If you are recently married or planning your wedding I know how much you have on your plate. I recently became engaged and the wedding planning is in full swing. I mention this to explain why there was an open wedding planning magazine in front of me. My wonderful fiancé showed me an article on financial planning for newlyweds that was in this magazine. After perusing the article I mentioned how most of the advice was good but some of it was really out there and nothing I would ever suggest to my clients. So after a little discussion I was encouraged to produce an article on the same topic but with only the good parts. What follows is that article. Yes, I do see the flaw in my advising newlyweds when I’m not married yet. However, I am going into my eleventh year in business and have given this same advice to many of my clients with rather good results over the years.
The very first thing is please have multiple checking accounts. You each had your own checking account when you entered into this relationship (hopefully) and it should stay that way. In addition to your individual accounts please open a joint checking account. The joint account can be used for household bills, joint savings, and major purchases. So if you cash a physical pay check just deposit the bulk of it into the joint account and the remainder in your personal. If you have your check electronically deposited, then see if your employer can split your check into multiple accounts or have the entire thing go into your personal account and then transfer money over to your joint account. Your retirement planning money and insurance premium money should be paid out of your joint account. After all you are planning on staying together forever (if you’re not, maybe the whole marriage thing wasn’t the best idea) and you will retire together so you can contribute together. This works very well since rarely are a husband and wife in total agreement on how much to put aside and how much risk to take. This way you can average it out or come to a compromise somewhere in the middle and use your joint money. If there is something you want to do separately, play the lottery, invest in speculative penny stocks, or be very safe and buy a CD, you can do that with your own money and not risk the “our” money.
To focus on my last point, the insurance premium money should come out of the joint account as well. In the case of homeowners or renters insurance, you are living together, or will shortly so it should be a shared expense. The same should hold true with your life insurance and disability insurance. You purchased it to take care of each other, so it should come out of the joint account. Also, if you’re going to pay monthly, many companies offer the cheaper option of auto-deduction from a checking account. Using the joint account makes accounting for these premiums easier. A joint account can make your advisor’s job easier as well. When I do a retirement plan for a couple I look at the total of the couples’ assets and where they are invested. So when we rebalance we can look at the investments as one pool of money. The joint account makes it easier because any recommendation for additional funds can come out of the joint account. This way you’re investing as a couple and growing your money together. This helps to eliminate the idea of one person’s investment doing better than the other. Long term this works well because one member of the couple doesn’t feel entitled to more of the money or the ability to spend recklessly because it came from “his or her retirement account”.
Here is my disclaimer concerning my next point. I am not an attorney and anyone reading this article should consult their own attorney for the proper legal advice. The following is only my opinion and some prudent ideas. Now that the legal part is out of the way…Get a Will. Like now, if you are married or shortly after the ceremony if you are still single. This is huge, does not cost a great deal of money and can prove very useful. That being said, and before you get the idea in your head, let me say, See an Attorney about drafting a Will. Do not do the “do it yourself” online kind. You may think it is fine, but I have seen a couple of incidents where it was not fine and needed correcting. Some of these mistakes were found after the person had passed away and permanent damage had been done. Some other wills were fixed after seeing a professional. That personal interaction is vital to getting your will done correctly and thinking ahead and setting up the correct planning provisions. It is worth the time and money, because once you do die, there is no do-over. The will is vital even if you don’t have kids or a lot of assets. It can take care of whatever money or debt you do have, as well as pets, and spelling out the persons final wishes.
Along these lines of planning, please set up a budget. You will each have different bills, spending habits and attitudes towards money. The new family budget can help you to figure out your bills, leisure spending, investing, and how much to keep in that new joint checking account. Also, please don’t leave this up to just one person. At first please do this together, so you both get familiar with what’s happening to your money and how you have things set up. If one person takes the lead for the bill paying that is fine and for most people more efficient. But neither person should be in the dark. So for the first couple of months, do a budget together, to make sure you don’t get into financial trouble and so you both get comfortable with where your money is.
Back to the wonderful topic of insurance. Disability insurance is being cut from worker’s benefit plans at an alarming rate. When benefits get expensive and employers need somewhere to cut back on the disability insurance is usually the first to go. This is particularly bad for younger couples. It is true that you may not have kids depending on your income, but you have each other and probably some big bills. Even today, disability is the largest cause of someone defaulting on their mortgage and losing their home. It causes more defaults then all of this sub-prime and adjustable rate mortgage mess combined. Disability insurance is very important for younger people, and you have a higher likelihood of using it than your life insurance. The majority of people who get hurt or sick and become disabled go back to work within 2 years of the incident. How you pay to live for those two years is up to you, but most people do not have savings adequate to cover that. So please make sure you have the correct disability coverage at work, or go get some from a good company and competent advisor.
This brings us to the topic of life insurance. I think this is one of the key building blocks to a strong financial foundation. A number of advisors I have seen on TV recommend not getting insurance until you have children. I do not always agree with this and it can be a harmful blanket statement for these people to make. Insurance can be used to help guarantee a loan, or fund a buyout plan for a business. More and more young people are becoming business owners, and if you have partners, the life insurance can be a necessity to secure financing or setting up a buy-sell agreement with your partners. If you are young and healthy and plan on having children or financially protecting your spouse you can buy your insurance early. Say a large block of 30 year term. It is inexpensive and you can lock in that coverage you will need just down the road. Insurance gets more expensive the older you are when you purchase it. Also, most people do not get healthier as they age, so there is a good chance your health rating for your insurance will be better today than it will be in the future. For me, the piece of mind to have that protection locked in at a cheap price is worth paying for it, for a little while before I “need” it. I don’t want to take any chances when it comes to taking care of my future family.
Please don’t think that this is the end of the line, far from it. But for the sake of attention span, I think this is enough to digest for one article. The road ahead will be filled with a lot more discussions concerning money between you and your spouse. But take it from me, if you set up a budget, have a joint account, take care of your insurance and investments, and start saving and working on this together it will be a lot easier. You will be very far ahead of the curve and creating a strong foundation for your financial future. The one thing I really wanted to stress in this article was the concept of savings. Savings is such an important topic that I gave it its own article. So please look back into the archives of this blog and also read the article on “Back to Basics: Savings.” I think it will be most helpful to you, and prevents having to make this article any more cumbersome then it already is. Until next time, happy investing, good luck and best wishes to your lives together.
Wednesday, December 31, 2008
Tuesday, December 30, 2008
Is Green the new Red or Black?
