Viewing entries tagged
Financial Planning

Disagreement With An Icon

I hate disagreeing with people, but in finance, that's more or less the norm at times.

I hate disagreeing with people, but in finance, that's more or less the norm at times. 

Avoiding losses also means avoiding gains. 

Avoiding losses also means avoiding gains. 

Zvi Bodie, who is the Adele Barron Professor of Management at Boston University is one of my favorite authors and speakers. His textbook, "Investments" is renowned around the world and is used in the certification program of the CFA Institute and the Society of Actuaries. 

With all that said, sometimes, even Zvi just gets it dead wrong.   

In a recent BU video titled "Three Crucial Tips" Professor Bodie offers some "salient" advice on matters of personal finance. I take exception to just about all of them, here's the skinny on each

1. Take No Risk

Professor Bodie notes that he hates to lose money more than anything and to that end, he takes virtually no risk with his investments. He further notes that [a] he is much more concerned about loss than he is about gains and [b] taking risk is dependent on how you're going to feel if you lose the money. 

Well, first off, Professor Bodie is a professor of management so we can assume safely I think, that he's probably paid more than most people and being grounded in management, he's  a bit more comfortable confronting his financial issues than most are. To that end, he likely started saving early and often with reasonable deposits. If most people were to operate that way, saving early and often, the need for "risky" investments would naturally diminish over time. After all, once you've accumulated enough to fund your goal, it's funded. Enough said. 

As to concern about losses, behavioral science tells us that there is no difference between professors and the general population, everyone counts losses more than gains. That's why people prefer to buy into the stock market at 12,000 on the Dow (when it's expensive) instead of at 8,300 when it's cheap. Amazingly, we're so scared of losses that we inadvertently wait till they're the most likely to happen in our effort to avoid them. That's part of the problem. If that seems irrationale to you, let's shift the "consumable" from stocks to socks. If you needed to buy a supply of gym socks for your year long workout regime, better to buy them at $3.00 a pair or $1.00 a pair? I thought so. 

2. Trust No One

Professor Bodie contends that "no one knows you better than you know yourself." Again, enough said on that, and simply stating the obvious doesn't, in my way of thinking, present a cogent argument on why to either do or not do something. 

At point of fact, we don't even really know ourselves all that well. If we did, we'd have a better understanding about our goals, vision and dreams for the future and we'd be doing something to make them a reality. 

While it's true that no one knows you better than you know yourself, you can in fact, work with an advisor who will know you almost as well as you know yourself and, who should be able to motivate you to do something to make some progress towards your hopes and dreams. 

The Professor did note that if he had to take his car to be fixed, something he'd trust someone else to do, he'd ask a lot of questions of that person. That's good advice, when people seek out a financial professional to help them, they too, should ask a lot of questions. To the best of my recollection, both the FPA and CFP Board have consumer materials on their website listing questions to ask your advisor. 

3. Get Guarantees and Read Some Books

Oh boy. Really? We're sort of back at square one. There aren't many investments out there that come with guarantees. There aren't any investments out there that come with guarantees that are in and of themselves going to enable you to reach your goals. Remember when Jimmy Carter was president? The yield on 30 year treasury bonds was 14%, unfortunately, the core inflation rate was about 16% which meant you were locking in a guaranteed loss of 2% in purchasing power. Is this the type of guarantee that Professor Bodie had in mind? I think not. 

The good professor also notes that finance isn't that hard and that there are many books out there that can teach you about finance if you'd read them. 

There are as many books out there about weight loss and yet we live in a world of largely large people. Cooking, wine, golf, scores of books producing woefully bad results. If reading about something meant that you'd automatically inculcate what you read into your life and times, what a wonderful world this would be. 

And, yes, personal finance is easy if for no other reason than what ideal life you aspire to has nothing to do with financial matters, since;  [a] your goals financial and otherwise should be based on your wishes, dreams and building a life that makes you happy, [b] you can delegate the complicated part to someone who will make that ideal life the centerpiece of everything you do and each decision you make, and lastly; [c] all you have to do is start and then keep up with it, in concert with a trusted advisor to guide you and help you make interim course adjustments. 

Finance should work like the Apollo mission. JFK said we were going to send a man to the moon and bring him home safely before the decade was out. (Note: This is a GOAL, clearly defined and stated.)

He had the vision about what he wanted and then he turned it over to the people that he trusted to make it happen. 

Then it happened. Enough said. 

Were there not the details of life, were we all blessed with all the understanding and money we needed, personal finance might be easy. 

Steve Jobs was rumored to have told his designers and technicians at Apple to build the best phone the world had ever seen. 

Then he too turned it over to people he trusted to make it happen. 

