Study Reveals Investing Is Hazardous To Your Health

Investing Hazard-01I don’t need to inform you that investing is dangerous business.  You already know in your gut what Joseph Engelberg and Christopher Parsons at U.C. San Diego found in their new study, that there is a noticeable correlation between market gyrations and our mental and physical health.

But when do you think the financial industry will get the point?

Shortly after I became a financial advisor, I was given a book to commit to memory.  It told me what my role in life would be: To make a very good living helping approximately 250 families stay in the stock market.

The text insisted that regardless of my client’s age or risk temperament, it would be in their best interest to be—and stay—in stocks, exclusively and forevermore.  I was the doctor; they were the patients.  I was the ark-builder; they were the—you get the point.

The book might even be right.

But…

The Behavior Gap

My friend and New York Times contributor, Carl Richards, has been drawing a particular picture for years.  He’s struck by the research acknowledging the noticeable difference between investment rates of return and what investors actually make in the markets.  (Investors make materially less.)

Investors, it appears, allow emotions to drive their investing decisions.  A desire to make more money causes them to choose aggressive portfolios when times are good, but a gripping fear leads them to abandon the cause in down markets, missing the next upward cycle.

Investors buy high and sell low.

Well-meaning advisors, then, including the author of the book I referenced, have claimed their collective calling to be the buffer between their clients’ money and their emotions.  Unfortunately, it’s not working.

Maybe it’s because the intangible elements of life are so tightly woven into the tangible that we can’t optimally segregate them.

Maybe it’s because we’re not actually supposed to forcibly detach our emotions from our rational thought.

Maybe it’s because financial advisors and investing gurus should focus less on blowing the doors off the benchmark du jour and more on generating solid long-term gains from portfolios designed to be lived with.

Livable portfolios.

Portfolios designed to help clients stay in the game.

Portfolios designed to help clients (and advisors) avoid falling prey to the behavior gap.

Portfolios calibrated with a higher emphasis on capital preservation.

How much less money do you make, anyway, when you dial up a portfolio’s conservatism?

The Same Return With Less Risk

In his book, How to Think, Act, and Invest Like Warren Buffett, index-investing aficionado, Larry Swedroe, writes, “Instead of trying to increase returns without proportionally increasing risk, we can try to achieve the same return while lowering the risk of the portfolio.”

Using indexing data from 1975 to 2011, Swedroe begins with a standard 60/40 model—60% S&P 500 Index and 40% Five-Year Treasury Notes.  It has an annualized rate of return of 10.6% over that stretch and a standard deviation (a measurement of volatility—portfolio ups and downs.) of 10.8%.

Next, Swedroe begins stealing from the S&P 500 slice of the pie to diversify the portfolio with a bias toward small cap, value and international exposure (with a pinch of commodities).  The annualized return is boosted to 12.1% while the standard deviation rises proportionately less, to 11.2%.  (Remember, this is still a 60/40 portfolio with 40% in five-year treasuries.)

But here’s where Swedroe pulls the rabbit out of the hat:  He re-engineers the portfolio, flipping to a 40/60 portfolio, proportionately reducing all of his equity allocations and boosting his T-notes to 60% of the portfolio.  The net result is a portfolio with a 10.9% annualized rate of return—slightly higher than the original 60/40 portfolio—with a drastically lower standard deviation of 7.9%

Same return.  Less Risk.

This, of course, is all hypothetical.  This happened in the past, and for many reasons, it may not happen again.  These illustrations are not a recommended course of action for you or your advisor, but instead a demonstration that it is possible—and worth the effort—to work to this end.

Because we can’t keep hiding from the following logical thread:

1)   Volatile markets increase investor stress (even to the point of physical illness).

2)   Heightened investor stress leads to bad decisions—by both investors and advisors—that reduce investor returns.

3)   Market analysis suggests that portfolios can be engineered to maintain healthy long-term gains, while at the same time dramatically reducing the intensity of market gyrations.

How could we not, then, conclude that more investors would suffer less stress, thereby reducing (hopefully eliminating) their behavior gap, thereby allowing investors to hold on to more of their returns?

Isn’t that the point?

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Retire Like These Guys…Not These Guys

Executive Summary2While most of the commentary these days regarding retirement is about the math and “science” of cash flow and portfolio management, there is also an art to retiring well.  Making a graceful transition from the vocation that marks your life into whatever follows helps form your legacy—for better and worse.

Led Zeppelin was the best rock band of all time—at least in their time, and for many of us, still. Jimmy Page was the musical mastermind behind this super-group of savants, but it’s hard to imagine that they could’ve reached legendary status without Robert Plant.  Every generation since has attempted to replicate Plant’s voice and stage presence.  Although the band’s retirement was unplanned after drummer John Bonham’s death in 1980, Plant and Page’s work since is a fascinating case study in retirement.

Retire like Robert Plant…not like Jimmy Page

pageplantRobert Plant has explored, experimented and remade himself several times since retiring from Led Zeppelin.  As I write, I’m listening to one of my favorite albums, Raising Sand, a Grammy-award winning collaboration between Robert Plant and Alison Krauss, a legend herself in the realm of bluegrass.