At least that is what a slew of new studies are debating when it comes to your money. Obviously when it comes to your accounting and investment statements you want to be in the black. Unfortunately the markets seem to be choosing red as their favorite color as of late. But unless you completely shun all media and human interaction you will have noticed that “green” is all the rage. So before I get into this let me say for the record: Whether you wish the world was covered in toxic waste or your idea of dining out is a handful of dirt and some twigs I am not casting judgment on you. But you can’t deny that “green” has become big business. The following will try to shed some light on how “green” has become part of the investing landscape and how to utilize it in your planning.
When it comes to investing, the term “green” is not used nearly as often as the phrase socially responsible, when referencing funds or companies. That was the simple part. From here on out the rest of this article gets confusing and rather vague. You see, there is no universally agreed upon definition of term such as green or socially responsible, just like there is no government organization to certify or monitor what passes for socially responsible. Each person has their own idea of what being responsible or green means to them. Not just individuals but each mutual fund defines what they consider green to be. So if you want to do some responsible investing it will require some serious homework or a financial advisor well versed in the subject.
A fund is just a collection of the stocks or bonds it invests in. So it is up to the fund to decide which companies to invest in. One of the major difficulties with green funds is that they not only have to find companies that are good investments but companies that are ethical as well. This extra difficulty is why many green funds stipulate that only a certain percentage of stocks they own fit their guidelines of green. So for many green funds, what you are buying is only partially green. Another problem that green funds face is the concentration of green companies in the technology sector. A great many green companies are in the area of developing new technology to make things run more efficiently, cleaner, or anything more eco friendly. This can be a problem when trying to diversify your green holdings because so many of the companies that qualify as green are technology based. This is also a major reason why a lot of investors have steered away from green funds. Not only are they not as diverse, but when technology took a nasty fall in 2000-2001 and now again recently, green funds were hit very hard. When people invest they want to make money, not lose money even if they feel strongly about the merits of the fund they are buying. If that weren’t the case people would just donate more to their favorite cause and get the write off rather than risk their money in the market.
Another issue facing these funds is that there can be a large gap between what is considered green as opposed to socially responsible. The “sr” funds generally do not invest in companies that deal in alcohol, tobacco, firearms, and gambling. These were the original batch of “sr” investing. The new school of “sr” funds obtains information and scrutinizes companies in the areas of: corporate governance and ethics, workplace practices, environmental concerns, product safety and impact, human rights, community relations, and Indigenous peoples’ rights. Let me point out that for a “sr” fund to invest in a company, it does not have to have a spotless record, but must be up to a standard set by the fund, or be the best of a bad lot when you get into some industries. Also, if you look at the list above, only one of the criteria is environmental concerns. So when you are looking to invest, it is important to decide if you want a fund that is greener or more socially responsible.
I have covered some of the more intriguing aspects of green investing, but there are just a few more things I would like to touch on. First, is the hidden socially conscience fund. There are funds out there, some you may already own, put out by both large and small fund families that are quality funds. They have good management, a record of strong returns, and a policy of investing in green or socially responsible companies. Yet, they do not advertise their ethical investing choices; they have just always done it this way, figuring it was good for business, and that socially responsible companies were better long term investments. Many of these funds have been correct and have very good track records. Then there are the green funds that have less than 25% of their holdings in green companies…some of which wouldn’t be considered green by most other funds. But these are the funds that are advertising themselves as green funds. So the ultimate lesson here is buyer beware.
On the flip side of this coin are funds called “Sin” funds or “Vice” funds, that invest in companies whose primary business is alcohol, firearms, tobacco, and gambling. These funds on the whole have done well. Yes they have suffered in the economic downturn as well but still consistently beat the S&P 500. The strange thing is that many of these funds end up having almost the same production numbers as their socially responsible counterparts. So if you want to hedge against green you can buy these funds, or for a conversation starter you can own some. But for the same return why not pick the “good” fund instead of the “bad” fund. There is also another off the beaten path line of funds out there. I refer to them as religious funds. Funds that only invest following strict Muslim laws, or Jewish laws, or Christian laws. There are fewer of these funds than green funds or more mainstream funds. But these funds feel they offer the best of both worlds: a good return, and adherence to a person’s faith.
I suppose no matter what you want to do, there is a fund for you out there. That being said, it just goes to show that more people should be investing. Investing in something you like, that can make you money and allow you to sleep at night. You can have it all, at least most of the time. If you are so inclined I think that green funds or socially responsible funds can be a great choice and compliment your portfolio. But just like any one investment, too much isn’t a good thing. This is merely my practical side urging you to stay diversified and invest on a consistent basis. And remember, if your green funds are pulling your portfolio down, there is probably another green fund out there that is better, and better suited for you. It really is up to you as the investor to make sure your “green” is making you enough green. Until next time, Happy Investing.
When it comes to investing, the term “green” is not used nearly as often as the phrase socially responsible, when referencing funds or companies. That was the simple part. From here on out the rest of this article gets confusing and rather vague. You see, there is no universally agreed upon definition of term such as green or socially responsible, just like there is no government organization to certify or monitor what passes for socially responsible. Each person has their own idea of what being responsible or green means to them. Not just individuals but each mutual fund defines what they consider green to be. So if you want to do some responsible investing it will require some serious homework or a financial advisor well versed in the subject.
A fund is just a collection of the stocks or bonds it invests in. So it is up to the fund to decide which companies to invest in. One of the major difficulties with green funds is that they not only have to find companies that are good investments but companies that are ethical as well. This extra difficulty is why many green funds stipulate that only a certain percentage of stocks they own fit their guidelines of green. So for many green funds, what you are buying is only partially green. Another problem that green funds face is the concentration of green companies in the technology sector. A great many green companies are in the area of developing new technology to make things run more efficiently, cleaner, or anything more eco friendly. This can be a problem when trying to diversify your green holdings because so many of the companies that qualify as green are technology based. This is also a major reason why a lot of investors have steered away from green funds. Not only are they not as diverse, but when technology took a nasty fall in 2000-2001 and now again recently, green funds were hit very hard. When people invest they want to make money, not lose money even if they feel strongly about the merits of the fund they are buying. If that weren’t the case people would just donate more to their favorite cause and get the write off rather than risk their money in the market.
Another issue facing these funds is that there can be a large gap between what is considered green as opposed to socially responsible. The “sr” funds generally do not invest in companies that deal in alcohol, tobacco, firearms, and gambling. These were the original batch of “sr” investing. The new school of “sr” funds obtains information and scrutinizes companies in the areas of: corporate governance and ethics, workplace practices, environmental concerns, product safety and impact, human rights, community relations, and Indigenous peoples’ rights. Let me point out that for a “sr” fund to invest in a company, it does not have to have a spotless record, but must be up to a standard set by the fund, or be the best of a bad lot when you get into some industries. Also, if you look at the list above, only one of the criteria is environmental concerns. So when you are looking to invest, it is important to decide if you want a fund that is greener or more socially responsible.
