Coffee to Car Payments

What Do Most Roller Coasters Have In Common?

 I'm sure I'm not the first guy to ever compare the market to a roller coaster, and I'm sure I won't be the last.  Most of the time, the comparison is referencing the ups and downs, the anticipation on the way up and that crazy thing that happens in your stomach on the way down as you think "Oh well.  I'm already committed.  May as well ride it out."

What woke me up at four o'clock this morning though was the thought that every roller coaster I've ever been on usually starts and ends at the same place.  That's right.  One big circle.  That's the rub.  Here.  Take a look at the last 10 years:

I guess that's OK if you don't plan to retire any time soon.

When I was younger, I used to love to ride roller coasters.  I'd stand in line for an hour for a 2 or 3-minute ride, hop off at the end a race back to stand in line again.  Now, I'm kinda partial to chair lifts.  They typically take you from one place to another and save you lots of steps.  Sometimes they move so damn slow you wonder if you're ever going to get there.  Eventually though they begin there smooth descent to deliver you to point B.

The view from a chair lift is interesting too.  You can hear people screaming on the other rides.  You look down and see very clearly that almost all the other rides just go around in circles.  You might even see a ride that looks like fun and think "Hmm.  I'll have to come back and check that out."

All the other rides are purely for entertainment.  The chair lift is unique because it actually takes you somewhere.

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Honey, Make Me a List.

Before I took Sheri to the airport on Tuesday, she asked if I wanted her to make me a list of the things I needed to do.  I said "Sure!"  Here's what she gave me:

• "Plain chewy in the morning"  This was for the dog.  A chewy is a rawhide treat.
• "Flavored chewy in the evening"  Didn't know.  Good tip.
• "Put squirrel in garbage on Friday (garbage day).  It's between the house and the garage."  Okay.  Dead squirrel from front yard goes in the garbage on garbage day.  Got it.
• "Empty dehumidifier 2X/day."  Oops!  Better go do that.
• "Eat something."  Cool!  She still cares about me.
• "Eat tomatoes."  We've got an overload of tomatoes on the counter from friends.

Pretty detailed list.  Huh?  She thought of everything.  Wait a sec!  She didn't tell me to feed or water the dog.  Should I do that?  She's gone for 5 days.  What's my point?  In the age of the internet, it's great that people do enough research to have their own informed ideas about financial planning.  But, if your financial planner asks you a few extra questions, don't worry about what he's trying to sell you.  He's just doing his job.  In my case, had I followed Sheri's list to the letter, the dog might be dead but hey, at least the squirrel got in the garbage without stinking up the container and the basement smells nice.  OK.  Gotta go mow the lawn.  That wasn't on the list either.

A Trip to the Airport

Yesterday I was taking Sheri to the airport.  She's spending a few days in "The Big Apple" with four of her girlfriends.  Her flight was leaving at 8:20.  Since the Des Moines airport is relatively easy to navigate, we figured we'd be good if she got there at 7:30.  Since we live less than five miles from the airport, we left the house at 7:10.  After all, it's a 10-minute drive but it was rush hour.  We pull to the end of the driveway and "Bam!  There's a crane truck parked right in the middle of our street on one end and, the other end is closed (big sewer project...long story).  I immediately begin to weigh the options.  Do I drive up on the unfinished sidewalk to get around this thing?  Can I pull into my neighbor's driveway and then cut across the grass.  Neither of these seemed to be an option because it had rained hard the day before and, I might get stuck in the mud.  Oh wait.  I could go home and get the Jeep because then I wouldn't have to worry about the mud.  Sheri, meanwhile, went and asked the crane operator how long they were going to be.  "5-10 minutes" was the reply.  OK.  problem solved.  We wait and then we're on our way.  We'd already planned and extra 10 minutes for the unexpected.