Maybe since it was his baby, Jimmy Page has struggled to ever let go of Zeppelin, a fact that was evident in his 2012 Rolling Stone interview.  He’s struggled to retire well.  He seems to have lived between a handful of attempted (and certifiably mediocre) Led Zeppelin reunion gigs, and implies Robert Plant is at fault for resisting a full-out remarriage.

It’s not easy to retire from the best gig you’ve ever had, but unwillingness to acknowledge that it’s over can be even more painful.  Loosening your grip on the past, however, can free you up for a fulfilling and rewarding second act.

Retire like Michael Strahan…not like Brett Favre

07-1t107-kelly-300x450I had to recuse myself from using my beloved Ravens’ Ray Lewis as the favorable example in this gridiron comparison to preserve objectivity, but objectively speaking, Michael Strahan’s exit from the winning New York Giants in Super Bowl XLII may indeed be a better example of one of the very few NFL players who managed to truly go out on top.  Strahan capitalized on the Giant’s surprise win over the New England Patriots to position himself for a second and third career that now pits him against the less-than-menacing Kelly Ripa.

Brett Favre, on the other hand, who was the most exciting quarterback of a generation, couldn’t let go.  He leads the NFL in retirement threats, retirements and comebacks, finally ending his career in a concussive fog as a Minnesota Viking.  Favre wisely turned down a request from the St. Louis Rams just this week to replace injured Sam Bradford, citing his many concussions and subsequent memory loss.  He can only hope to forget the sexting scandal that marred his good-old-boy reputation at the end of his career.

When you excel at your craft and you’re competitive, it’s hard to let go, but holding on too long can destroy your reputation, damage your legacy and hamstring the team you leave behind.

Retire like Sallie Krawcheck…not like John Thain

Sallie Krawcheck’s retirement was involuntary—she was fired from her position at Bank of America—but she still managed to do it gracefully.  Krawcheck is the former lots-of-things Wall Street, having been at the helm of major divisions at Citi and more recently Bank of America, as the head of Global Wealth and Investment Management (including Merrill Lynch and U.S. Trust).  But she doesn’t talk or act like most Wall Street execs, and not just because she’s a woman.  She’s taken surprisingly principled stances on conflicts of interest, like the “cross-selling” mandate pushing Merrill brokers to sell banking products, and the touchy topic of regulatory reform within the industry.   While maintaining her principles may have led (in part) to her forced departure from Wall Street, in retirement her striking combination of competency and transparency have earned her respect that few of her scandal-ridden colleagues enjoy.

John Thain has handled himself, well, differently.  He’s the former Merrill Lynch head who infamously gave his office a $1.22 million dollar upgrade and paid out billions in bonuses to country club cronies as the American financial system came crashing down.  Even the financial industry couldn’t stomach him and he was “tossed out on his ear” by then CEO of Bank of America, Ken Lewis.  Thain is Wall Street excess personified and an easy target for the 99%, but don’t feel too bad for him; while he may have traded a $35,000 in-office toilet for “plastic and Formica,” he’s back on the scene with the $2 billion bailout beneficiary, CIT.

It’s much better to make a graceful early departure than to be thrown out in disgrace.

Three Keys To A Successful Retirement

What retirement lessons do Robert Plant, Michael Strahan and Sallie Krawchek teach us?  Three keys to a successful retirement are to know when to leave, leave well and retire to something meaningful.  You don’t have to be a rock star, a professional athlete or Wall Street royalty to model and benefit from these practices.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Face-Off: Comparing The Impact Of The Shutdown vs. The Debt Ceiling Crisis

1_photoThe government shutdown is to the debt ceiling threat as political squabbling is to political suicide.  I mean no disrespect to the many individuals who are negatively impacted by the shutdown—you are being unjustly abused like the single shovel in a sandbox argument—but I can only muster so much sympathy for the campers holed-up outside of the Grand Canyon waiting to begin their rafting trip.  All of us, however, and the full faith and credit of the world’s currency reserve nation, are being held hostage in a high stakes game of political chicken regarding the newly dubbed Debt Ceiling Debacle of 2013.

Okay, now I’ll drop the SAT logic, metaphors and hyperbole to explain the fundamental differences between the government shutdown and the debt ceiling threat, the two dominant news headlines of the day:

Government Shutdown

The government shutdown occurred because of disagreements in Congress over the proposed budget for the coming (now current) fiscal year, beginning on October 1, 2013.  It’s as if you and your spouse can’t agree on how your household income should be spent.  We haven’t actually had a budget passed by Congress for years, but continuing resolutions were passed each time the moment of truth arrived [read can kicking] to maintain the levels of preceding budgets.  This time, they didn’t agree on a continuing resolution.

The resulting government shutdown has a very meaningful and noticeable impact for those working directly for the government, doing contract work for the government or availing themselves of government resources.  Non-essential government employees are furloughed, but have been promised back pay.  Many government contractors are also idle and are not expected to receive pay for time off.  As for the many government services—from federally subsidized mortgages to national parks—USA Today did a good job answering 66 questions about the shutdown on October 1, and followed up with another 27 a day later.  If you’d prefer a more visual and humorous description of what precipitated the shutdown, check out The Atlantic’s explanation—in Legos.