I have covered some of the more intriguing aspects of green investing, but there are just a few more things I would like to touch on. First, is the hidden socially conscience fund. There are funds out there, some you may already own, put out by both large and small fund families that are quality funds. They have good management, a record of strong returns, and a policy of investing in green or socially responsible companies. Yet, they do not advertise their ethical investing choices; they have just always done it this way, figuring it was good for business, and that socially responsible companies were better long term investments. Many of these funds have been correct and have very good track records. Then there are the green funds that have less than 25% of their holdings in green companies…some of which wouldn’t be considered green by most other funds. But these are the funds that are advertising themselves as green funds. So the ultimate lesson here is buyer beware.
On the flip side of this coin are funds called “Sin” funds or “Vice” funds, that invest in companies whose primary business is alcohol, firearms, tobacco, and gambling. These funds on the whole have done well. Yes they have suffered in the economic downturn as well but still consistently beat the S&P 500. The strange thing is that many of these funds end up having almost the same production numbers as their socially responsible counterparts. So if you want to hedge against green you can buy these funds, or for a conversation starter you can own some. But for the same return why not pick the “good” fund instead of the “bad” fund. There is also another off the beaten path line of funds out there. I refer to them as religious funds. Funds that only invest following strict Muslim laws, or Jewish laws, or Christian laws. There are fewer of these funds than green funds or more mainstream funds. But these funds feel they offer the best of both worlds: a good return, and adherence to a person’s faith.
I suppose no matter what you want to do, there is a fund for you out there. That being said, it just goes to show that more people should be investing. Investing in something you like, that can make you money and allow you to sleep at night. You can have it all, at least most of the time. If you are so inclined I think that green funds or socially responsible funds can be a great choice and compliment your portfolio. But just like any one investment, too much isn’t a good thing. This is merely my practical side urging you to stay diversified and invest on a consistent basis. And remember, if your green funds are pulling your portfolio down, there is probably another green fund out there that is better, and better suited for you. It really is up to you as the investor to make sure your “green” is making you enough green. Until next time, Happy Investing.
Thursday, December 18, 2008
Condense to Win
So, how many IRAs do you have? Not a common question around the water cooler or anywhere for that matter. It is a question you should ask yourself. Maybe you have an old IRA from as far back as the 1970s or maybe you started a Roth IRA in the late 90s when they came into being. You probably have an old 401k that you rolled over into an IRA. After all, the average American will have 7 different jobs during their working life and that is a lot of old 401ks that probably got rolled over and forgotten about. For people who use their bank for investing, a great many of them open up a different IRA for you each year with a different CD in them. All of this adds up to a lot of IRAs. This is not inherently bad, at least not from a legal or tax standpoint.
However, there are a lot of common sense issues with continuing on in such a manner. First, there is the issue of annual fees that are included in every IRA account. Now I don’t know about you, but I’m not a fan of paying a separate fee in 6 different accounts when I can consolidate those accounts and pay only one fee. The fee is usually a standard fee and has nothing to do with account size. If these IRA accounts are smaller in size there is a good chance you are also paying a small account fee. Once again, condensing some or all of your accounts can solve this problem. Let’s go green for just a moment. Do you really need statements showing up every quarter from the plethora of accounts when you could have just one account statement? Not to mention the simplicity of tracking and accounting for just one account. I mean, why make your life easier, you know…who needs that?
There is also the issue of making more money. Many of the better money managers and investment products available today have minimums. Each IRA account may not qualify, but if you combine your accounts, you may qualify for a higher quality investment vehicle. This way, you can have your money working harder for you while you worry less. This is truly a win-win situation. Also, if you condense your accounts, you can use fewer mutual funds or mutual fund families if that is a direction you want to take. This will allow you to qualify for a bulk discount or “breakpoint” which will reduce the mutual fund fee you are paying.
A few of you may wonder if this is sound advice given that only one beneficiary is allowed to be listed per IRA account. Many people purposely broke their “tax qualified” money up into a few accounts to aid in estate or inheritance planning. Thankfully a change in tax law in 2002 now allows you to list more than one beneficiary per IRA account. So this old strategy no longer need apply. Just another great reason to bring your accounts together. When the day comes that you do pass away, it is much quicker and easier for the executor of your estate to handle fewer rather than many accounts. The whole process goes smoother, especially if you know there will already be tension amongst the relatives.
One final thought may be “How much of a pain in the butt will this be?” If you work with a good financial advisor, it won’t be difficult at all. Now I hope your advisor already has mentioned combining your accounts to you, but even if you have to bring it up, it’s still a good idea. It just takes a few signatures and perhaps picking a new home for your money and the transfers can begin behind the scenes. It is easy and allows you to revisit and rebalance money you may have forgotten about, or just let slip through the cracks. It truly is one of the easiest, most cost effective, and long term time saving things you can do with your money.
However, there are a lot of common sense issues with continuing on in such a manner. First, there is the issue of annual fees that are included in every IRA account. Now I don’t know about you, but I’m not a fan of paying a separate fee in 6 different accounts when I can consolidate those accounts and pay only one fee. The fee is usually a standard fee and has nothing to do with account size. If these IRA accounts are smaller in size there is a good chance you are also paying a small account fee. Once again, condensing some or all of your accounts can solve this problem. Let’s go green for just a moment. Do you really need statements showing up every quarter from the plethora of accounts when you could have just one account statement? Not to mention the simplicity of tracking and accounting for just one account. I mean, why make your life easier, you know…who needs that?
There is also the issue of making more money. Many of the better money managers and investment products available today have minimums. Each IRA account may not qualify, but if you combine your accounts, you may qualify for a higher quality investment vehicle. This way, you can have your money working harder for you while you worry less. This is truly a win-win situation. Also, if you condense your accounts, you can use fewer mutual funds or mutual fund families if that is a direction you want to take. This will allow you to qualify for a bulk discount or “breakpoint” which will reduce the mutual fund fee you are paying.
A few of you may wonder if this is sound advice given that only one beneficiary is allowed to be listed per IRA account. Many people purposely broke their “tax qualified” money up into a few accounts to aid in estate or inheritance planning. Thankfully a change in tax law in 2002 now allows you to list more than one beneficiary per IRA account. So this old strategy no longer need apply. Just another great reason to bring your accounts together. When the day comes that you do pass away, it is much quicker and easier for the executor of your estate to handle fewer rather than many accounts. The whole process goes smoother, especially if you know there will already be tension amongst the relatives.
