“Are you measuring yourself in the gap or the gain?”
No, this isn’t a question pitting retail clothing against laundry detergent. It’s a question posed by Greg McKeown, the author of the essential book Essentialism, in his recent 1-Minute Wednesday newsletter.
Your answer matters, both in the way you approach money and life—but especially money.
“Gap thinking means looking at the distance between where we are and where we want to be (or comparing ourselves to what other people have achieved),” said McKeown. “Gain thinking means looking at the progress we have already made.”
For example, I had breakfast Friday morning with two friends, both of whom have experienced degrees of success in their professional lives that I could argue dwarf my own. That’s where my head would be if I was a gap thinker, anyway.
If I was a gain thinker, however, I might relish the fact that these dudes thought highly enough of me to give me a seat at the table…or at least that I was in good company for a free breakfast at a great restaurant!
As a financial advisor for a couple decades, I can tell you that the #1 question I’ve been asked by clients is some version of, “So, how am I doing…you know…relative to your other clients in similar situations?”
It’s not because these people are overly insecure or emotionally needy. But money—and, in many ways, financial planning—breeds gap thinking. Dollars, cents, credits and debits make it so easy to create a seemingly tangible success scorecard.
Perhaps you’re familiar with Lee Eisenberg’s book from several years back, The Number: A Completely Different Way To Think About The Rest Of Your Life. He recalls a regular-rotation TV commercial at the time (that may still be running in some form today) for a big financial institution where you see people walking down a busy street, each with a dollar number hovering over them.
This is the type of image that the very nature of money makes it hard to avoid.
It’s not an entirely unhelpful notion to quantify our financial security in the form of a single number, despite the risk of oversimplification. But such thinking leads us very quickly to comparison, which many years ago Teddy Roosevelt accurately declared to be “the thief of joy.”
That’s the message of one of my favorite books of 2020, “The Psychology of Money,” written by Morgan Housel and inspired by a popular blog post he wrote in 2018. It’s a compelling read and the book offers many great lessons, but I thought this particular encouragement was worthy of the fresh slate afforded us all by the start of a new year:
“We all do crazy stuff with money, because we’re all relatively new to this game and what looks like crazy to you might make sense to me. But no one is crazy—we all make decisions based on our own unique experiences that seem to make sense to use in a given moment.”
Author and financial planner Rick Kahler echoes this sentiment, suggesting that “every behavior around money, no matter how illogical it seems to you or others, makes perfect sense when we understand the underlying thoughts, feelings, and beliefs.”
What difference does it make if we just keep screwing up? Can we increase our accountability to ourselves? Here are four steps you can take to help you understand these insights—and screw up less:
The question of whether or not the U.S. President or a particular party has an impact–positively or negatively–on stocks, bonds, unemployment, inflation, the deficit, and GDP growth–has been flying around like crazy. But especially in the midst of a contentious election cycle, it’s never been harder to find clear answers.
But take a glance at this interactive chart that enables you to click on each U.S. President going all the way back to 1929 to see what the major market and economic indicators looked like for each presidential cycle. I think you’ll find that it’s conclusively inconclusive:
So, should you consider changing your investment plan ahead of the election?
Short answer: No.
And here’s the slightly longer answer from one of the brightest investment people I know (and a darn good guitar player), Jared Kizer, CFA, Chief Investment Officer, Buckingham Wealth Partners:
Everything coming at us right now is purposefully designed to unsettle us. We have to work to be settled in an environment like this. Here are three simple steps you can take to find peace in the midst of the chaos, and likely help others around you do more of the same:
1) Control Your Inputs.
A friend told me yesterday that he needs to replace the screen on his brand new, fancy-schmancy, big-screen OLED television. You know why? Because the banner running across the bottom of the screen of his news channel of choice has scorched itself into the screen. I didn’t even know that was possible.
Turn off Fox News. Turn off CNN. The former has a daily show called “Special Report,” a phrase that was once reserved for something that was Earth-shattering news, and the latter has a daily show called “The Situation Room,” which used to be an actual place in the West Wing of the White House reserved for the most serious of situations are discussed.
The last time I put a presidential campaign sign in my front yard was 2004. We lived on a small court, and we had just moved in that September. One of our neighbors was another young couple, but the other two families had lived there since the houses were built in 1960.
