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Posts from the ‘Financial Literacy’ Category

21
Apr

Coping with Market Volatility: Cash Can Help Manage Your Mindset

Holding an appropriate amount of cash in a portfolio can be the financial equivalent of taking deep breaths to relax. It could enhance your ability to make thoughtful investment decisions instead of impulsive ones. Having a cash position coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.

That doesn’t mean you should convert your portfolio to cash. Selling during a down market locks in any investment losses, and a period of extreme market volatility can make it even more difficult to choose the right time to make a large-scale move. Watching the market move up after you’ve abandoned it can be almost as painful as watching the market go down. Finally, be mindful that cash may not keep pace with inflation over time; if you have long-term goals, you need to consider the impact of a major change on your ability to achieve them.

Having a cash cushion in your portfolio isn’t necessarily the same as having a financial cushion to help cover emergencies such as medical problems or a job loss. An appropriate asset allocation that takes into account your time horizon and risk tolerance may help you avoid having to sell stocks at an inopportune time to meet ordinary expenses.

Remember that we’re here to help and to answer any questions you may have.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.

30
May

Retirement Confidence Increases for Workers and Retirees

The 29th annual Retirement Confidence Survey (RCS), conducted by the Employee Benefit Research Institute (EBRI) in 2019, found that two-thirds of U.S. workers (67%) are confident in their ability to live comfortably throughout their retirement years (up from 64% in 2018). Worker confidence now matches levels reported in 2007 — before the 2008 financial crisis.

Confidence among retirees continues to be greater than that of workers. Eighty-two percent of retirees are either very or somewhat confident about having enough money to live comfortably throughout their retirement years (up from 75% in 2018).

Retirement plan participation

Retirement confidence seems to be strongly related to retirement plan participation.  “Workers reporting they or their spouse have money in a defined contribution plan or IRA, or have benefits in a defined benefit plan,  are nearly twice as likely to be at least somewhat confident about retirement (74% with a plan vs. 39% without),” said Craig Copeland, EBRI senior research associate and co-author of the report.

Basic retirement expenses and medical care

Retirees are more confident than workers when it comes to basic expenses and medical care. Eighty-five percent of retirees report feeling very or somewhat confident about being able to afford basic expenses in retirement, compared with 72% of workers. Confidence in having enough money to pay medical expenses in retirement was also higher among retirees than workers: 80% versus 60%. However, 41% of retirees and 49% of workers are not confident about covering potential long-term care needs.

Debt levels

The survey consistently shows a relationship between debt levels and retirement confidence. “In 2019, 41% of workers with a major debt problem say that they are very or somewhat confident about having enough money to live comfortably in retirement, compared with 85% of workers who indicate debt is not a problem. Thirty-two percent of workers with a major debt problem are not at all confident about their prospects for a financially secure retirement, compared with 5% of workers without a debt problem,” said Copeland.

6
Mar

The lessons learned from “the old Enron story” still apply.

The following is from Edward Mendlowitz’s Feb. 24, 2015 Blog.
“in his book Money: Master the Game, Tony Robbins dredges up the old Enron story, which I agree with, and want to call to your attention now.  Here is a brief listing copied from Tony’s book of the lauds, Enron received right up until their bankruptcy filing.

Mar 21, 2001 Merrill Lynch recommends
Mar 29, 2001 Goldman Sacks recommends
June 8, 2001 J.P. Morgan recommends
Aug 15, 2001 Bank of America recommends
Oct 4, 2001 A G Edwards recommends
Oct 24, 2001 Lehman Brothers recommends
Nov 12, 2001 Prudential recommends
Nov 21, 2001 Goldman Sacks recommends (again)
Nov 29, 2011 Credit Suisse First Boston recommends
Dec 2, 2001 Enron files Bankruptcy

Millions of Investors trusted these venerable firms and followed their recommendations.  A question I had at the time was, “How much work did they do before they made their recommendations?”  I could not have been too much since every recommendation was wrong.  Another observation is that many of the largest mutual funds has significant positions in Enron.

Now, lets fast forward to today.  Has anything changed?  Were lessons learned?  Are more intensive analysis being done now?  I suggest that nothing has changed.  Examples are in the many recommendations to buy oil stocks a few months ago before a subsequent additional 35% drop.  …Next, as Robbins points out, most actively managed mutual funds do not outperform the index they are trying to beat….

The principles in the book are easy to understand, digest and act on…. I have condensed them [his seven steps] and … restate as follows:

1. Commit to regular savings program
2. Know and understand why you are investing in
3. Develop a plan and, while at it, reduce spending, keep investment costs low and shed debt
4. Allocate your assets carefully and rebalance periodically
5. Create a lifetime income plan
6. Invest like the .001%, i.e. don’t be stupid and re-look at step 2
7. Be happy by growing and giving

All good advice you can start following today.