In short, the government shutdown may not show DC’s best side and is an annoyance to those of us not receiving the government services that come out of our paychecks, but it’s likely to be forgotten a couple days after it’s over.  The same can’t be said regarding the debt ceiling issue.

Debt Ceiling

The debt ceiling issue is not a direct consequence of the government shutdown, although it certainly is tangentially related to our inability to pass balanced budgets that actually take in the amount of income required to pay all of the government’s bills.  Since we spend more than we make as a country, we must go further into debt to meet our expenses.  The debt ceiling, then, is our credit limit set by Congress, which currently stands at $17.3 trillion (with a “t”).  It’s the equivalent of you maxing out your credit cards and going back to the credit card company asking for an increase of your limit.

We’ve had a debt ceiling in place since 1917, but Congress has continually raised it.  “Since 1960,” writes Mark Koba at CNBC, “Congress has acted 78 times to permanently raise, temporarily extend or revise the definition of the debt limit—49 times under Republican presidents and 29 times under Democrats.”

The biggest threat if we sail through October 17th without an agreement, when it is estimated that the U.S. Treasury will run out of necessary funding and lack the power to borrow anything more, is that our worldwide creditworthiness would come seriously into question, which could precipitate a demotion from our long-standing as the world’s currency reserve.

What does that mean?  Currently, international business is conducted in U.S. dollars.  When foreign countries buy oil, soy beans or steel, their currencies are exchanged into dollars to complete the transaction.  This has given the U.S. dollar more strength than it likely deserves, as foreign countries stockpile our cash to spend as needed.

Not raising the debt ceiling at this time could even mean not paying interest to those who hold our U.S. debt obligations the world over—for the first time.  Ever.  The corresponding lack of confidence in our political process and uncertainty of our financial capabilities could very well pull us back into the recession that many feel like we haven’t left yet, and the longer-term implications are even worse.

Worst of all?  We—you and I—can’t do anything about it.  Unless, that is, any of our elected representatives are checking their Twitter accounts as they sit with arms folded, legs crossed and brows furrowed.  In that case, consider tweeting this post—they might just receive an education.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Don’t Forget To Update Your Financial Operating System (OS)

ios-7

Android die-hards can tell you everything that is wrong with iOS7, Apple’s recently released operating system for iPhones, iPads and iPods.  Those who gripe every time something changes are also among the early detractors.  Everyone else—that is, those of us who’ve gone back for a second or third helping of tasty iKool-Aid—loves it.  The exclamation that I hear most often regarding the new iOS is, “It’s the same phone, but it seems like it’s brand new!”  What struck me even harder than iWorship last week, however, was recounting the number of individuals who, with unchanged exteriors, have undergone noticeable overhauls in their Personal Operating System (POS)—for the better.

“I’m bad with money.”

Don’t you love the way we label ourselves as predestined for failure?  “I have a bad temper.”  “I have no willpower.”  “Exercise and I don’t mix.”  “Oh, I have ADD.”  “I’m not a good listener.”  “I have a sweet tooth.”  Or the one I hear often as a financial planner and educator, “I’m just bad with money.”

It sounds like self-deprecation—even humility—but it’s actually self-justification.  We’re giving ourselves permission to behave badly in the future.  Before you get angry with me for hurling accusations, let me confess that I am one of those people who have used this tactic, unknowingly and sadly, knowingly, at times.

What all of these expressions of inability or ignorance have in common is that they’re simply inexcusable.  Not only are they not rocket science, they are not even changing the oil in your car.  They are more like brushing your teeth or putting gas in the tank.  Even if you’re predisposed to flying off the handle, it’s no excuse for being mean.  Even if you’re prone to indulgent spontaneity, you must own your decisions.  Even if you’re not a gym rat or naturally fit, as a human you weren’t designed to be sedentary.  Even if your attention migrates easily, you can’t use it as an excuse for intellectual laziness.  Just because you like chocolate, it doesn’t excuse gluttony.  Lastly, you don’t have to understand the Alternative Minimum Tax or be able to articulate Modern Portfolio Theory to spend less than you earn and plan for the unknown, the two categories into which the vast majority of financial planning recommendations fall.

“Completely new and instantly familiar”

The great news about overcoming self-deception is that we can turn on a dime once we recognize it.  While some of us may need to do a deep dive with a counselor to target more systemic self-denial, many are free to simply choose the alternative path of wisdom and act accordingly, almost immediately.  Especially regarding our dealings with money, we can upgrade our financial operating systems right now.  Like our phone updates, it may take a little time to install the new mindset, but in dealing with behavior that is not tied to a compulsive diagnosis, we can look the same on the outside with a completely new perspective internally in a very short period of time.  Two of the life-changing tools that I’ve seen dramatically reboot people’s financial programming are Dave Ramsey’s book, The Total Money Makeover, and You Need A Budget, cash flow software created by former accountant, Jesse Mecham.