Here's the the real three topics you must learn; 

  1. Say what you want (set appropriate goals)
  2. Turn it over to someone who will help you make it happen 
  3. Trust the process  

When will you?   

Take a tour red.jpg

"This Is 911, What's Your EMERGENCY!!"

What you need to do about emergency reserves depends on your persona situation. First, let's understand exactly what I mean when I say "emergency reserves." I'm talking here about cash basically and all it's inherently stable alternatives. Its where you put your dollars when you have to be certain that the value will stand up over time, where a dollar's always going to be worth a dollar.

Cash is often still king; especially when it's paying for an emergency. 

Cash is often still king; especially when it's paying for an emergency. 

Next, if you are already familiar with or have some "rule of thumb" you believe in as to how much your emergency reserve amount should be, you need to explore that a bit as it relates to your specific situation. Having three or six months salary is a great place to start, however is it enough? Let's take a look at a few possible scenarios that you might face:

Both you and your spouse work in the same industry or profession

This might mean that more reserves are required than less, since its more likely that you could be out of work at the same time or be impacted by the same events.

Your income is adequate, but in reality, your financial life works because of your commissions and bonus

In a weak economy, you may not get all those commissions or bonus dollars and even when things are going great, your compensation still largely rises and falls considerably, that would impact your level of emergency reserves.

In addition to your family, you're helping keep your parents going with regular financial help

These additional needs are often overlooked when putting an emergency reserve plan in place and they shouldn't be. If you're helping Mom and Dad out, that won't change even though your circumstances might.

And what happens when there's not good emergency planning? As a rule, you're more apt to make uninformed decisions about how to deal with a crisis, like borrowing on your 401(k) or selling out stocks when the market's down.

Besides developing a sound emergency reserve plan, you should check to be sure that your risk management program is up to snuff. The right insurance protection at the right time can keep you from raiding your reserves or other investments.

A professional financial advisor can help you develope an emergency reserve plan that is based on sound judgement and an understanding of all the risks that you face. Also, good advisors integrate the emergency reserve plan into your overall financial and investment strategy so that your plan becomes one of the components of an overall strategy to keep you moving forward with financial peace of mind.

Preparing For Retirment Appears To Be Not Preparing At All

The 2011 Retirement Confidence Survey seems to show what we've known in the profession for known for some time; while American's confidence in financial security continues to fall, the largely aren't doing anything to improve their chances. This proves again that the uncertainty and decision making leading into life's transitions, paralyzes people even in the fact of a problem that they likely understand very well on many levels.

The number of people saving actively toward a specific retirement goal has leveled off at about the same place as they were during the period from 2001 through 2008. The market decline in 2008-2009 bumped the savers up about 7% but that increase has gone away.

Getting ready means getting ready, not wandering into the unknown hoping we'll figure it out some how along the way. 

Getting ready means getting ready, not wandering into the unknown hoping we'll figure it out some how along the way. 

The report goes on to note the paucity of amounts actually saved, with most workers having less than $25,000. Perhaps more importantly, 30% of workers noted that they had to dip into retirement savings to simply pay for basic lifestyle expenses.

Consider this expert from a recent Financial Magazine blog post:

"Still, the vast majority of American employees are still under financial strain, even when the study looked at the least vulnerable demographic groups-men, those between 55 and 64, and workers who earned between $150,000 and $199,999 per year. According to the study, 83% of them reported having some financial stress; as well as 76% of those in the above age group; and 84% of those earning mid- to high six figure salaries." (Read the entire article here.)

Is Planning The Answer?

Planning is at the least a central part of the answer, if only because it frames the issues in a more understandable and less threatening way. Also, it takes what are largely the scary unknowns and converts them to known items, allowing for us to better understand the problem, it's implications as well as it's potential short and long term solutions.

Only 42% of workers have completed some form of "retirement needs calculation" according to the report. An an advisor I can assure you that most of those calculations are fraught with their own inadequacies, so while 42% may be the number taking that bold step, the percentage getting realistic advice as a result of it, is much, much less.

The difficulty here as we see it is that this becomes a problem easy to ignore, either because ignoring it allows you to live the illusion that if you can't see the problem it doesn't exist, or; because once you know the full scope of the problem, you're left with the fact that the problem's too far gone and you can't do anything to change it in any meaningful way.

And, this last fact is where we believe that there's a value in an adviosry relationship. The reality is that you can do something about it no matter how far along the problem is.

The input and persepctive of a professional can be an invaluable resource in working through the details of planning for any of life's transitions.

Anyone wishing to read the entire Retirement Confidence Survey can do at the EBRI website by selecting this link.

If you would like a complimentary reviwe of your own wealth management plan, connect with us and request a no cost, no obligation appointment for your review.