 

 

 

20
Sep

Fees of a Fee-Only adviser are only paid by the client.

I have not understood why there has been any resistance to requiring financial planners and investment managers to be held to a fiduciary standard.  A recent article in the Wall Street Journal (WSJ) may indicate why some do not want to be held to a fiduciary standard.

The Free Dictionary by FARLEX defines a Fiduciary as: “An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.”

A fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person.”

Many of us believe it is putting the client first. 

Jason Zweig’s September 20th article “ ‘Fee-Only’  Financial Advisers Who Don’t Charge Fees Alone” may show why there is resistance to a fiduciary standard for financial planners and investment managers.  They found that 24% of the 33,949 certified financial planners (CFP) they analyzed described their compensation as “fee-only”. 

The article notes that “Securities lawyers and government regulators say that an adviser who works for a brokerage firm or insurance company that charges commissions shouldn’t describe his services as ‘fee only’, even if the adviser himself doesn’t charge commissions to his clients.” Although none of the CFPs at major banks and brokerage firms, the WSJ identified 661 listed CFPs who call themselves ‘fee-only’” at some of the major banks and brokerage firms.  The problem extends beyond CFPs. 

Can you argue that if the compensation is not accurate, the advisor is not a fiduciary?

The WSJ Article

26
Aug

Risk

It is important for you to understand your tolerance for risk and capacity to recover from investment losses.  Financial professionals need to understand this also.  It is part of the understanding needed to help develop a foundation to guide you through your life’s journey. 

Risk tolerance is your capacity to withstand a loss.  Your capacity to withstand a financial loss is your ability to recover from or absorb a financial loss and still be able reach your financial goals. If the probability of an investment portfolio is too low, then the person does not have the capacity to withstand the loss.

If you do not have the tolerance or capacity to withstand a loss, something else may need to be changed.  It may be any combination of actions including: increasing income, lowering expenses, increasing savings, or lowering financial goals.   

The reliability of your sources of income is another factor to consider.  If have a good job with a strong reliable company in a growing industry, you are in a better position to withstand investment losses.   However, if you are not satisfied with your employment you are not in as good of a position to withstand investment losses. 

Age and health are two other factors to consider.  If you are in the earlier stages of you career, you have more time and resources to recover from investment losses.  The existence of health issues generally reduces the ability and flexibility to withstand losses. 

Future plans to start a new business and to travel extensively are two other factors to consider.  These plans may reduce your ability and flexibility to recover from investment risks. 

This discussion is an introduction to an understanding of your risk tolerance and capacity.  Without this understanding, your financial planning may not be achievable.
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7
Aug

Tips for selecting a fianncial professional

Linda Stern (Reuters) provided some tips for getting help selecting a financial planner and/or adviser in her August 4, 2013 column in the Chicago Tribune.

The first part of the article summarizes the battle that has been going on since the 1990s to impose a requirement that all financial planners and/or advisers put their client’s interest first.  The point she was making is that you should not wait until Congress decides who should be covered and by what standard as an excuse for not getting help with your financial matters. 

“If you are getting your financial advice for free, you are not getting an adviser who is putting…” your interest first.  “Smart and unconflicted financial advice is worth something…”  Many of us provide guidance, support, etc. for those that want to manage their financial matters themselves.

“Look for the term ‘fiduciary planner’.”  Until Washington waters it down, it means the adviser has to make sure your investments are the best possible investments for you.”  Those that have the Personal Financial Specialists Credential (PFS) had to establish they had the specified experience, specified education and successful completion of the required examination.  As a member of the AICPA, we are also are subject to the AICPA Code of Professional Conduct.  CPA/PFS professionals must maintain objectivity and integrity, be free of conflicts of interest, and shall not knowingly misrepresent the facts.  Some believe these requirements are the essence of the fiduciary duty.

“Regardless of where you get your advice, make sure your assets are held in a bona fide brokerage account insured by the Securities Investor Protection Corp. “

Bottom line is that you should not delay planning.  Delays can limit you alternatives and require more effort to reach your financial goals.  You should also do your due diligence in selecting a professional to guide you through the process.
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12
Jun

“Simple Ways to Stop Doing Dumb Things with Money”

Carl Richards spoke at a conference I attended this year.  I decided to read his book, “The Behavior Gap – Simple Ways to Stop Doing Dumb Things with Money”.