Jony Ive, Apple’s SVP of Design describes the new iOS as “completely new and instantly familiar.”  The best part about acquiescing to our own personal evolution is that it too will feel oddly familiar, because it’s how it ought to be.  Adults aren’t supposed to throw temper tantrums.  We’re designed to overrule our basest instincts with self-control.  It feels great when we expend the calories we take in through physical activity.  We’re capable of being present in a world full of distractions and applying our attention to those who most deserve and need it.  Sweets taste better as treats than as main courses.  And with a little guidance—but primarily common sense and intellectual honesty—we can choose to be good managers of money, and then do so.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

5 Ways To Prepare Your Portfolio For A Government Shutdown

Screen Shot 2013-09-25 at 7.11.50 PM

Tim discussed this issue on CNBC this week.

We all stare agape, shocked that the U.S. government has allowed splintered self-interest to rise above its collective duty.  No, we’re actually not surprised.  Sadly, we’ve come to expect this.  The question we have to answer is: Are we going to alter our lives, our financial plans and our portfolio strategies to accommodate D.C. drama?

Unfortunately, there isn't a specific portfolio prescription for political gamesmanship or government gridlock.  Heavy handed federal influence in the aughts, especially since 2008, has taught all of us that the government may impose its fractured will at any time, effectively changing the rules of the game.  But the strategy to deal with this is little different from dealing with one of the market’s constants: UNCERTAINTY.  Consider utilizing the following five strategies in response to today's brand of uncertainty:

1. IF you have created a portfolio that is designed to accomplish your objectives over the long-term through deliberate diversification, you may be wise to respond to the news of a government shutdown by simply IGNORING it.  (This is my favorite response.)

2. Crises of every variety can serve as a good reminder to do what we should be doing anyway in our management of investments—like reallocating. This may be a particularly good time to siphon some U.S. exposure, which has been on a seemingly undeserved tear this year, shifting it to the international exposure in your portfolio which has likely lagged.

3. Regardless of the market's direction, increased uncertainty tends to create more volatility in the markets.  If your sanity will only be maintained by “doing something” at this time, you may respond to this aggressively by purchasing the VIX through a volatility index that rises when the spread between market peaks and valleys rises.  Or, respond conservatively by increasing cash allocations.

4. If this government standoff extends, the economy's recent trend toward optimism may also revert, causing the Fed to balk at its expressed intent to taper its bond-buying.  If so, you might get another chance to re-finance your mortgage and slow any strategies you've employed that are designed to hedge against rising interest rates.

5. Recession (or depression) in Europe, protracted Middle-East conflicts, war in Syria, slowed growth in China, student debt bubble, government debt bubble… Take your pick of the crisis du jour that could send our high-flying S&P 500 into the correction (or worse) many feel it deserves.  Could a government shut-down be the back-breaking straw for this weary camel?  If you rode the market all the way down and then all the way up, it might be a good time to conduct a portfolio analysis with the goal of making capital preservation a higher priority.  To stay on the ride isn’t investing—it’s gambling.

Inaction is likely the best action to take in the face of this month’s government drama as long as you have a well-conceived, well-implemented investment strategy.  But this flavor of uncertainty could also be a great reminder to do what you should be doing anyway—ensuring that your portfolio is not a collection of hunches but a well-oiled machine constructed of wisdom, knowledge and foresight.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Boomer Esiason: NFL Great Turned Life Insurance Advocate

Things are super at the Super Bowl“Today is your day to go out into the world.  You’re going to be great!”  This affirmation is one of a precious few memories that National Football League great, Boomer Esiason, can vividly recall about his mother, who died when he was only seven.

She was the “Belle of the Ball,” according to Esiason’s grandparents and older sisters—a beautiful singer, dancer and piano player who “would light up a room” with her blond hair and blue eyes, inherited by her only son.  But Boomer was not old enough to own these recollections himself.  Those memories endear him to the woman he can barely recall, but his enduring memories are limited to only two.  The first was sitting on his mother’s lap while she tied his shoes on the first day of kindergarten, whispering prophecies that would indeed come true.  The second and last memory was being denied access to her hospital room as she died of ovarian cancer.  Young Boomer was relegated to sitting in a courtyard, the scene emblazoned in his memory, as his mother would occasionally come to an overlooking window to catch a glimpse of her boy.

Living With A Broken Heart

Almost 30 years later, in 1996, Esiason found himself at that same hospital visiting his maternal grandmother shortly before her passing.  But that time, as an adult with children of his own, he recalls looking from his grandmother’s room, fixating on the very courtyard where he once sat contemplating the loss of his mother.  There was so much that he didn’t—couldn’t—understand as a child that he was able to comprehend as a husband and a father.

Boomer’s father, Norman, was a member of the Greatest Generation, a World War II veteran who took advantage of the G.I. Bill.  He worked his way into a solid job, but his wealth was in his family, not his balance sheet.  The loss of his wife—her income, of course, but especially her presence—had a significant negative impact on their household.  But quiet, reserved and proud, he never once considered complaining or outwardly lamenting the financial difficulties he endured after the passing of his wife, even shielding his children from the reality.  Boomer recalls at the age of 16, lingering as his dad finished the weekly examination of household finances so that he could ask for five dollars to take his girlfriend out, a favor he was rarely denied.