My political convictions were (and are) important to me, but one day, as I pulled into the court and saw the sign, it struck me that while it may have been a bridge to one neighbor, it could almost certainly be a stumbling block for another. I hadn’t even met all my neighbors in person yet—did I really want my vote to be the first impression I made?
I pulled out the sign, and I haven’t raised another since.
Sometimes I have to pinch myself, because as a financial advisor, my job is to meet people, learn about what’s most important to them, help them articulate those values as intentions and goals, and then help create and follow a plan designed to reach them. What a gig, and what a privilege!
One of the greatest gifts of my 20 years and counting in the business is the wide variety of people with whom I’ve been able to engage. While you might tend to think that there is a stereotypical financial advisory client, my experience has been anything but uniform. From teaching college students—one of the best educations I’ve ever received—to advising individuals and families, it’s the striking differences between people that have left an indelible mark on me.
Sure, aside from the college students, they all had something in common—they were blessed with means sufficient enough to hire someone to help in its stewardship—but that’s where the similarities stopped. And their political proclivities have ranged across a vast continuum.
Especially over the last decade, and increasingly over the past four years, I’ve also seen these political opinions manifest as convictions so gripping that I’d describe them as visceral. People seem increasingly concerned with the potential for politics to shape their lives externally, and these concerns are so deeply internalized that I can see, hear and feel the weight of them in the faces and voices of my clients.
These feelings seem just as strong across the political spectrum. It’s not uncommon for us, as advisors, to have a conversation with someone who is convinced that their livelihood is doomed and the very fate of our nation sealed if so-and-so wins only to find, in the very next conversation, that another person is convinced of something equally cataclysmic if such-and-such wins.
So what are we advisors supposed to do? How do we navigate these intense emotions with our clients? And how should we navigate the opinions we hold, knowing that our convictions are rarely, if ever, going to be entirely aligned with those of our clients?
It’s become almost passé to bemoan the exorbitant cost of a college education and the collective debt burden, now over $1.6 trillion, resting on the shoulders of U.S. students and parents. While it’s true that college tuition has risen at twice the rate of inflation, many academic consumers refuse to recognize their complicity in skyrocketing costs. Indeed, educational institutions charge what they do because we’re willing to pay for it.
Yet a perplexing antinomy exists—a college education can be excessively expensive, holding students and their benefactors financially hostage for decades, or it can be surprisingly inexpensive. Case in point:
Harvard Vs. Harford
Without accounting for any financial aid or scholarships, a student could trade one semester of Ivy League education for a four-year undergraduate degree from any number of excellent state universities. Specifically, if a student, living in Harford County, Maryland, were to commute from home to Harford Community College for two years and then commute to Towson University for the second two years, the total cost of tuition and fees—for an entire undergraduate degree—would be approximately $27,826 by my calculations, based on 2020 published estimates. That would buy you just a hair under 10% of four years of tuition, room, board and fees at Harvard–it wouldn’t even cover a single semester.
This is quite obviously a gross oversimplification, only factoring one of many important dimensions of the full college experience, and not accounting for the fact that few students at any college pay full price, but the illustration forces us to recognize that there are other educational options available aside from paying a fortune.
It also begs the question: In a day and age when the undergraduate degree has been largely commoditized and viewed as a prerequisite for virtually every white collar job available, do the intangible benefits to be derived from any collegiate scenario costing more than the $27,826 represent a good value proposition? Is the nearly $200,000 premium (in today’s dollars) you pay for the elite private or Ivy League undergraduate experience worth it? Is the $100,000 premium you pay to live on campus at an out-of-state, state university worth it? Is the $50,000 premium you pay to live and eat on campus at your state university worth it?
The answer for any of the above may very well be an emphatic and justifiable YES! but the value proposition for each student/school/benefactor combination will be different and worthy of exploration. Here’s a four step process that will help you make that determination and properly fund the resulting decisions.
Step 1: Can you?
This instruction is directed largely to parents, but the logic is identical and the process just as important for those flying solo in their educational endeavors. In developing your Family Education Policy, you must first ask the question “Can I?” What is a reasonable expense for your children’s education that your household could bear without unduly hampering your own financial plan, present and future?