One final thought may be “How much of a pain in the butt will this be?” If you work with a good financial advisor, it won’t be difficult at all. Now I hope your advisor already has mentioned combining your accounts to you, but even if you have to bring it up, it’s still a good idea. It just takes a few signatures and perhaps picking a new home for your money and the transfers can begin behind the scenes. It is easy and allows you to revisit and rebalance money you may have forgotten about, or just let slip through the cracks. It truly is one of the easiest, most cost effective, and long term time saving things you can do with your money.
Monday, December 15, 2008
Back to Basics: Savings
As a regular part of my practice I discourage my clients from having savings accounts. This may seem odd, and the reason for this statement was mainly to get your attention. While it is true I don’t think very much of savings accounts, I do think that savings are very important. Savings are the cornerstone of any financial plan. Saving may not be fun or sexy, but it should be viewed as the permission slip that allows you to hold some riskier investments. Whether you want to be prudent, like to have some green around you can touch, or believe in Murphy’s Law, savings is the way to go.
Savings can come in all different shapes and colors: a savings account (the second least effective method), short term CDs, money market accounts, or even good old cash under the mattress (the least effective against inflation, or robbery; most effective against a bank run). Whether you earmark this money for a rainy day, fixing something major that will break at the worst time, or even bailing someone out (that may be a jail reference depending on your family), you need savings. It always comes in handy and can be useful in so many ways.
Okay, time for me to play devil’s advocate. I have heard many times that savings just sit there doing nothing and is being wasted. It could be invested or used to pay down some debt. I am not advocating having a ridiculous amount in savings - rather a prudent, sensible amount. Old rule of thumb was 6-12 months’ worth of living expenses. In the good old days of the Market Mania, people chopped that down to 6, then 3, then even 1 months worth of savings. Not wise. Maybe I am too old for my age or conservative, but I say at least 3 months’ worth of living expenses should be in savings. That is a starting point and you should work towards six months. Now back to my original thought. All those people who said the savings could be used to invest…I have to ask how their investments are doing right now. I bet having some savings would make them feel better and help support their investment choices. As for paying down debt, that is a good one. I only caution if you pay the debt down, please keep it down and don’t run it up again. If you do run it up, then you are creating a hamster on a wheel cycle and that credit that was available is now tied up when an emergency happens.
To address my earlier notion expressed by many about savings just sitting there. You are correct, it does just sit there. But that is its job…and it does it well. It sits there waiting, willing, and able to help when you need it. One of the worst feelings is when a great opportunity presents itself, and you cannot take advantage of it for lack of preparedness. This money helps to eliminate that. Whatever you need the money for, and you can keep that to yourself, it is there. Whether it’s for a new business, an investment or to help out someone you care about, it doesn’t matter. When, not if, you need this money, it is there in savings waiting to go to work for you. Just think on that for a while the next time you are doing your budget or thinking of better ways to use your money.
Savings can come in all different shapes and colors: a savings account (the second least effective method), short term CDs, money market accounts, or even good old cash under the mattress (the least effective against inflation, or robbery; most effective against a bank run). Whether you earmark this money for a rainy day, fixing something major that will break at the worst time, or even bailing someone out (that may be a jail reference depending on your family), you need savings. It always comes in handy and can be useful in so many ways.
Okay, time for me to play devil’s advocate. I have heard many times that savings just sit there doing nothing and is being wasted. It could be invested or used to pay down some debt. I am not advocating having a ridiculous amount in savings - rather a prudent, sensible amount. Old rule of thumb was 6-12 months’ worth of living expenses. In the good old days of the Market Mania, people chopped that down to 6, then 3, then even 1 months worth of savings. Not wise. Maybe I am too old for my age or conservative, but I say at least 3 months’ worth of living expenses should be in savings. That is a starting point and you should work towards six months. Now back to my original thought. All those people who said the savings could be used to invest…I have to ask how their investments are doing right now. I bet having some savings would make them feel better and help support their investment choices. As for paying down debt, that is a good one. I only caution if you pay the debt down, please keep it down and don’t run it up again. If you do run it up, then you are creating a hamster on a wheel cycle and that credit that was available is now tied up when an emergency happens.
To address my earlier notion expressed by many about savings just sitting there. You are correct, it does just sit there. But that is its job…and it does it well. It sits there waiting, willing, and able to help when you need it. One of the worst feelings is when a great opportunity presents itself, and you cannot take advantage of it for lack of preparedness. This money helps to eliminate that. Whatever you need the money for, and you can keep that to yourself, it is there. Whether it’s for a new business, an investment or to help out someone you care about, it doesn’t matter. When, not if, you need this money, it is there in savings waiting to go to work for you. Just think on that for a while the next time you are doing your budget or thinking of better ways to use your money.
Thursday, December 4, 2008
To 401k or Not to 401k
Okay, so this one seems like a no brainer. The 401k (prior to the recent market meltdown) has become the holy grail of retirement planning. People used to ask each other how their investments or stocks were doing. That was replaced with “How is your 401k doing?” No other investment gets as much touting or fanfare in the media. It’s hard to go a week without reading an article or seeing a report on the news about your 401k. Let us not forget its cousin the 403b. Both act virtually the same, the only difference is that the 403b is mostly for non-profit and government employees, where the 401k is for corporate employees.
So here is your little history lesson on the 401k. That catchy number is the IRS code used to discern the 401k on a tax basis from other investments. It’s what allows it to be a useful retirement vehicle. Your 401k money goes in pre-tax and gets to grow tax deferred. It’s these features that make your 401k so attractive as a retirement tool. Then if you consider your employer match as free money you would be crazy not to take advantage of this great investment. Now that we have come this far, don’t you want to go max out your contributions?
If you have read any of my other articles, you will know that my main purpose is not to cast judgment one way or another on any investment or strategy. Rather my goal is to provide some basic information and point out some features or viewpoints that most of the media seems to leave out. This way you can make an informed decision and obtain some gentle guidance rather than buying into something that may not work for your individual situation. After all no two of us are alike and what works great for your friend may not be the best thing for you. This way you can take the wheel and have confidence in knowing what your financial game is and why you are following it. We, as financial professionals, put your plan together with the information you provide us and make sure you stay on track, but the final decision to move forward is always yours.
Now that my disclaimer part is finished let me discuss why you might not want to max out your 401k…or for that matter even have a 401k. The main reason most people participate in a 401k plan is because of the company match. They reason this is “free money” and you should get as much as you can. I agree with this wholeheartedly. Unfortunately, there are a great many plans that do not offer a match. I would not do those plans until I exhausted a number of other investments first. Just remember my rule of thumb, that you should only contribute enough to get the entire company match. Anything above that amount may be better used someplace else…before you think I’m nuts, I promise to cover that in just a minute.
