Viewing entries tagged
Planning

The River Guide

In Seth Godin's blog post (you can read it here) from May 16th, he talks about the river guide and the rapids in short but eloquent terms.  

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Frequently, we're asked to change things up, adapt to the market, react to the news, fine-tune strategies for current events. Nothing could be further from rationale.  

Advisors, when they captain the "boat" correctly tend to not over-react. Over-reaction and emotional actions are the purview of the uninformed short-cut taker.  

And let it be known that there are Clients who over-react and live on emotion and advisors who do so as well, ardent in the belief that the way you add value is to "change it up" and show that you can meet the challenge.  Doing nothing unfortunately is not recognized as strategy in many quarters and that's unfortunate. 

But imagine the heart surgeon who thinks that the likelihood is that you might be in for a cardiac surprise at some point if you don't loose weight and watch your cholesterol telling you that it might be better to operate now just on the off chance something bad might happen someday down the road.  Nope, then you'd feel that doing something was specifically not the thing to do and we'd agree. When the action doesn't cure the problem or when the problem does not yet exist, then staying the course is the right choice. 

Let's celebrate doing nothing by judging it based on it's effectiveness and not it's level of effort.  

 

How About You Don't Go With The Flow...Probably A Much Better Idea

I always have lots to read. And, thankfully between some web apps like Pocket and Evernote, I pretty much can scan the various online magainze articles I get (about 100 a week) and "clip and post" stuff to the web for reading on my iPad or my iPhone. 

Ignore the noise and choose your own path. Stick with your long-term plan.

Ignore the noise and choose your own path. Stick with your long-term plan.

I tend not to get too deep into these articles, a quick scan, find a few keywords and "see" a theme for what the article is about all the initial effort I put in. If it feels right, clipped or pocketed, it's saved.

I tend not to get too deep into these articles, a quick scan, find a few keywords and "see" a theme for what the article is about all the initial effort I put in. If it feels right, clipped or pocketed, it's saved. 

Well I happend to come across the article titled "Hefty Redemptions In Mutual Funds"  that appeard in Financial Planning Magazine last week, and it was only that I had been using another article in a conversation with a client that this particular article or portion of it, jumped out at me: 

"Once again, U.S. equity funds took the brunt of the most recent drubbing, losing an estimated $3.08 billion in outflows, a sharp reversal from the previous week’s $906 million inflow. The outflow was less than half the huge $7.2 billion outflow the week ended May 23...."

Really? We're still at it huh? Still believing in tooth fairies and elves it seems. Do we really think that all this fernetic activity is how we're going to get ahead? Boy, Wall Street has got you sold on trading. 

Here's the immutable reality out there for all the folks that believe it's "TIMING THE MARKET" that makes money when every piece of research within reason will tell you it's "TIME IN THE MARKET" that wins the day; you're not going anywhere by getting in and getting out. Oh I know, you'll look at the week you weren't in and say that you avoided the 8% drop, but won't count the 12% you lost the following week when you hadn't gotten back in on time as a loss. That's not math, that's convenience. By the way, I prefer to think of my Hyundai Sonata as a Porsche 911 Turbo. (It's not by the way, no matter how much I think it is. And, avoiding and 8% drop followed by missing a 12% gain is a 12% loss.)

When will we learn that strategy most times involve doing absolutely nothing except sticking to a plan?

I can hear Wall Street's cash register ringing even as I write this....trading doesn't make anybody money except the traders. 

Which Lever Do You Pull?

My colleague Carl Richards at Behavior Gap has it just right in his video blog this month.

There are literally a host of things that we can do to improve our financial lot in life. We can spend less. And we can save more. We can continue to work past our retirement date which has it's own benefits, more income contributed towards goals and your contribution to the workforce is increasingly being shown as both needed and a benefit to your long-term health.  

There are literally a host of things that we can do to improve our financial lot in life. We can spend less. And we can save more. We can continue to work past our retirement date which has it's own benefits, more income contributed towards goals and your contribution to the workforce is increasingly being shown as both needed and a benefit to your long-term health.  

It's the things that you can control that count. 

It's the things that you can control that count. 

We can down size our homes, or take smaller vacations. We can carefully consider college costs and opt for high quality schools and our own ability to guide our kids as opposed to Ivy League schools and student loans. 