It’s actually a selfish act to prioritize your children’s education over your retirement savings, because it will be much less costly for your children to pay off finite student loans than to bail out parents in the midst of a financial and health crisis in their old age. If you can’t, don’t; then set your pride aside and discuss this reality with your budding scholars.
If you’re having trouble answering the question Can I? without more of a frame of reference, let me give you a rough idea of how much you’d have to save monthly, from the day your child is born, for 18 years, assuming the cost of education rises at 5% and you’re able to earn 7% on your savings:
Community college / In-state State U commuter: $ 155/ mo
In-state State U resident: $ 542/ mo
Out-of-state State U resident: $ 857/ mo
Premier private / Ivy League resident: $1,618/ mo
Does that offer some perspective?
Step 2: Will you?
After determining whether you can, you should follow that with “Will I?” The financial entities who sell and administer education savings plans have seemingly colluded with academia to create an unspoken moral imperative for parents to fund their children’s college education. And while I have no desire to strip you of a healthy desire to pay for your child’s post-secondary schooling, I want to give you the freedom to recognize that it is your choice to make. This is an opportunity to parent, and to make a mark on your children based on your articulated personal principles and goals—the first step of every good financial plan. I urge you to capitalize on that opportunity.
Step 3: Develop a Family Education Policy
At this point, you can, with the aid of your co-parent, clearly set forth a Family Education Policy. This is your answer to the question your kids will eventually ask: “Hey, Katie’s parents told her they would pay [whatever] for college—what are you doing for me?” My hope is that you won’t even wait for that query to arrive, proactively communicating this message even before curiosity forces the issue. Maybe you’ll offer to pay up-to the four-year cost of an in-state state university education; or possibly up-to four years at your alma mater (although I’d warn you that this common directive seems less about them and more about you); maybe you’ll offer to pay the first two years of school, or a fascinating idea one client proposed—the second two years (to ensure her children were serious about the endeavor).
If you have the wherewithal and desire to offer your children the educational blank check—you can go wherever your heart desires that will accept you—by all means, do so. But if all you have is the desire and not the wherewithal, you’re doing no one a favor.
Step 4: Develop an Education Savings Plan
The number 529 has become nearly synonymous with education savings, and in part for good reason. 529 plans offer education savers options for hedging the future costs of education and/or tax privilege. Prepaid tuition plans give us the opportunity to pay for tomorrow’s tuition at today’s prices. The plans are state administered and typically only cover the cost of tuition in your state (although you may be able to use the equivalent of the tuition cost of your state’s universities in another state). If the cost of education continues to rise at its current pace, this would appear to be a good hedge, but the solidity of your prepaid plan of choice must also be considered. Since many states are enduring financial difficulties of their own, the solvency of some plans has been reasonably questioned.
A 529 investment savings plan is very different conceptually. It is an investment bucket of mutual funds you own that receives tax privilege similar to that of a Roth IRA. You contribute after-tax dollars to the plan, and the principal and growth can be distributed tax-free if used for a wide range of qualified education expenses. You may also receive a state tax deduction for a portion of your contribution. The contribution limits are quite liberal, allowing $15,000 per parent (or even grandparent), per child in 2020, also with an allowance to prefund up to five years. But since the funds invested in these accounts are subject to market volatility, a bigger concern over the past decade has been whether or not you are actually making money at all—much less over the college inflation factor.
If your children are very young and you can stomach the volatility, a college investment savings plan is an excellent tool, but I highly recommend using a no-load version of one of these 529 plans so you don’t start your investment in the hole via a brokerage commission. If your children are older and you live in a state with a strong prepaid tuition plan, that may be a good option to consider. But in either of these cases, I recommend you apply the 50% Rule. Save 50% of your expected education needs in education-specific 529 plans, but store the other 50% in conservatively invested taxable accounts (or even savings accounts and CDs) since there are so many other variables at work.
Does education have a price? Learning has inherent value which is incalculable. Education is one of the primary ways we learn. I taught at the college level for seven years and believe that it is one of my most important contributions; but while the educational process may be priceless, we must not ignore the associated price tag.
This article, updated in 2020, was originally published in my blog on Forbes.com.
Do you ever get so caught up in your own head, in your own stuff, that you lose perspective? I can’t imagine a time that would be more inclined to lead us to insular thinking, self-pity, conspiracy theorizing, and perspective losing than this season we’re trudging through.