 The book does not attempt to provide a simple way for people to achieve their financial goals.  It provides observations to show how to avoid doing dumb financial things.  Start by taking “… a deep breath and reflect on past decisions.”  Identify actions you took or did not take that did not turn out as you expected.  Identify how you can make better decisions in the future.

You need to recognize that not every decision will be perfect.  Recognize where you are and where you want to be.  Stay “…in tune with reality, with your goals, and with your values.”  You will need to move forward and recognize what changes are needed to reach your goals.

 Following is a small sampling of key points he makes in the book:

“We can stop chasing fantasies.  We are not going to get what we want by beating the market or picking the perfect investment or designing the perfect bulletproof financial plan.”

 ‘Our assumptions about the future are almost always wrong.”  “…we can take sensible steps to protect ourselves from life’s inevitable surprises.”

 “Your financial decisions should align with what you know about yourself and the world”.

“The process of financial planning is vital” not the financial plan.

“Our objective is “…to do the best we can and move forward. “

 The author does not claim that his ideas are original.  His goals are to clarify or simplify to give the reader the confidence to improve their financial decisions.
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30
Nov

Picking a financial adviser

Aparna Narayanan’s November 5th article in The Wall Street Journal  provides tips on how to decide on which financial adviser you should work.  The article is the basis for this discussion.

Determining what help you are seeking is the first step.  You could be looking for an answer or guidance to one or more questions, a comprehensive plan and/or investment management.  Generally people are trying to provide a framework to improve their financial well being.  Often the issue that motivated someone to see a financial adviser is not what needs the most attention.  This cannot always be determined in the introductory meeting.

Understand how the adviser is paid.  You want to understand if the compensation arrangement could create a conflict of interest.  Some advisers get paid only by their clients, in fees that are hourly, a fixed amount or a percentage of investment assets.  Others get commissions or a combination of fees and commissions.  Some advisers are legally required to put their client’s interests first as fiduciaries.

Each adviser has their own approach to an introductory meeting.  Many will offer a free introductory meeting.  The information required for an initial meeting varies among advisors.  The more information you have available the broader the initial discussion can be.  It is best that your partner or spouse is also at the initial meeting.
Understand the purpose of an initial meeting is generally not to provide answers.  The purpose is to see if you (and your spouse or partner) wants to work with the advisers.  The reverse is also true.    The adviser is trying to determine if there is a good fit with you and your needs.

There is no such thing as a bad question.  Listen to the responses to see if the adviser you want helping you with your financial issues.

Let the adviser know once you have made a decision as to who you want to work with.  Also let those you are not going to work with know you will be working with someone else.  This will eliminate unwanted follow-up with you.

READ MORE 

 

 
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10
Aug

Parents need to educate their children about money.

The Journal of Accountancy reported, 08/09/2012, the results of a survey conducted for the AICPA.
Some of the findings were:
30% of parents never talk to their children about money or have had only one talk with their children about money.

67% strongly agreed that they knew enough about personal finance to teach their children about personal finance. 
Some tips from the National Financial Literacy Commissions include:

Start early by discussing that delayed gratification is the basis for budgeting and savings goals.

Discuss things they are interested in. 
Frequent discussions about good financial habits should include how they relate to current and future benefits (needs).

Your actions should reinforce good financial behavior.

There is a lot of evidence that children are not getting introduced to financial related matters early enough.  Some schools are starting to include these topics.  These efforts need to be expanded.  Parents should assume the responsibility now and not wait for the schools to provide these topics.  Parent should also request/demand that the schools include financial educations.

These topics should include behavioral finance.  This is an increasing volume of studies showing that some of our instincts are detrimental to our financial well being.

Read More

Link to AICPA’s 360 Degrees of Financial Literacy:

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8
Aug

Most under 45 underestimate their life expectancy.

This was the finding of a survey by the Society of Actuaries, as reported the Financial Advisor Magazine August 1, 2012.

Many people forget that the average represents the middle.  That is half will live longer and half will not live that long.  The life expectancy for newborn American males increased from 66.6 years to 75.7 years between 1960 and 2010.  During the same period the life expectancy for newborn American females increased from 73.1 to 80.8.

A majority say they would be very or somewhat likely to make significant reductions in their living expenses if they thought they would live 5 years longer than they expected.  “More than half of per-retirees would also use money they otherwise would have left to heirs or downsize their housing.”

The survey also found many underestimate their planning time-line when making major financial decisions.  Retires generally look 5 years into the future and per-retirees look 10 years into the future.

The report concludes this can result in underfunding for retirement.   Understanding the increased life expectancy, the current state of the economy and the volatility of the stock market require people to do a better job of managing their finances and planning for retirement.

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