Once the crane moved, Sheri says "Now, I know this is against your nature but, I need you to drive like a madman."  Out of sheer habit, I say "Yes Dear." and then proceed to drive the speed limit.  I'm doing 40 miles an hour down the road and calculating in my head that if I do 50, I could shave about a minute off the trip.  So, we're going along and Sheri says "You just got passed by an old, white-haired man."  "Yes," I replied "but the one sure way to miss your flight is for me to get a speeding ticket."  So I kept going 40 and bottom line: She made her flight.

Now.  What's my point?  Don't be influenced by outside forces when it comes to your money.  The old, white-haired guy passed me more than once.  So, that means, at some point, I passed him.  Focus on the plan.  My goal was to get Sheri to the airport on time without taking unnecessary risks.  Guess what?  It worked!  The crane, Sheri's advice to "drive like a madman", and the old white-haired guy were merely distractions from my ultimate goal.

Too Many Cooks In Your Retirement "Soup"?

If I asked you to give the tagline for Timex, could you?  Probably.  But that was two taglines ago.

Just came across this post from Drew McLellan.  For those two people who don't know Drew, he's the guy who, in his own words, "gets branding and marketing and he desperately wants you to get it too"  The post is about Timex changing their tried and true tagline, "Takes a licking and keeps on ticking" to "Timex.  Life is ticking."  all because some new guy came in and said that he could do better.  That guy's since been fired and so has the tagline.  Now it's "Timex.  Be there now."  "Be there now?"  Can't any watch do that?  Heck, my cell phone can do that.  So can the clock in my car.  What's so special about that?

I guess what hit me immediately is that this is what so many people do with their money.  They sit down with one financial planner and put together a plan.  Things are going according to plan and then they go to a seminar.  Maybe it's because they're unhappy or maybe it's just the free meal.  Then they switch gears and go with the new guy.  That doesn't work out.  So, they go to another seminar...you get the picture?  What happens is that they end up with a shotgun approach to financial planning.  They've got duplications and ommissions everywhere.  Odds are that they end going up back to the original guy who put together a plan and ask him to sort it out.   Someone once said (I wish I could remember who.  It's buried somewhere in the 500+ pages of the latest version of "The Intelligent Investor".  So, most likely, it was Benjamin Graham.)  "A lot of bad advice is given free."  If you've got a plan that's working for you, one that can, in fact, "take a licking", stick with it.  These are confusing times but, a plan is a plan is a plan.

5 Handy Excuses You Can Use For Not Saving For Retirement

I've even sorted them by age to make it easier for you.

Ages 21-30
"I'm just getting started in life!"

Ages 30-45
"I've got a growing family on my hands!"

Ages 45-55
"I have two children in college!"

Ages 55-65
"Things aren't working out the way I thought they would!"

Ages 65-70
"It's too late!"

Stop Busting Your Assets!

Image via Wikipedia

I've been doing a lot of reading lately on investing.  I'm currently reading 'The Intelligent Investor' by Benjamin Graham, Warren Buffett's mentor.  He talks in depth about two types of investors.  The defensive (passive) investor is one who takes the safe route and just invests in the overall market.  The aggressive (active) investor is one who knows how to read a company's financial statement and make decisions as if he were actually buying the business.  Basically, you don't buy anything that you don't understand.  When the active investor finds the business he wants to own at the price he wants to pay, he buys it planning to hold it indefinitely.  He has bought into a business and not a number on a ticker somewhere.

I found a great blog today that I will be referring to often.  It is called the Behavior Gap by a financial planner named Carl Richards.   I just want to highlight a couple posts for now.  The first post describes why the average investor does considerably worse than the average investment over time.  In short, you can outperform 99% of your neighbors simply by changing your behavior.  The role of a financial planner is not to find great investments but to develop better investors.  The second post describes what happens by the time that you find out that something is a great investment.   I mean, think about it.  What happens when you do exceptionally well at your job?  You are given more responsibility, more money, and so forth until eventually, you have reached a plateau.  Then the excellence turns to mediocrity and pretty soon, if you're "too big to fail", you end up asking Congress and the taxpayers for bailout money but, I digress.  These hot fund managers do well when they are small enough to fly under the radar but then, when more and more money gets dumped into the fund, the manager can perform about as effectively as the Hindenburg in a dog fight.  Then you, the investor, are back to square one looking for the next hot manager based on what?  His historical performance.