So in this week’s Financial LIFE Planning weekly installment, you’ll get some perspective that I hope will give you peace and help you make wise financial, and other, decisions:
An exclusive FLiP video chat with Michael O’Neal, the Executive Director of global non-profit, ONEWORLD Health
A confounding Weekly Market Update with a side of cheese
A reminder about our capacity to overestimate our own capabilities
Oh, and Happy Mothers Day, to mine and all of you moms!
How to Get More Than You Give
Have you ever noticed that when you give to someone whose needs are greater than yours, you actually feel like you have more? Whether it’s a friend in need of a pick-me-up, an investment of your time at a soup kitchen, or a charitable contribution, this change in perspective is one of three major benefits of giving.
The other two? Well, in addition to our perspective being changed, we experience a biological phenomenon, an endorphin rush. Apparently, we’re biologically wired to feel good when we give. Cool, right? And pragmatically, depending on how (or if) you file your tax return, you may also get a rebate on a portion of your financial gifts…check with your CPA.
This week, I recorded a video chat I had with the Executive Director of ONEWORLD Health, Michael O’Neal, specifically for you! We discussed their unique approach to sustainable development work that has enabled them to survive the COVID-19 crisis–and the success they’ve had cultivating relationships with individuals, families, businesses, and even rock bands, like NEEDTOBREATHE, who alone has raised over $2.3 million for the work their doing.
He also explains why we always get more than we give. Click below to watch the nine-minute excerpt, or top off your coffee and click HERE for the full 23-minute interview.
And yes, if you’re jonesing to put that give-more-than-you-get business to the test right now, it’s easy–click HERE and hit the Donate button. And if you choose to give $50 or more, please let me know, because I’d like to send you a personal thank you.
Weekly Market Update:
After two marginally down weeks, the market had another week in the green, almost confoundingly so:
+2.56% DJIA (30 big U.S. companies)
+3.50% S&P (500 big U.S. companies)
+2.71% EFA (~900 international companies)
The biggest question for most people is, “How!? How is the market going up when the economic news is historically bad?” It’s true: Unemployment this week hit 14.7%–the worst since the Great Depression.
Although clearly indeed of a beard trim–sorry, Mom!–I joined Jill Wagner on Cheddar (an online TV channel) to discuss this seemingly odd phenomenon, and to offer some suggestions for the unemployed, under-employed, self-employed, and gainfully-employed in these challenging times:
Is the wind at your back?
I’m not a “cyclist,” but I do love to ride my bike. Last week, I took a new ride, recommended by my good friend–who is a cyclist–that stretched me a bit, and gave me another healthy dose of perspective.
I love to have a destination, so I set my course for the Bulls Island Ferry, a beautiful spot in Awendaw, SC. The total ride was about 20 miles, and on the way there, I felt like an Olympian, averaging about 18 mph. (“Maybe I can call myself a cyclist,” I was beginning to think.
With head held high, I took in the beautiful view, nodded proudly to the couple that I passed on the last mile, and headed homeward. Only then did I realize that I’d had a meaningful tailwind that I’d now be fighting the entire way home. The wind had been at my back.
And as I was thinking about a contingency plan on mile 15–suffering the embarassment of calling my wife and asking her to pick me up in the middle of nowhere, a length to which I thank the Lord I didn’t (quite) have to go–a question hit me like an easterly wind pounding route 17:
How much of whatever I’ve done well in life was actually just thanks to a solid tailwind? Being born into a great family? In the right zip code? Being on the right team? Having selfless friends? Working with amazing people?
How about you? Is it possible that your successes have been aided by a tailwind? If so, who is deserving of thanks? (In addition to your mother, of course!)
How about now? If you feel like a failure at the moment, is it possible you’re just facing the greatest economic headwind of a generation? Who can you ask for help?
Or if you’re fortunate enough to be cranking through this crisis at top speed, who can you help?
And if you think of the people who’ve been your tailwind, I hope you take a moment–why not now?–to thank them.
The spent lungs and sore butt were worth the perspective…and so was the view:
I hope you have a great Mother’s Day and find a healthy tailwind this week!
Few things in our lives have been so dramatically altered throughout the COVID-19 crisis as school and education. From online coursework to cancelled proms to a March devoid of Madness but full of uncertainty about whether or not college campuses will even reopen for the fall semester, there seem to be even more questions than answers.