Why then, as Carl suggests, do we always focus on investment returns as the central issue to concern ourselves with? 

I'd suggest that it's easier for us to focus on the thing we can't control because we don't have judge ourselves if it fails. It's long been known that investors tend to pat themselves on the back for good investment decisions when markets pan out and to blame some nefarious other factor when they don't, be it Europe, the Fed or the current administration. 

As I wrote last week, we have an aversion to taking control of things. Pulling the other levers as Carl refers to it, takes more thought and places the responsibility on us and it will be squarely in our path. That's harder than surrendering to what you can't control. 

Imagine telling your son or daughter that they can't go to Brown University because you simply can't afford it after the 2008 market and the summer swoon of 2011. Not your fault, the market took that money from you, you didn't lose it. That's a lot harder than deciding to work till age 70 or just sitting your kid down and saying; "we don't think that Brown is a necessary expense. You can do just as well at a smaller school with more focus and working harder." That's not a subtle shift in the conversation. 

Knowing that your focus should be controlling what you can control isn't new, but for many it's almost impossible. Until we can resolve that without planning you can't know what to control...you'll continue to avoid it. 

The "doing/knowing" gap suggests that in many instances, knowing that something should be done is the equivalent of actually having done it. (Can't tell you how many married couples with kids I've talked to over thirty years that know that they should have a Will done and yet, after 13 years of marriage, don't have one.) 

We can finish on this note: doing/knowing will seem like the same thing, until it's not. And when that happens, you won't know what levers to pull, when to pull them or why. 

Save yourself the trouble and start making active decisions now, while you have both the time and space to consider their implications. Setting a course, a real course, has to be the first step in the process unless ignoring how you get somewhere is the way to go. 

Deciding where to end up is never hard. Knowing how to get there is, but doesn't have to be. 

Have You Heard The One About The "Fiscal Cliff?"

So that there's no shortgage of things to worry about, meaningless as they often are, we'll give you some advanced lead time to prep for the next problem dejour, the "Fiscal Cliff." 

It seems that the fiscal cliff is the collision of a number of policy changes that are set to take place in 2013 that are destined to be the next fiscal impediment. 

There will always be change and challenge. Question is, what will you do to adapt and prosper?

There will always be change and challenge. Question is, what will you do to adapt and prosper?

The attached article presents the facts rather susinctly I feel and it comes with one of the more noteworthy admonitions...ignore it when you hear it. 

This all flows so wonderfully well with an insight from last weeks blog by Larry Swedroe. In discussing the predictive capabilities of our world full of "experts" Mr. Swedroe noted: 

"One of my favorite sayings is that there are three types of investment forecasters: those who don’t know where the market is going; those who know they don’t know; and those who know they don’t know but get paid a lot of money to pretend they do. In other words, they are playing an entirely different game."

Read up on the Fiscal Cliff here, and be ready to ignore it when the media grabs this by the tail and starts running with it. 

Sounder investment decisions help to prevent this kinds of dooms day thinking. 

The Compass or the Map

Over the last few years I've read a few of Seth Godin's books and I receive his blog feed just about every day. He's one of the bloggers that I tend to read just about everything he writes and as with his books, I find Seth's perspective on things to be interesting and intriguing. 

If you don't know where you're going, any road will take you there. 

If you don't know where you're going, any road will take you there. 

Over the last few years I've read a few of Seth Godin's books and I receive his blog feed just about every day. He's one of the bloggers that I tend to read just about everything he writes and as with his books, I find Seth's perspective on things to be interesting and intriguing. 

On February 22nd, his blog titled "The map has been replaced by the compass" (you can read that blog as well as the other "February" bloggings by Seth.) another interesting paralell has been drawn between whatever inspired his blog on that day and the wealth management process. 

In that blog, he writes..."The compass, on the other hand, is more important then ever. If you don't know which direction you're going, how will you know when you're off course?

And yet...

And yet we spend most of our time learning (or teaching) the map, yesterday's map, while we're anxious and afraid to spend any time at all calibrating our compass."

In the world of personal finance there also exists both map and compass.

And, likewise, maps while inferior at the job tend to win out.

One word of caution; if your map is getting all your attention that's a problem you need to work at fixing. 

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?   

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