The other main reason many people contribute to their 401k is to avoid the taxes now and get the tax deferred growth. While I think that tax deferred growth is a great thing, just remember you cannot defer the taxes forever and at some point you will need to access this money to live. The old saying about death and taxes still holds true. This can become problematic from a tax and future standard of living point of view. Follow me back in time to around the 1970s and 80s. As companies do away with pension plans they rely more heavily on employee contribution plans such as the 401k. Executives and many white collar workers loved these plans because they were getting hit hard with income tax and the plans offered an immediate tax savings. In case you didn’t know, the top marginal tax rate around these times was 70%...and that is not a typo. So people poured money into these plans, saved on taxes, got tax deferred growth and figured that they would retire later in life, needing less money and living in a lower tax bracket. It was a great plan and for many of them it’s worked great. They are retired today, paying 25% or maybe a little more in taxes and avoided those huge tax bills back in the day.
Okay, so here we are in 2008 and we have the lowest tax rates in the history of this country since income taxes were established. Definite tax changes next year will not change the overall low rate of taxes in this country. So we are faced with a unique problem. Adding to our 401k and avoiding taxes now while they are low…only to pull this money out down the road when taxes will almost assuredly be higher than they are now. Our current situation is the exact opposite of what worked so well for those workers of past decades. This is why I advise contributing no more than enough to get the company match. Who cares if you have to pay taxes on free money because it was free in the first place and the free money will cover the taxes owed on what you have put in. But please do not put in more than that, because long run the tax structure will work against you.
A few last points to make about the almighty 401k. Someone else gets to pick your available investment choices. Most plans do not contain many choices, and even fewer good choices. This combined with sometimes mandatory enrollment into company stock and you can be left with an investment that gives you very little control over where your money goes. Let us not forget that the 401k does not have to disclose its fees as other investments do. You can end up paying much higher fees in your 401k than an IRA done on your own outside of work. It requires more effort to find out the true cost of doing your 401k, but it is worth it to help determine if your 401k is truly your best option. So when entering the world of 401k, just remember everything is not roses and some diligent homework on your part (and a good advisor) will help you avoid mistakes and maximize your value.
So here is your little history lesson on the 401k. That catchy number is the IRS code used to discern the 401k on a tax basis from other investments. It’s what allows it to be a useful retirement vehicle. Your 401k money goes in pre-tax and gets to grow tax deferred. It’s these features that make your 401k so attractive as a retirement tool. Then if you consider your employer match as free money you would be crazy not to take advantage of this great investment. Now that we have come this far, don’t you want to go max out your contributions?
If you have read any of my other articles, you will know that my main purpose is not to cast judgment one way or another on any investment or strategy. Rather my goal is to provide some basic information and point out some features or viewpoints that most of the media seems to leave out. This way you can make an informed decision and obtain some gentle guidance rather than buying into something that may not work for your individual situation. After all no two of us are alike and what works great for your friend may not be the best thing for you. This way you can take the wheel and have confidence in knowing what your financial game is and why you are following it. We, as financial professionals, put your plan together with the information you provide us and make sure you stay on track, but the final decision to move forward is always yours.
Now that my disclaimer part is finished let me discuss why you might not want to max out your 401k…or for that matter even have a 401k. The main reason most people participate in a 401k plan is because of the company match. They reason this is “free money” and you should get as much as you can. I agree with this wholeheartedly. Unfortunately, there are a great many plans that do not offer a match. I would not do those plans until I exhausted a number of other investments first. Just remember my rule of thumb, that you should only contribute enough to get the entire company match. Anything above that amount may be better used someplace else…before you think I’m nuts, I promise to cover that in just a minute.
The other main reason many people contribute to their 401k is to avoid the taxes now and get the tax deferred growth. While I think that tax deferred growth is a great thing, just remember you cannot defer the taxes forever and at some point you will need to access this money to live. The old saying about death and taxes still holds true. This can become problematic from a tax and future standard of living point of view. Follow me back in time to around the 1970s and 80s. As companies do away with pension plans they rely more heavily on employee contribution plans such as the 401k. Executives and many white collar workers loved these plans because they were getting hit hard with income tax and the plans offered an immediate tax savings. In case you didn’t know, the top marginal tax rate around these times was 70%...and that is not a typo. So people poured money into these plans, saved on taxes, got tax deferred growth and figured that they would retire later in life, needing less money and living in a lower tax bracket. It was a great plan and for many of them it’s worked great. They are retired today, paying 25% or maybe a little more in taxes and avoided those huge tax bills back in the day.
Okay, so here we are in 2008 and we have the lowest tax rates in the history of this country since income taxes were established. Definite tax changes next year will not change the overall low rate of taxes in this country. So we are faced with a unique problem. Adding to our 401k and avoiding taxes now while they are low…only to pull this money out down the road when taxes will almost assuredly be higher than they are now. Our current situation is the exact opposite of what worked so well for those workers of past decades. This is why I advise contributing no more than enough to get the company match. Who cares if you have to pay taxes on free money because it was free in the first place and the free money will cover the taxes owed on what you have put in. But please do not put in more than that, because long run the tax structure will work against you.
A few last points to make about the almighty 401k. Someone else gets to pick your available investment choices. Most plans do not contain many choices, and even fewer good choices. This combined with sometimes mandatory enrollment into company stock and you can be left with an investment that gives you very little control over where your money goes. Let us not forget that the 401k does not have to disclose its fees as other investments do. You can end up paying much higher fees in your 401k than an IRA done on your own outside of work. It requires more effort to find out the true cost of doing your 401k, but it is worth it to help determine if your 401k is truly your best option. So when entering the world of 401k, just remember everything is not roses and some diligent homework on your part (and a good advisor) will help you avoid mistakes and maximize your value.
Wednesday, December 3, 2008
Holiday Planning Without the Presents
This article will have nothing to do with how to save money on Black Friday shopping, host a stress free Christmas dinner, or driving safely on New Years Eve. I think all of these things are important, but this is going in a different direction. When you are around your family, friends, charities or whatever matters most to you, the holiday season will bring it to the surface. Please pay attention to what makes you feel good, loved, and what makes you smile. Those moments that you will cherish, remember, and wish that you could relive them all year long. Now imagine that you could protect these people, help these people, give them a bigger gift then you could ever afford. If bettering the lives of those you love and countless other appeals to you...then please read on.