“I know that he lived with a broken heart,” the younger Esiason confessed.  “He died in 1999 on Thanksgiving, of all days, at the age of 77.  But from the time that my mother passed away in 1968 to 1999, I never saw my father with another woman in all those years.  He raised me with a broken heart and I think I was his escape.”  Indeed, Boomer gave his dad something to cheer about.  After setting 17 school records at the University of Maryland, he was drafted into the NFL by the Cincinnati Bengals in 1984.  In 1988, he led the Bengals to the Super Bowl and was voted Most Valuable Player of the league.  His dad was also able to see his son retire from football and begin a successful broadcasting career that continues to this day.

Today, however, Boomer’s passion for football seems eclipsed only by his desire to pass on the life and financial lessons that he has learned through experience.  So when Boomer was asked to be the spokesperson for Life Insurance Awareness Month by the LIFE Foundation, it was an easy decision.  “This absolutely fits what has happened to me in my life for a number of reasons,” Esiason told me as he opened the window into his life beyond the gridiron.  “When I became an NFL football player and decided to have kids in the early 90’s, I recognized that I didn’t want to have happen to my kids what happened to us, as [we were] struggling when I grew up.”

Further compounding the importance of life insurance for Boomer and his wife, Cheryl, is the fact that their son, Gunnar, has cystic fibrosis, a genetic disease that primarily attacks the lungs and often compounds the impact of other illnesses.  Day-to-day medical expenses are high, and the cost of finding a cure, higher still.  So in addition to the $100 million raised by the Boomer Esiason Foundation to benefit all CF patients, Esiason sees life insurance as vital to ensuring that his son has the financial resources necessary to continue his push toward a cure.  “If I don’t protect [Gunnar’s] future and I don’t protect my family’s future, then if we ever found ourselves in the situation that I found myself in when I was seven, it would be an unmitigated disaster and my kids and my wife would not be able to sustain the life that we’re fortunate to live now.”

Boomer and his best-friend, Tim O’Brien, made the decision to acquire adequate life insurance for their respective families together in the early 1990’s.  Later that decade, O’Brien helped move the Boomer Esiason Foundation headquarters “closer-to-heaven,” to the 101st floor of the World Trade Center’s North Tower.  While thankfully all of the Foundation’s full-time employees were absent the morning of September 11, 2001, Esiason lost over 200 friends, among them, Timothy O’Brien, husband and father of three children, ages seven, six and four when he died.

There is no financial strategy or product that can return a life when it’s been taken, but the life insurance conceived in Tim O’Brien’s foresight allowed his family to grieve properly and to move forward deliberately, without fear that their livelihood was also at risk.  There is no athletic accolade that will reprogram Boomer Esiason’s brain with memories of tender moments with his mother at his high school or college graduations, his wedding or the birth of his children, but the financial and life lessons learned from her loss and the endurance demonstrated by his father are already being passed on to future generations.

“My business is me.”

“I don’t have stock options and I don’t own companies,” Esiason told me.  “My business is me.”

Although I’ve never been asked to provide color commentary for the Super Bowl, and most of the people I know have never been voted the MVP of the most valuable sports league in the world, the same can be said for most of us: My business is me.  Your business is you.  Have you really done adequate financial and life insurance planning to ensure that those you love would be cared for even beyond the demise of your business—you?

Most people avoid conversations about life insurance because we generally don’t like to brood over the topic of our own demise, and many attach a hard-sale stigma to the life insurance business, using that as a rallying cry for inaction.  Death’s inevitability considered, a fear of it is certainly understandable, but meaningful discussions on the topic can be surprisingly life-giving.  And while the entire financial industry has more work to do in its evolution from sales to advice, the stereotype of pushy life insurance salesmen coercing you to sign your life away is grossly overstated.  Besides, neither of these concerns reduces the importance—the responsibility—of planning for the unexpected.

Boomer Esiason doesn’t sell life insurance.  He’s an ex-pro football player, an NFL commentator and the chairman of a foundation in support of the cystic fibrosis cause.  I don’t sell life insurance.  I’m a fee-only financial advisor, an educator and a writer.  Both of us, however, wholeheartedly support the LIFE Foundation’s initiative to bring awareness to the vital role of life insurance within financial planning in the month of September.  Consider utilizing their life insurance calculator and description of the different types of life insurance as a first step in that journey.  Feel free to ask me questions about your specific situation in the comments section or via email at tim at timmaurer dot com.  But please don’t let “Look into life insurance” be another important to-do left undone.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Life Is Not An All-Star Game And Investing Is Not A Home Run Derby

MLB: All Star Game-Home Run Derby162.  That’s how many games are played in the regular season of Major League Baseball.  There’s only one All-Star Game—in the middle of the season, played last night—and it’s rightly referred to as a break for the sport that requires more endurance than any other.

Life has come to look too much like an all-star game, with our greatest hits trotted out on LinkedIn, Facebook, Twitter, Instagram and more.  And while social media has made it easier to craft perception, we’re often putting the face on just the same at networking events, church (especially church) and family parties.