I wrote in an earlier post about advisors needing to manage their clients expectations and, Carl does an excellent job of showing how you can take control of the situation by managing your own behavior.

What are your assumptions about money?

Doctors, Advisors, and Cab Drivers.

It's a little amusing to me how a lot of guys in my business, whether they call themselves an insurance agent or a financial advisor, feel the need to tether their level of professionalism to something totally unrelated to the task at hand.  They say things like:

• "It's like when you go to the doctor..."
• "You wouldn't want the doctor to just walk in and write a prescription without asking you a few questions."

There's a lot more but, you get the point.  A lot of the statements made have some validity but, we really are nothing like a doctor.  First off, we don't have a cot in the office where we sleep just in case you need us.  If you paged us in the middle of the night, there'd be no point in responding outside of normal business hours.  There are no lives in the balance.  Last but not least, do you really want us to act like a doctor, lawyer, or anything else that requires more than an undergraduate degree?  We could talk over your head and use big confusing words that you'd never hear anywhere else.   We could make you feel like our time is so valuable that you're lucky you've got a few minutes of it.  Do you really want to worry about the outcome of our next or last meeting?

I don't think so.  Financial planning can be very intimidating.  Since they don't teach financial literacy in school (yet), it's a topic with which many of us are unfamiliar.  It's kinda like going to a major city that you've not been to before or maybe you have been there, but you don't really know your way around.  You arrive at the airport and you can do one of two things.  You can rent a car or hail a cab.  Remember, it's a big city where the natives drive like maniacs, parking's a bear, and you're not real sure where you're going.  So, you opt for the cab because everything you plan to do is just another short cab ride from your hotel.  What are you really looking for at that point?    You want someone who you can count on to get you where you want to go, get you there in one piece, and speaks your language.

2008 (Useful) Quote of The Year

I laughed along with the rest of America when Tina Fey (or was it Sarah Palin?) said "I can see Russia from my house."  but the quote that sticks in my head and resurfaces about every other day was back in September when Warren Buffet said

 “You see, the economy is like a bathtub - you can’t have cold water in the front, and hot water at the back!”

I was reading Mark Perry's blog this morning and he referenced a couple quotes from Thomas Sowell, author of "Basic Economics: A Citizen's Guide to the Economy" :

"The first lesson of economics is that we live in a universe of scarcity, and we face tradeoffs. The first lesson of politics is to ignore the first lesson of economics."

and

 "You want the impossible? You got it. Politicians don't get elected by saying "No" to voters. People can get the possible on their own. Politicians have to be able to offer the voters something that they cannot get on their own. The impossible fills that bill perfectly."

Scale these quotes down to your personal economic security plan and you get "There is no free lunch.", "If something sounds too good to be true, it probably is.",  and "You can't have your cake and eat it too."  You get the picture.

I believe that too many people who call themselves financial planners have become nothing more that "yes" men to their clients.  They lack the courage to politely inform their clients that their expectations may be a little unrealistic.  This opens the door for guys like Bernie Madoff to run giant Ponzi schemes and market them freely through reputable brokers and investment firms. 

Consequently, 81% of high net worth investors are now considering taking money away from their current advisors and 86% of them plan to tell others to avoid their advisor altogether while only 2% of them would recommend him or her to someone they care about.  The advisor really didn't do anything wrong other than try to meet rather than mange their clients' expectations.

If you happen to be among those who are considering changing advisors, make sure you don't end up with another "yes" man or you'll be shopping around again when the next bear market comes around.

Remember: A portfolio without a plan is really just a bunch of accounts.