This is just a short piece about how you can take care of all of these things. In November and December more of this product is purchased then in all other 10 months combined. No coincidence that this comes up at the same time that people are staring right at the things that matter most to them. It is a wonderful gift that provides for virtually every need that money can take care of. Of course it is impossible to replace you, however it is possible to supply money at the most critical of times, and in affect help many people. Depending on the benefactor of your generosity you can take that a step further and contribute to saving many lives. I don’t know about you, but that is something that sounds wonderful to me. In fact I own quite a bit of this stuff and know that it will someday be a blessing to those I care about.
Now that I have piqued your interest (some of you may have figured it out by now) I should let you in on my secret. This entire time I have been referring to life insurance. Good old boring, no fun, down trodden life insurance. But if it can do so many great things, it may just be one of the greatest financial instruments ever created. It never gets moved to the head of the class or receives exciting headlines, but it can be used to accomplish so many things. Now before you think any further on this let me say just a few more things. When insurance is used for family or charity it must be set up correctly. It is important to use the correct product, set up in the correct manor (sometimes utilizing a trust), with only a high quality insurance company. This is where a good advisor can really help. Most people think of the insurance they get at work and maybe some extra they purchased when they had children. This can be used for so much more, from helping a charity to leaving a legacy for your family and generations to come. For pennies on the dollar you can leave great sums of money to whomever or whatever you desire. There are a slew of tax advantages to be had as well. So please, this holiday season give this concept some serious thought and consult a professional to see how you can enrich the lives of so many others. It’s also not an accident that my contact info is located on this blog, so if you have some questions and are so inclined feel free to contact me. In the mean time…Merry Christmas and Happy New Year!
This is just a short piece about how you can take care of all of these things. In November and December more of this product is purchased then in all other 10 months combined. No coincidence that this comes up at the same time that people are staring right at the things that matter most to them. It is a wonderful gift that provides for virtually every need that money can take care of. Of course it is impossible to replace you, however it is possible to supply money at the most critical of times, and in affect help many people. Depending on the benefactor of your generosity you can take that a step further and contribute to saving many lives. I don’t know about you, but that is something that sounds wonderful to me. In fact I own quite a bit of this stuff and know that it will someday be a blessing to those I care about.
Now that I have piqued your interest (some of you may have figured it out by now) I should let you in on my secret. This entire time I have been referring to life insurance. Good old boring, no fun, down trodden life insurance. But if it can do so many great things, it may just be one of the greatest financial instruments ever created. It never gets moved to the head of the class or receives exciting headlines, but it can be used to accomplish so many things. Now before you think any further on this let me say just a few more things. When insurance is used for family or charity it must be set up correctly. It is important to use the correct product, set up in the correct manor (sometimes utilizing a trust), with only a high quality insurance company. This is where a good advisor can really help. Most people think of the insurance they get at work and maybe some extra they purchased when they had children. This can be used for so much more, from helping a charity to leaving a legacy for your family and generations to come. For pennies on the dollar you can leave great sums of money to whomever or whatever you desire. There are a slew of tax advantages to be had as well. So please, this holiday season give this concept some serious thought and consult a professional to see how you can enrich the lives of so many others. It’s also not an accident that my contact info is located on this blog, so if you have some questions and are so inclined feel free to contact me. In the mean time…Merry Christmas and Happy New Year!
Wednesday, November 19, 2008
Home is where the Heartbreak is
There’s no place like home. An expression offered across the country, from tired people at the end of a long day, to families coming home for the holidays. We think of our homes as a sanctuary, our castle, a respite from the crazy world outside. A funny thing happened a few years ago; our humble homes started growing, dominating and becoming the superman of dwellings. All of a sudden people started viewing their homes as their biggest asset, the key to wealth, for many even an ATM that couldn’t run dry. Until it did run dry. The “biggest” asset went back to being a liability, and the “key to wealth” couldn’t unlock anything. How could our good homes turn so bad?
Once upon a time owning your own home was the American dream. Somewhere along the line it became viewed as a right rather than a dream. Then there was the long line of people, (let me just refer to them as anyone who could benefit from the housing boom), who enabled this massive bubble to grow and burst. A lot of people want to assign blame and point fingers, but there is such a large shirking of responsibility from everyone involved that almost everyone has some dirt on their hands. That being said, let us look at what happened so we can learn from this, make changes to limit any damage, and plan better for the future.
Your house is a shelter. That is its purpose. That is why it was created. Anything else above and beyond that is great, but let’s just keep its original intention in mind. Some will say that it is also a great tax advantage. That is not always true, in fact that is rarely true. We are discussing your primary residence, not a vacation home, not an income property, and not a commercial property. Some of these other entities do offer great tax advantages and can be part of a well balanced and diversified investment strategy. But we are only speaking about your home. I keep harping on this, but for the sake of this article it is very important to keep this in mind. Your primary house does not offer near the tax benefits as other types of real estate. Yes you can deduct your mortgage interest, but that still means you have to pay that interest. Which would you rather have, the tax deduction on the interest, or not having to pay the interest. Once you look at it from that angle, a deduction is never as good as the alternative.
Another part of the craze was that everyone wanted to “get in” before prices went even higher. Many were motivated by the notion that prices only went up and there was no ceiling on this historically high growth. The result was many people paid too much for the house they are in. You may even be drastically upside down on your mortgage meaning that you owe more then your house is worth. This is not the end of the world, in fact it may be alright. At some point houses will increase in value again, at least on a national level. So if you remember that you liked your house, it met your family’s needs and it is just shelter, then you are fine. You have a nice place to live that meets your needs and that hopefully you can afford. The other issue with individual home prices is that they are so localized, that it is hard to say what truly the right price for a home is, and where that price is headed. Parts of the country have stabilized, some higher end homes have continued to go up in price, and yet part of the country is still in a form of free fall.
I mentioned in the previous paragraph that hopefully you can afford your home. I am directing that more towards people that purchased a home in recent years and may have gotten in over their heads or purchased a variable rate mortgage. Now, let me put in one caveat before your mind starts thinking about how bad adjustable rate mortgages (ARMS) are. Finance and investment products are often referred to as tools and sometimes vehicles. That’s because you use them to serve a purpose, fix a problem, or get you to your end goal. They are not inherently good or bad. Depending on your situation, different tools may be good and work for you, and other vehicles may be bad and get you nowhere except the poor house. Now back to the topic at hand. ARMS used properly are just fine and serve a purpose. The bad part is that many people utilized this tool incorrectly and are now running into problems. If you can afford to live where you are, that is great. If you can’t afford your current situation, please act as quickly as you can to improve your situation. Call your lender for starters. Many lenders can work with you and may even restructure your loans to keep your home affordable. You may have to sell and downsize or rent to make your budget work. Please do whatever it takes to get a proper shelter and not destroy your credit in the process. Those long term effects can be much more serious then delaying home ownership or a home upgrade for a few years.