Façade creation is expensive.  It’s inherently limited to the external, the material, and almost always comes with a price tag.  It also tends to degrade, both in appearance and value.  How much time, effort and money do you expend on your perception engine?

No, life is not an all-star game.  It’s grinded out over long and arduous seasons, filled with many highs and lows and sleepless nights spent picking fiberglass-laden tobacco out of our teeth contemplating an oh-for-five game, imagining how we can do better next time.

The highlight for many of the All-Star break, however, is the Home Run Derby, where the game’s biggest sluggers do their worst to cream-puffs tossed by coaches.  It’s like batting practice on steroids (pun intended), complete with no fewer than 47 “Back, back, back…and it’s gone!” calls from the Swami himself, Chris Berman.  Quite the spectacle.

Too many investors, however, emulate home run derby strategies in their process, swinging for the fences on every pitch.  This is problematic for at least two reasons: First, the market’s not pitching balls at half-speed right down the middle.  There simply aren’t any no-brainers (Apple) or sure things (real estate).  The second reason concentrating your investing on the long-ball is a bad idea is that, well, you’re probably not an all-star.  I mean no offense—neither am I.  But I’ve been around the business long enough to see (brilliant) grown men brought to tears, exasperated by the apparent futility of their efforts.  I know enough to know that I don’t know enough to be a big-league stock picker, and I’m ok with that.

Unfortunately, many on Wall Street have a tendency to overestimate both the power of their swing and their knowledge of the game, and I’m not just talking about the overwhelming majority of mutual funds that underperform their benchmark.  Bill Miller, manager of the once-vaunted Legg Mason Value Trust (LMVTX) struck out at the plate so many times in 2008 (most notably in his all-in bet on Bear Sterns) that he inflicted systemic damage to the fund and the very firm he helped put on the map. As investing success persists, it seems, hubris inflates, making these minted sluggers ever more likely to end up walking back to the dugout with their heads hung low.

I’m not just talking about stocks, bonds and mutual funds as investments, either.  It’s even easier to deceive ourselves into thinking that an expensive degree or a home priced out of our reach are worthy of a home run swing.  Let’s, instead, make a practice of getting on base repeatedly, and allowing someone else’s luck or error to drive us home.

Chris Davis leads the major leagues in home runs with 37 only half-way into the season, but he admitted that it wasn’t actually Oriole Magic (or steroids for you haters).  “It was more about consistently putting the bat on the ball, not swinging at balls 14 feet out of the strike zone.”  That’s good advice, for baseball and investing.

If you enjoyed this post, let me know on Twitter @TimMaurer, and if you’d like to receive my weekly post via email, click HERE.

Can Financial Experts Agree On Anything?

IMG_0139The level of public disagreement in the financial kingdom—which adds financial media, gurus, educators, authors and bloggers on top of the behemoth financial industry—has become so prominent that the public doesn’t know who or what to believe.

DIFFERENTIATION

Disagreement—or put more politely, differentiation—pays the bills.  It puts us on the map, drawing attention to us and our ideas.  Differentiation isn’t inherently bad, but it’s certainly not always good.  “The thing is, differentiation is selfish,” says Seth Godin, marketing author/guru extraordinaire.  “Most customers, of course, don't have the same selfish view of the market, the same obsessed knowledge of features and benefits.”

We, as financial experts, might consider acknowledging that those whose patronage we seek don’t care nearly as much as we do about that which differentiates us.  Their lives do not hinge (as ours often seem to) on the difference between passive and active investment strategies, term and permanent insurance, fee-only and fee-based planning, fiduciary and suitability standards, capital gains and ordinary income tax rates, and the list goes on and on.

Even though we may be willing to sacrifice our very livelihood, devoted to differentiating on one or more of these issues, most people who seek the opinions of financial experts just want a better life.

THE FINANCIAL COMMON GROUND PROJECT 

The differentiation frenzy came to a head a few weeks ago when Dave Ramsey reared back and threw a round-house tweet at a collective of financial planners who aggressively questioned the validity of his investment approach.  I wondered in a blog post response if a diverse group of financial experts would come together to find common ground, to affirm what we jointly believe to be the foundational principles of personal finance, to momentarily set aside our differentiation and speak in a single voice for no commercial benefit.

Over 30 experts from a wide variety of specialties and four different countries answered with a resounding YES.  Together, we co-authored a list of 12 Unifying Principles of Personal Finance that we hope experts and consumers alike can support and benefit from.