How events unfold is especially high stakes for the students and parents facing the myriad of decisions surrounding the meaningful investment—personally and professionally—of college education. So, both as an advisor and a parent of teens, I asked one of the most knowledgeable people I know on the topic of college planning, my colleague Dave Ressner, a wealth advisor and education planning specialist. And he answered:
Tim Maurer: What impact is the COVID-19 crisis having on institutions of higher learning?
David Ressner: COVID-19 has affected almost every sector of the economy, and higher education is certainly no exception. One higher education group estimates more than $100 billion in emergency response costs across the sector, and some schools are worried they won’t be able survive this crisis.
The coronavirus is dominating our attention so pervasively in the present moment that the notion of retirement seems even more distant for savers. That’s understandable—natural, even. But it’s precisely our fixation on the present that causes us to struggle to follow through on our intentions to secure our future. Let me show you why.
I have a proposition for you: I’d like to give you one of two gift certificates to your favorite restaurant (that is sure to reopen when the quarantine is lifted). But first, please picture that inviting atmosphere at 7:00 p.m. on a bustling Saturday night, the thoughtful waitstaff, the right musical backdrop, and the perfect meal in front of you and your ideal dinner companion. Now, choose between a $200 gift certificate you would receive today or a $400 gift certificate you would receive 10 years from now.
Time’s up. Which did you choose?
Unless you’re gaming the system – that is, you’re anticipating a financial advisor would never encourage seemingly impulsive behavior over deferred gratification – you almost surely chose the $200 gift certificate today. I would too. Lord knows we’re going to be ready for a night on the town when we return to public life! And that doesn’t make us wasteful or foolish. It makes us human.
To be clear, our all-so-human behavior isn’t inherently foolish or wasteful, especially in this instance. After all, your tastes could change 10 years from now. Another new restaurant could come into town. Heck, your favorite restaurant could shutter its doors, making your gift certificate worthless! A guaranteed two hundo today is almost certain to win over $400 a decade from now for most of us.
This tendency is a cognitive bias called hyperbolic discounting. It suggests that we’d prefer having something today rather than tomorrow, and that our bias for the present only compounds the further away on the calendar we place our hypothetical tomorrow.
But hyperbolic discounting moves out of the hypothetical and into reality when we examine it within the context of saving for retirement. Psychologically – biologically, even – we’ll generally default to today over tomorrow, and the result is that a generation of retirees hasn’t saved enough to meet their goals in retirement.
The odds were stacked against future retirees when the 401(k) was introduced. Think about it. You’re enduring one of life’s more stressful endeavors – starting a new job. You’ve exhausted your mental capacity and willpower on a long series of important decisions. After selecting tax withholding, choosing health insurance coverage, and navigating an array of other benefit options, you arrive at your 401(k) or equivalent retirement plan. And this is how your brain hears the question:
“Would you like to further reduce the amount you can spend today by setting even more money aside for a day decades in the future that might never come?”
How many people do you think opted-in to a 401(k) within the first six months of work? The numbers are atrocious – one study found 34%. But then, inspired by behavioral economists, companies started using an opt-out mechanism, requiring new hires to choose not to set aside at least a modicum of savings. The numbers shot up.
That sounds great, but our bias to choose the default doesn’t actually address hyperbolic discounting. More people may be saving, but they still aren’t saving enough. How, then, can we solve the hyperbolic discounting dilemma? Can we rewire ourselves to prefer saving more?
The answer, according to extensive research by Hal Hershfield on the subject, is to picture yourself in retirement. In one of his studies, Hershfield showed that digitally altering images of present-day participants, extrapolating what they might look like years down the road, could positively affect their saving behavior.
Furthermore, we can employ our imaginations to animate those future images. What do you most want to be doing in retirement? How do you want to feel?
In other words, to save more, we should first think about the lifestyle we want in the future and then back into the financial decisions required to make it a reality. And the degree to which these visions of our future self are vivid and positive will increase our propensity to save more.
Now, back to our initial proposition. The notion of $200 to spend today or $400 to spend 10 years from now isn’t so outlandish. If you’re earning an annual average return of 7% – a reasonable expected return for a balanced investment portfolio – your money doubles in roughly 10 years. And in retirement, it’s precisely stuff like food – and housing, transportation, travel and recreation – that add up to the lifestyle we desire.