Now, assuming you’re living in a home you can afford or are in the market for a home, let’s look at some of the lessons we have learned and approach this situation from the right frame of mind. House prices do not always go up. They often go up by only modest levels and frequently stay level for many years; not normally what you want to look for in an “investment”. Also, this so-called asset costs a lot of money in up-keep. Besides the cost of home owner’s insurance, property taxes, electric, water and sewer for many people, heating & cooling, general maintenance & up-keep, there is the interest on the mortgage that you don’t get back. There are a slew of other costs to owning a home. If you view these as the cost of shelter and living for your family, it’s well worth it. If you view it from an asset frame of mind, it costs a lot of money for a potentially small long term return, which you have no control over.
One last thing to consider is how illiquid a house can be. With the lending market right now, it is hard to get a home equity loan to be able to use all of the money you accumulated (if you have any). Also there is something wrong about having to borrow and pay interest on your own money to take it out and use it; not to mention how difficult it can be to sell a home right now. So all of this “wealth” that is built up inside your home is very hard to tap into, if you can get to it at all. If you do cash out and sell, besides possible tax implications you will still need somewhere to live. Remember it is a dwelling place first. So either you get a new mortgage, start renting, or buy a smaller dwelling which will eat into that chunk of money you thought you had.
Something that costs a lot of money, with minimal upside, almost no tax advantage, and is difficult to access is not something I would ever recommend to my clients as an investment. As a home, it can work out, but as a “key to wealth”, I’ll let you decide that.
Once upon a time owning your own home was the American dream. Somewhere along the line it became viewed as a right rather than a dream. Then there was the long line of people, (let me just refer to them as anyone who could benefit from the housing boom), who enabled this massive bubble to grow and burst. A lot of people want to assign blame and point fingers, but there is such a large shirking of responsibility from everyone involved that almost everyone has some dirt on their hands. That being said, let us look at what happened so we can learn from this, make changes to limit any damage, and plan better for the future.
Your house is a shelter. That is its purpose. That is why it was created. Anything else above and beyond that is great, but let’s just keep its original intention in mind. Some will say that it is also a great tax advantage. That is not always true, in fact that is rarely true. We are discussing your primary residence, not a vacation home, not an income property, and not a commercial property. Some of these other entities do offer great tax advantages and can be part of a well balanced and diversified investment strategy. But we are only speaking about your home. I keep harping on this, but for the sake of this article it is very important to keep this in mind. Your primary house does not offer near the tax benefits as other types of real estate. Yes you can deduct your mortgage interest, but that still means you have to pay that interest. Which would you rather have, the tax deduction on the interest, or not having to pay the interest. Once you look at it from that angle, a deduction is never as good as the alternative.
Another part of the craze was that everyone wanted to “get in” before prices went even higher. Many were motivated by the notion that prices only went up and there was no ceiling on this historically high growth. The result was many people paid too much for the house they are in. You may even be drastically upside down on your mortgage meaning that you owe more then your house is worth. This is not the end of the world, in fact it may be alright. At some point houses will increase in value again, at least on a national level. So if you remember that you liked your house, it met your family’s needs and it is just shelter, then you are fine. You have a nice place to live that meets your needs and that hopefully you can afford. The other issue with individual home prices is that they are so localized, that it is hard to say what truly the right price for a home is, and where that price is headed. Parts of the country have stabilized, some higher end homes have continued to go up in price, and yet part of the country is still in a form of free fall.
I mentioned in the previous paragraph that hopefully you can afford your home. I am directing that more towards people that purchased a home in recent years and may have gotten in over their heads or purchased a variable rate mortgage. Now, let me put in one caveat before your mind starts thinking about how bad adjustable rate mortgages (ARMS) are. Finance and investment products are often referred to as tools and sometimes vehicles. That’s because you use them to serve a purpose, fix a problem, or get you to your end goal. They are not inherently good or bad. Depending on your situation, different tools may be good and work for you, and other vehicles may be bad and get you nowhere except the poor house. Now back to the topic at hand. ARMS used properly are just fine and serve a purpose. The bad part is that many people utilized this tool incorrectly and are now running into problems. If you can afford to live where you are, that is great. If you can’t afford your current situation, please act as quickly as you can to improve your situation. Call your lender for starters. Many lenders can work with you and may even restructure your loans to keep your home affordable. You may have to sell and downsize or rent to make your budget work. Please do whatever it takes to get a proper shelter and not destroy your credit in the process. Those long term effects can be much more serious then delaying home ownership or a home upgrade for a few years.
Now, assuming you’re living in a home you can afford or are in the market for a home, let’s look at some of the lessons we have learned and approach this situation from the right frame of mind. House prices do not always go up. They often go up by only modest levels and frequently stay level for many years; not normally what you want to look for in an “investment”. Also, this so-called asset costs a lot of money in up-keep. Besides the cost of home owner’s insurance, property taxes, electric, water and sewer for many people, heating & cooling, general maintenance & up-keep, there is the interest on the mortgage that you don’t get back. There are a slew of other costs to owning a home. If you view these as the cost of shelter and living for your family, it’s well worth it. If you view it from an asset frame of mind, it costs a lot of money for a potentially small long term return, which you have no control over.
One last thing to consider is how illiquid a house can be. With the lending market right now, it is hard to get a home equity loan to be able to use all of the money you accumulated (if you have any). Also there is something wrong about having to borrow and pay interest on your own money to take it out and use it; not to mention how difficult it can be to sell a home right now. So all of this “wealth” that is built up inside your home is very hard to tap into, if you can get to it at all. If you do cash out and sell, besides possible tax implications you will still need somewhere to live. Remember it is a dwelling place first. So either you get a new mortgage, start renting, or buy a smaller dwelling which will eat into that chunk of money you thought you had.
Something that costs a lot of money, with minimal upside, almost no tax advantage, and is difficult to access is not something I would ever recommend to my clients as an investment. As a home, it can work out, but as a “key to wealth”, I’ll let you decide that.
Tuesday, November 18, 2008
You won't need as much money in retirement...right???