The only question now is, are we the only ones?  Please read the list below and click HERE to show your support for this initiative:

THE UNIFYING PRINCIPLES OF PERSONAL FINANCE

  • Progress:  The benchmark for success in personal financial planning is progress, not perfection.  Excellence is more a product of good habits than a revolutionary event.
  • Discipline:  A household must consistently spend less than it earns, regardless of the level of income.  The foundation of financial success is a disciplined cash flow system (such as a budget), which is designed to make household spending decisions purposefully and in advance.
  • Debt:  Debt wisely used can help build wealth, but fueling unsustainable lifestyles with borrowing is the quickest path to financial ruin.  We are well-served to pursue an eventual debt-free path.
  • Buffer:  Changes, surprises and failures are guaranteed, but their impact can be minimized through the creation of a financial buffer.  This buffer—a cushion of cash savings—will help lessen the burden of emergencies and other unexpected events.
  • Risk:  It is better to make an informed risk management decision than to act on a consequential reaction.  Many risks can be adequately managed through risk avoidance, risk reduction or self-insuring through risk assumption.  However, the potential for catastrophes from which a household could not survive financially should be transferred through insurance.
  • Investing:  Investors have succeeded utilizing strategies on a continuum ranging from entirely passive to surprisingly active.  None succeed purposefully, however, without following a disciplined strategy.
  • Taxes:  Taxes are an important element of financial decisions, but rarely the most important.  Tax minimization is wise while tax evasion is illegal.
  • Giving:  Giving of time and money is good for everyone, donors and recipients alike, and may also result in a reduction in taxes.
  • Future:  Plan for tomorrow, live for today.  Failure to plan for major expenses, such as education and retirement, is folly; but deferring all gratification for the future strips the joy from life today.
  • Estate:  Everyone, with very few exceptions, should have well-conceived and clearly written estate planning documents including, at minimum, a will (with or without a revocable trust), a durable financial power of attorney and advance directives (including a health care power of attorney and living will).
  • Legacy:  Leaving a legacy—a relational impact on friends, family and community—is as or more important than leaving an estate—the sum of your assets less your liabilities at death.
  • Guidance:  Whether from a book, blog, article, class, radio program, TV show, advisor or specialist, financial advice is only beneficial to the degree that it is consistent with your values and goals and leads to action.

To learn more, sign-on or give us your thoughts, please click HERE or navigate to www.financialcommonground.com.

Unloc(k) The Mystery Of Your 401(k)

401k Lock-01Last week, in my review of the Frontline program, “The Retirement Gamble,” I promised to follow-up with a short blog series giving concise direction on how to demystify some of the more confounding elements of personal finance, beginning with the foremost culprit of “The Gamble” (aside from J.P. Morgan Chase, of course)—the 401(k):

Recent action by the Labor Department requires more transparency in the reporting of fees in 401(k)s.  “While the intent and spirit of the legislation was good, I’ve found the implementation was pretty ineffective,” says Josh Itzoe, author of Fixing the 401(k).  “It’s possible to be compliant from a regulatory standpoint and still make the information totally confusing and unclear.  I think that is where we are."  While you’re overcoming your shock that the government has failed to simplify the regulation of [anything] to a satisfactory degree, consider taking these three steps to unlock the mystery of your 401(k) or other employer sponsored retirement savings plan:

1. Educate yourself on the structure of your 401(k) and the associated fees.  Yes, I know this likely falls just below rolling in poison ivy on the totem pole of ways that most of us would like to spend our time, but we sacrifice the privilege of voicing our displeasure with the state of our primary retirement savings vehicle when we don’t even understand its basic structure.  Start with what you already likely know: Do you get a company match, and if so, how much do you have to contribute to reap its full benefit?  Then, move on to the fine print describing your company’s requirement to actually follow-through on its match (they can likely skip matching in certain circumstances) and when it is paid.  Review your investment options and their short-, mid- and long-term performance.

If you’re not satisfied with the amount of information provided, plug your mutual fund options into the “Quote” box in the top-center of Morningstar.com to see what they think of the fund.  Theirs is not the last word, but their findings can add to the context of your decision-making.  And while I believe that it can be worth it to pay truly gifted fund managers for outstanding work, 401(k) mutual fund options are notoriously mediocre.  This means that finding the lowest cost funds in your composition of a diversified portfolio is of paramount importance.  Emily Brandon’s article, “What You Need to Know About 401(k) Fee Reports,” offers a process designed to enlighten us on making the most of the new fee disclosures, which unfortunately are cryptic enough to render them nearly useless without guidance.  If you end this journey of discovery just as (if not more) confused as when you began, get some help; preferably from someone who won’t turn your confusion into a sales opportunity.

2. Speak up!  It’s a tiny minority of us who can go into the office the next day and restructure our employer-sponsored retirement plan, but wheels don’t squeak unless you turn them and we all know which wheels typically receive oil and in what order.  “You may not have the power to change the plan, but you can and should provide feedback to your employer about the plan,” says Roger Bair, director of retirement plan services at the Financial Consulate, Inc.  The chances are also good that your employer would benefit just as much from improving your 401(k) as you would, but it won’t be easy to affect change for numerous reasons.  (Among those reasons, your boss might lose a golf buddy if the plan is replaced!)  I wouldn’t necessarily recommend going quite as far as Maya in Zero Dark Thirty, writing the aggregate number of days you’ve been waiting for action on your boss’s office wall every morning, but pleasant persistence can go a long way.

3. Control what you can.  My biggest concern with Frontline’s “The Retirement Gamble,” as well as other notable critiques of the financial industry’s retirement plan mismanagement, is the less-than-subtle implication that the financial industry is so bad and 401(k)s are so complex and the effort of saving enough is so monumental that the majority of Regular Joes can do little more than raise the white flag and give up on retirement savings.  I agree with almost all of the criticism, but I’m unwilling to concede that the battle is lost.  Bair guides that “you should use the best investments and make the best asset allocation you can given the tools that you have.”  Itzoe encourages that the primary determinants of successful nest egg building—the amount saved, being globally diversified and choosing the best available funds with the lowest possible costs—still fall within our control.