I'm Not Here to Make You Rich.

Over the last couple weeks, the talking heads on CNBC have been debating whether or not "buy and hold" investing is dead.  If you've been listening to all the noise, you are probably just as confused as I am.  "It's too late to sell." says one guy.  "We've got to be close to a bottom and if you sell now you're just locking in all of those losses and you'll likely miss the beginning of the recovery".  "It's time to buy." says another.  He then quickly qualifies it buy saying you need to ease into it slowly, buying a little here and there until we're sure we've reached the bottom.  Then you have the pompous hedge fund manager who puffs out his chest and says "We've been sitting mostly in cash since February."  February?  Why February?...and why in the heck wasn't this genius being interviewed in February?  The truth is that even very competent experts are confused by the way the market is behaving right now.  Nothing makes sense and the only thing that makes is worse is lack of investor confidence.  So, they have to be a little reassuring to keep you from putting everything in a coffee can.

My last two posts were intentionally focused on the short term to set the stage for this one.  It's easy to become very despondent watching your retirement funds tank in the short term but if you take a little broader view, the picture still isn't pretty, but it certainly illustrates that it may be OK to consider other options.

Let's look at the last five years.  From October 2003 through October 2008, the Dow has returned a -.97% per year.  It still sucks but you've only lost a little less than 1% per year over the last 5 years.

How about the last ten years?  Well, from October 1998 through October 2008, the Dow averaged a .83% gain annually.  So, a little less than 1% per year average gain.

So, yes if you only look at the last month or the last year, things look pretty bleak and it seems you may have no choice but to ride it out.  But if you look at the last 5 or 10 years, all you've lost is time and a little bit to inflation.  For anyone who is 15 years or less from retirement, this is a good time to start considering options that you can count on to ensure that your money lasts as long as you do. 

I always tell new clients that my job isn't to make you rich.  It's to keep you from becoming poor. 

Plant an Acorn in Your Youth. Sit Under an Oak Tree in Your Old Age.

But, what if the government came along and made you cut a limb off every year after you reached a certain age?  I was reading the paper this morning and this headline caught my eye Retirement Account Rules Catch Many By Surprise .  Sen. Charles Grassley, R-Iowa, wants to see a review of a somewhat antiquated law that requires retirees to start taking distributions from their IRA and 401k accounts when they turn age 70 1/2.  This is know as your "Required Minimum Distribution" or RMD.  This distribution is mandatory whether you need it or not and carries a hefty penalty of 50% of the amount that should have been withdrawn if you don't take it.  The purpose of the law is to prevent people from abusing the tax advantages of these accounts.  Uncle Sam let you defer taxes all those years and now he wants his money.  The article further stated that 6 out of 10 households that owned traditional IRAs that made withdrawals in 2006 did so just to satisfy the RMD requirement.

On the surface, it looks like a Republican Senator looking for more tax advantages for his wealthy constituents.  I beg to differ.  I would estimate that closer to 80% of my clients who are over age 70 1/2 and are subject to RMDs say something like "Well, the government makes me take out so much every year.  What's that called again?".  It's your RMD.  A recent study by Cogent Research called "The Retirement Income Dilemma" showed that outliving assets was #4 on the list of Top 10 Investor Concerns.  My personal thoughts are that the retiree who had the foresight to save for retirement and not rely on entitlement programs alone should be allowed to have greater control over their money in retirement.  Uncle Sam wants his money but why not wait and enforce the RMDs on their beneficiaries?  This is currently a concept know as a stretch IRA.  This would lead to more tax revenue over time, make the inheritance last longer than six months, and provide greater financial security for the retiree who diligently saved all those years.

Watch for more upcoming posts on this topic:

• What will happen to the market in 2016 when the first baby boomers are forced to take RMDs regardless of whether they need it or not and regardless of other market conditions.
• Review of Ed Slott's book, "Parlay Your IRA Into a Family Fortune"