That is an age old question facing many Americans today. If you think that this question is limited to seniors, then please think again. If you don’t know when you are going to retire, or how much money you will need, then how can you set a retirement goal? That is the primary reason a good advisor will ask you a lot of questions surrounding the topic of retirement. Whether you are in your twenties, fifties, or even seventies, you need to set parameters so you can develop a plan. One of the first things I mention to my clients is that their plan will always be evolving and changing. Life happens, and usually in the most unpredictable ways. Maybe you take up a new and expensive hobby, change your retirement date, or your very idea of retirement. For many people today, retirement is not sitting around playing cards. Rather, it is about working or volunteering at something they love, visiting family that live far away, or taking that trip they have dreamed about for years. I say that to open peoples’ minds to how many great things retirement can entail. The next question should be, how do I pay for it?
This brings us back to the title of this posting, and all the problems and possibilities that go along with it. An old rule of thumb was that you would need about 70% of your pre-retirement income to retire comfortably. This was based on a study done so long ago, that most of the researcher assumptions and guidelines no longer apply. So here are a few thoughts to ponder when considering if you will really need less income and fall into a lower tax bracket. Will you still have a mortgage (1st or 2nd) to pay for? Will you still have educational expenses (your children or your own) to pay for? What about the ever increasing cost of heating your home, or paying your electric bill? Not to mention the high cost of health care, which is a double whammy. Not only are health care costs advancing faster than inflation, but we are living longer, and requiring more, costlier health care.
Now PLEASE pay ATTENTION to the following two thoughts: To put it in perspective, what is the day of the week when you spend the most money? If you answered with one of the weekend days, you agree with the majority of the population. Now keeping that in mind, when you are retired, isn’t every day a Saturday or Sunday? If a light bulb just went off in your mind, you are on the right track to gaining some important perspective. My final point requires just a small amount of math on your part, or you can simply trust me…it's your call. It will cost the average couple $219,000 to eat in retirement. Yes, you read that right, $219,000 to eat. This is based on never going out to eat, and cooking all of your meals. If you figure it costs $5 a meal, per person, for three meals a day, and there are 365 days in a year, and the average retirement lasts 20 years…you have $219,000! That is not taking into consideration the cost of inflation, or even the fuel you use to cook your food. Also, I personally have never met anyone who never goes out to eat.
These numbers are not meant to scare you, but rather to give you a better perspective as to how much retirement can cost. For most people, retirement will not cost less than their working years. In fact, according to some recent studies, the higher your current income, the more money as a percentage you will need to maintain your standard of living. In fact, many middle class and upper class people will need the same or more money than they are making currently to retire in the same lifestyle. So the next time you meet with your financial advisor, or are using a retirement planning tool, please aim as close to 100% of your income as you can for your retirement. Chances are that if 70% can’t get the job done today, there won’t be much choice in the future.
This brings us back to the title of this posting, and all the problems and possibilities that go along with it. An old rule of thumb was that you would need about 70% of your pre-retirement income to retire comfortably. This was based on a study done so long ago, that most of the researcher assumptions and guidelines no longer apply. So here are a few thoughts to ponder when considering if you will really need less income and fall into a lower tax bracket. Will you still have a mortgage (1st or 2nd) to pay for? Will you still have educational expenses (your children or your own) to pay for? What about the ever increasing cost of heating your home, or paying your electric bill? Not to mention the high cost of health care, which is a double whammy. Not only are health care costs advancing faster than inflation, but we are living longer, and requiring more, costlier health care.
Now PLEASE pay ATTENTION to the following two thoughts: To put it in perspective, what is the day of the week when you spend the most money? If you answered with one of the weekend days, you agree with the majority of the population. Now keeping that in mind, when you are retired, isn’t every day a Saturday or Sunday? If a light bulb just went off in your mind, you are on the right track to gaining some important perspective. My final point requires just a small amount of math on your part, or you can simply trust me…it's your call. It will cost the average couple $219,000 to eat in retirement. Yes, you read that right, $219,000 to eat. This is based on never going out to eat, and cooking all of your meals. If you figure it costs $5 a meal, per person, for three meals a day, and there are 365 days in a year, and the average retirement lasts 20 years…you have $219,000! That is not taking into consideration the cost of inflation, or even the fuel you use to cook your food. Also, I personally have never met anyone who never goes out to eat.
These numbers are not meant to scare you, but rather to give you a better perspective as to how much retirement can cost. For most people, retirement will not cost less than their working years. In fact, according to some recent studies, the higher your current income, the more money as a percentage you will need to maintain your standard of living. In fact, many middle class and upper class people will need the same or more money than they are making currently to retire in the same lifestyle. So the next time you meet with your financial advisor, or are using a retirement planning tool, please aim as close to 100% of your income as you can for your retirement. Chances are that if 70% can’t get the job done today, there won’t be much choice in the future.
Money's Biggest Enemy: Fear
Just think to yourself of all those great decisions you have made, when fear motivated you. I’m guessing the list is very short. However, fear is a part of life and can save us from getting into trouble. In the financial world, fear will only get you into trouble. In the 1980’s movie, Wall Street, the lead character (Gordon Gecko) was quoted as saying “Never get emotional about stock, it clouds your judgment.” I would like to take that a step further, and extend that warning to investing in general. People are creatures of emotion, and I see people get emotional over investing every day. This is not to say that you should turn a blind eye towards your financial affairs, or not care about them. Rather, this is a call to discipline.
The recent state of the economy and financial markets has tested the discipline of many investors. A lot of the investing public has been guided by fear. Those who had the discipline to remain calm, analyze what was going on, and either make strategic moves (guided by proper planning) or follow their game plan will come out on top. All I am advocating is to not be guided by fear. For some people, fear is a valid response to what is happening, especially when they are invested more aggressively than they should be, do not have the proper insurance coverage, or have lost their job. What is most beneficial in these situations, is to take a step back, try to calm down, and approach the situation from a position of mental strength. Do research on the problem if you don’t understand what is going on. Maybe losing your job can be the opening you needed to try something new, maybe even start a business. Perhaps what is most important is to speak with a professional. Now in this matter, of course I am biased, but good financial advisors are even more valuable when things are not all roses. Run your fears and concerns by us, that is why we are here. A good advisor can help educate you and take a look at your concerns from a different perspective. Helping to calm your fears and allowing you to make smart financial decisions is what keeps small problems from snowballing into major disasters.
Another great quote is, “There is nothing to fear, but fear itself.” In this market you can see it happening everyday. People get scared and sell something. Then, the next person sees that others are selling and the value of what they own is going down, so they decide to cut their losses and bail out. The entire situation snowballs. More and more people lose money, and no one wins. I don’t want you to fall in with that group of people. When you see things like this happening, go back to your calm, rational self and think the situation through. You will always be in a better position, and may even be able to make money. Again, here is a great place to call your advisor and ask what your options are and what you should do in this situation. I hope this will help you move forward no matter what the economy does. Remember, you don’t have to follow the crowd or be lead by FEAR.
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