In the 401(k), we see the mess created when corporate self-interest, profit motive in the financial industry and regulatory bungling collide, but for most of us, the 401(k) is still the best gig going for increasing the probability of a comfortable retirement.  So get to know your plan.  Better.

Retirement Doesn’t Have To Be A ‘Gamble’

Retirement Gamble-01If you missed the well-documented, artfully produced PBS Frontline program, The Retirement Gamble,” here’s the nutshell version: You’re screwed and it’s the financial industry’s fault.  This is a piece that is absolutely worth your time to watch if you haven’t yet, but I will warn you that it takes on a bit more of a sensationalistic tone than I’d hoped for from PBS (maybe because the chief correspondent is also one of the protagonists in the story?).

Yes, it’s true that the financial industry deserves the vast majority of the criticism it receives, but I’m pretty sure that if you watch the video in reverse, you hear the words, “J.P. Morgan Chase is Beelzebub.”  Outright demonization is a stretch, even if only a tiny one.  And Jack Bogle, the father of passive investing, may be the closest thing to a saint in the financial industry, but he’s so deified in this program that by the end I thought I was watching a Vanguard commercial.  And most importantly, if you’re going to take an hour to scare the crap out of people—telling them what’s broken and what doesn’t work—I’d like to see a bit more on what works and how we can mend what’s broken.  And yes, PBS, that’s an implicit challenge to follow-up “The Retirement Gamble” (TRG) with a part two: “Retirement Doesn’t Have To Be A Gamble.”  But just in case they’re not already filming and don’t read this post, let me attempt to paint a slightly more balanced, if not hopeful, scenario:

YOU still play the primary role in the success of your retirement planning.  You still choose how to spend your income and how much to save.  I can’t have been the only one to notice that one of the aggrieved “nobodies” featured in TRG is shown working on an Apple laptop at her kitchen table equipped with a flat-screen TV, sitting in front of stainless appliances.  I’m not judging her and I’m not sermonizing you, but most of us have limitations placed on our income that require us to make decisions to endure some form of sacrifice today in order to provide for tomorrow.  While compounding gains may be the engine propelling us toward a comfortable retirement, it’s not going anywhere without the fuel—our contributions.

YOURS is not as hopeless a situation as TRG makes you feel.  Crystal Mendez is one of the regular Janes featured in the program.  She’s 32 years old and making $70,000 per year, decent money for a teacher, and she’s saved $115,000 already for retirement.  According to a recent Fidelity study that judges our retirement readiness based on multiples of current earnings at different phases of life, Crystal is well ahead of the curve.  The study suggests she should have approximately 70% of her current salary saved—and she’s already at 164%.  (Nice job, Crystal!)  Furthermore, if she saves 10% per year until she’s 67 years old (when she’ll be eligible for full Social Security benefits), she’d then have $2,442,544—17 times her salary if we estimate she earns a 7% annual average rate of return and her salary increases only 2% each year.  According to Fidelity, she’d only need eight times her salary for a comfortable retirement at the age of 67.

Crystal's Path

YOU don’t really want the good ol’ days anyway.  We have a habit of painting the days of yore as an idyllic time, when everyone joyfully punched a time clock for the same benevolent company for 40 years straight; the same company that then subsidized a blissful 20 year retirement spent golfing and sipping lemonade on a wrap-around porch attached to a Cape Cod house unencumbered by debt.  But guess what, even if that sweetheart deal existed then, and more importantly today, we wouldn’t want it!  According to CNNMoney, “…by the time they reached their forties, the boomers worked about 11 jobs—equivalent to a job change roughly every two years.”  Generations X and younger hop jobs slightly more.  And is it possible that the employers of former generations weren’t solely offering pensions out of the kindness of their hearts, but also because they wanted to make it very difficult for employees to consider leaving their job—and their pension?  It is true that the once fabled “three-legged stool” of retirement—pension, Social Security and personal savings—is now down to a pair of stilts for most baby boomers and likely no more than a pogo stick for Gen X and younger; but a minority of us would trade a lifetime of occupational freedom for the continuation of a portion of our paycheck in retirement.

Yes, the odds are stacked against us.  And no, the financial industry does not exist for the benefit of its customers.  Yes, that’s a shame.  And no, despite a movement of well-intended zealots and justified outrage in the media, we’re not likely to see the Masters of the Universe unseated in less than a generation (although that won’t keep us from trying).  BUT, your chances for a comfortable retirement are still better than a roll of the dice, as seemingly purported in “The Retirement Gamble.”

Over the course of the coming weeks, I’ll be bringing you a collective of wisdom from numerous sources on how you can demystify decisions regarding not only your retirement, but specifically your 401(k) or other retirement plan, mutual fund selections and a couple of the most complex personal insurance products.  That way, regardless of whether or not the fallen angels of the financial industry clean up their act, you’ll be able to make informed decisions.