticed advisors around the room rolling their eyes and scratching their heads. The expert at the front of the room was providing well-researched data to help us understand what is important—and less so—to these generations and how we might consider breaking through to them.
But, as the attention of this group of well-heeled advisors descended into a collective yawn, the presenter scurried to wrap up before answering the most important questions:
- Why exactly should financial advisors dedicate themselves to working with younger clients?
- Why should advisors apply valuable time and money to crafting services and messaging for a demographic niche notorious for inspiring descriptors such as “entitled,” “ungrateful” and “distrustful”?
The U.S. Department of Agriculture (USDA) recently released its annual “Cost of Raising a Child” report. The news from it is really no news at all to us parents—kids are stinking expensive and growing even more so. However, if you read between the lines, there are three extremely important points that don’t show up in the executive summary:
1) Parents still have a choice. The USDA estimates that households with less than $61,530 in income will spend a total of $176,550 per child. Meanwhile, “middle-income parents” making between $61,530 and $106,540 each year can anticipate spending $245,340 per kid. Those blessed with household income over $106,540 should expect to spend $407,820.
Here’s how I read these numbers: It likely costs approximately $175,000 to care for a child’s needs in today’s dollars. Beyond that, it’s our choice as parents if and how we spend additional money on our progeny. When your household income jumps from $106,000 to $107,000, the USDA isn’t holding a gun to your head and demanding that you spend an additional $162,480 per child.
It’s completely up to you, and you may choose to spend more or less than some of the USDA estimates. For example, you may choose (wisely) to spend more on one child than another for various, justifiable reasons, including each individual child’s own gifts and weaknesses. If you choose to put even one child through private school, from kindergarten through a graduate degree, you could easily spend a million bucks just for education—and college isn’t even included in the USDA’s numbers.
There is no shortage of receptacles clamoring for your money each day. No matter how much money you have or make, it could never keep up with all the seemingly urgent invitations to part with it.
Separating true financial priorities from flash impulses is an increasing challenge, even when you’re trying to do the right thing with your moola — like saving for the future, insuring against catastrophic risks and otherwise improving your financial standing. And while every individual and household is in some way unique, the following list of financial priorities for your next available dollar is a reliable guide for most.
Once you’ve spent the money necessary to cover your fixed and variable living expenses (and yes, I realize that’s no easy task for many) consider spending your additional dollars in this order:
You know what has to be done, but it doesn’t make it any easier. You’ve done all the research, asked all the questions and mulled over your options, and you know that moving on from your current company is the right thing to do.
You wince, imagining the look on the face of your boss and co-workers when you tell them. You’re no longer an insider, but an outsider or—worse—a competitor. Even your relationship as friends could be compromised. It’s stressful for everyone, but especially for you because ultimately it’s your choice.
As you go through your morning routine on the day you’re delivering the news to your company, every step seems more pronounced than it typically does. Maybe it’s because you recognize it could be the last time you’ll go through the paces exactly like this. Or maybe it’s because the adrenaline has already notched up in anticipation of the discussions you’re about to have with your boss and colleagues.
Indeed, along with marriage, divorce, death and personal injury, changing jobs is consistently ranked as one of the most stressful things a person can do. That stress can be substantially reduced, however, if you’re better prepared for what comes next. Here are three ways to make the most of your job transition:
1. Leave well. “It’s more important to leave well than it is to start well,” a good friend once told me. And it’s true. You’ve already made a good impression on your new company—you got the job! But while you’re heading on to new and exciting adventures, your former employer is left to deal with the rejection and cleanup from your departure.
Make it easier by offering to stay on for a reasonable period of time, but not longer. In most cases, shorter is better for all parties, as it reduces the awkwardness and hastens the healing.
Part of leaving well is preparing to deal with impulsive counterattacks mounted consciously or unconsciously by your former co-workers. Especially if you brought or maintained client relationships, the words “I’m leaving” may magically transform you from friend to foe—but let that be their choice, not yours. Take the high road whenever possible.
2. Don’t leave anything behind. Along with your personal Swingline stapler and the letter opener your parents gave you, don’t leave your 401(k) or any other transferable benefits behind.
Specifically regarding your 401(k) or other comparable plan, you typically have three options, depending on the design of the plan you’re leaving and the plan your new company offers. The first option is to leave it there; I rarely recommend this unless you’re in love with the plan investment options and pay close attention to them.
Option two is to transfer the old 401(k) into the new plan, if they allow it. This gives you the benefits of consolidation and, while rarely advisable, the ability to borrow from your plan—a provision not available in old retirement plans or IRAs.
For most, the sensible choice is to aggregate the newly antiquated 401(k) plan with other prior plans in the form of a direct rollover to an IRA. In this case, you are not limited to the investment options in the new 401(k)—options that are notoriously mediocre. Be certain to check all the right boxes to ensure that your rollover is not a taxable event.
It’s also important to take stock of any company benefits that are transferable. Although they are nearly extinct, pension plans of various sorts accrued during your tenure may do nothing for you now but could be meaningful in the future.
One client recently had a premonition that she’d left a small pension behind from a previous job. I encouraged her to call the company’s human resources department, and indeed, there was $9,000 sitting in a plan earning 3 percent per year that she can’t touch for another 15 years.
If you’re blessed enough to have annual income in excess of your saving and spending needs, you may have a qualified or non-qualified deferred compensation plan to handle. And while also rare, there are occasions in which group benefits—such as life, disability income or long-term care insurance through your company—can also be traversed to private policies with the vendor.
3. Make the most of your fresh start. Nobody’s perfect—including you. But as the saintly image of yourself you’ve been promoting to your new company starts to settle into something closer to reality, you do have an opportunity to trade some bad habits for good ones.
Take advantage of this clean slate by embracing the time-management method that’s worked so well for your friend, or finally start using a system to seize control of your email inbox.
Develop a healthier rhythm of life and work. Be careful not to overextend yourself at the beginning of the new gig, lest you set expectations you’ll never be able to live up to.
Make wise choices with your new benefits package. Increase your 401(k) contribution to the level you know you should be saving, and put sufficient time into really understanding the new investment options and determining the optimal mix for you. Don’t forget to add beneficiaries to your new 401(k) plan and any group life-insurance coverage in the new benefits package.
As you review your group benefits—especially health, life and long-term disability-income insurance—be sure to actually understand them and acknowledge whether or not you should be supplementing them privately. (You can be almost sure that the base level of free life and disability-income insurance is insufficient.)
Consider opening your mind to a high-deductible health plan, which gives you the option to utilize a Health Savings Account (HSA). Many assume this is too complicated or costly, especially if you have a young family, but even in that case, this can be a great way to make nearly all of your household medical expenses tax deductible.
While certainly stressful, a job change navigated well can be an amazing personal and professional launchpad—especially when you leave on good terms, don’t leave anything behind and take full advantage of the fresh start.
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Tim Maurer, a certified financial planner, is director of personal finance at the BAM Alliance and an adjunct faculty member at Towson University. He has co-written two books with best-selling author Jim Stovall. Their most recent release is “The Ultimate Financial Plan: Balancing Your Money and Life.”