So, wherever you are on the continuum from now until your personal retirement then, consider using your imagination to help increase your motivation to save for the future.
Investing is a young person’s game, am I right? I mean, I can understand the argument for ignoring short-term market dives when it’ll be decades before you need to actually touch the money. But what about retirees who need income today? Should retirees and near-retirees be cashing out of stocks on fears that a worldwide pandemic will continue to throttle markets?
First, it’s important to address this question on an emotional level before attempting to respond rationally, because it’s not cold, calculating rationale that leads the charge in times of high market volatility, especially of the downward variety. (Indeed, as my friend Jeff Levine said, “Nobody ever seems to mind volatility when it’s up.”) Furthermore, when we are feeling and responding through the fast-acting, impulsive processor in our brain, thoughtful logic isn’t particularly comforting.
Retirees, in particular, may feel downright scared, and perhaps their fear is justified, because:
They feel disempowered because they’re no longer earning a paycheck and are now reliant entirely on sources of income beyond their control.
They don’t have as much time as an investor in his or her 20s, 30s or 40s to recoup losses.
The math does change for those who are in the distribution phase of their life. Losses can indeed be compounded when you’re taking income out of a portfolio, rather than opportunistically buying through regular contributions.
Therefore, whether you’re a financial advisor counseling someone through turbulent markets or a white-knuckled investor eyeing the eject button, please know this: Every emotion is valid and worthy of acknowledgement. The best financial advisors will take it one step further and explore the emotions in play, even enlisting them in support of the best long-term investment strategy.
Once we’ve addressed this valid concern on an emotional level, it’s time to look at it from a logical perspective, and indeed, for most retirees, it’s important to maintain a healthy allocation to stock exposure in order to ensure that your lifestyle keeps up with inflation. In determining how much risk any investor should take, one’s “time horizon”—the ability to take risk—is a material consideration. A retiree in her late 60s has a shorter time horizon than a new investor in his early 20s, but, however limited, theretiree’s time horizon still isn’t zero.
Retirees need to satisfy income needs today, but they also need to address income needs in the future. Therefore, while it’s a slight oversimplification of a total return portfolio strategy, in times of extreme market volatility, I would invite retirees to view the meaningful portion of conservative fixed income in their portfolio as their income engine in the short-term while their portfolio’s stock exposure is designed to generate income years from now.
(Of course, this presumes that one’s fixed income portfolio is actually conservative, a stabilizing force in your portfolio. Corporate, longer-term, and especially high-yield bonds tend to have equity-like characteristics in down markets; so dare to be boring with your fixed income allocation.)
The optimal percentage of equities in a retirement portfolio will be driven by the retiree’s need to take risk. If you don’t need to take the risk, who am I (or any other financial person with a propensity for stock market cheerleading) to convince you otherwise? Yes, you might need a boost from market returns to outpace inflation. And yes, even if you’d struggle to spend all your money in this lifetime if you kept it in a Mason jar, you might consider investing it for the next generation. But there’s no moral imperative to endure market volatility if you don’t need or want the long-term benefits we expect to receive.
And that’s especially because the most important factor in determining how much equity risk you take in your portfolio is your internal willingness to assume risk. This is the gut-check test, and if you’re at risk of bailing out at the bottom—the worst possible time to sell—you must limit your exposure to stocks. Sticking with a conservative portfolio will earn you more in the long run than fleeing a more aggressive one.
Of course, you can only “stay the course” if you have one. You can only stick with the strategy that exists. Typically, emotions are heightened among those who don’t fully understand or can’t fully articulate their strategy and especially among those who don’t have one.
Too many investors own a collection of securities—or even a collection of someone else’s strategies—that have built up over a lifetime, rather than a well-designed, purposely built, customized portfolio. Those investors should be concerned, and they should use this market hysteria du jour as the catalyst for a substantive portfolio review.
If you’re in the minority, however, who do have an understandable, goals-based strategy—who have considered their ability, willingness and need to take risk—and who have proportionately set their exposure to stocks, then by all means, rest easy and rebalance. Know that however ugly this particular market event gets, it likely will not amount to a blip on the radar when looking at your lifetime of investing. Acting rashly in these situations is more likely to do harm than good.