-30 + 43 = 13

This is a mercifully short blog just to drive home a few points.
First, the heading

-30 + 43 = 13

is indeed a myth, it is false . . . if we're talking about rates of return.  The correct math is this;

-30 + 43 = 0 or, more precisely, -30% + 43% = 0% return for those two time periods.

Suppose last month you invested $1000 in Bitcoin and by the end of the year your share is worth $700, a 30% loss.  If next year you gain 42.85% you would be back to even (700 x 1.4385 = 1000), a zero rate of return. 

In frothy markets like we have currently, everyone is an investment genius.  But our selective memory for achieving double digit returns doesn't accurately project over the long term.  Here are the keys to staying afloat and avoiding herd mentality:

1. Take all ego and emotion out of your investment decision making.

2. Remember your goals.  Very few people come to me with a goal of making as much as possible, especially after we work through what that really means to them.  Over what time period?  Compare to what?  Starting with what and adding how much periodically?  And, most importantly, why?  So you can buy a mansion in Paris that you can't visit?

3. Stick with the plan.  If you've done your Expense Plan, with all your dreams and goals built in to it, and our plan achieves those goals with very little risk, do you really want to let your lizard brain kick in to start running the show?

4. But be flexible.  Sometimes new hazards as well as new opportunities will present themselves and we'll have to adjust, that is, without succumbing to shiny object syndrome or FOMO (fear of missing out).

One of my favorite motivational speakers, Jim Rohn, once said that we have two choices in life, discipline or regret.  It took me many years to understand and absorb that somewhat grim prescription.  Words will fail, you just need to examine and initiate your own disciplined efforts.  What gives your actions power is the order in which you make them.

Look at your heart, for example, and the astonishing daily discipline with which it keeps you alive.  It isn't suffering or complaining at the effort (unless you have heart disease) or wishing it could just stop  and watch some TV.  Its most important task is keeping you, and itself, alive and healthy.  

So, what's most important to you?  Wouldn't it be worth a discussion with someone expert in getting specific with your goals, plans and dreams?

https://calendly.com/g---5 

Your Constructive Comments are Welcome!

THE TWO MOST IMPORTANT FINANCIAL TOOLS FOR 2017

This post heading is NOT a myth, for once.

Think about common risks in your life and the tactics you use to minimize or avoid them.

• If you're trying to lose weight then you burn more calories (read: Exercise) and consume fewer or at least better calories (quality proteins, greens, fruits & oils versus sugars, carbs & artificial or saturated fats).
• If you're taking a trip and worried about your car breaking down, you can take it in for service, check the tire pressure, top up the tank and other fluids.
• If you're worried about passing a class then you can burn the midnight oil, get help from your teacher and fellow students, search for tips and tricks online.

And so on.  We counterbalance risk with compensatory actions and strategies.

In my practice, most of my clients are concerned about two possibilities:

1. Outliving their income and assets
2. Inflation ballooning their living costs to unmanageable levels.

How can we compensate for these two very real risks in retirement?  We have two great tools (and I have Tom Hegna to thank for these concise ideas:

1. Risk pooling
2. Longevity credits

Let's review Longevity credits first.  I don't know if this is a true story or not but there were five elderly women who like to travel together in the Summer.  On New Year's day they would each put $100 in a box and save it for fun money on their trip.  One year, before their trip, one of them passed away.  The surviving four then had $125 each to spend on their trip.  They each received a 25% longevity credit.  

Is this a way to counteract inflation?  Of course!  (To be sure, in real life much larger groups are formed, but to similar effect.)

Cojoined with Longevity Credits- and making longevity credits possible, is Risk Pooling.  We've all seen schools of fish, flocks of birds, herds of wild animals.  There is great survival value in pooling the risk of predators.  By gathering together, more of them are likely to survive.  It's the same with house insurance.  If the risk were 1 in 1200 that a house would burn down in your neighborhood each year, you could band together with your neighbors to create a fund sufficient to replace that house every year.  (Ideally, it wouldn't be the same house.)  So instead of having to come up with, say, $500,000 to replace your house if it burned down, you would only have to pay 1/1200 of that each year, or $416, otherwise known as a Homeowner's Insurance Premium.

Aside from being a perfect hedge against outliving one's income (we'll get to that) Risk Pooling is a relection of our better nature, like the Amish coming together to build a barn for a neighbor.  Unfortunately, Risk Pooling is an insurance process and must be conducted by insurance companies under most state and federal laws.  I say "unfortunately" because insurance companies get a (mostly) undeserved bad rap.

Social Security is the best current example of both these concepts.  Millions of people participate and the law of large numbers, the larger the Risk Pool, means the system works more predictably the greater the number of participants.  Social Security is an insurance program, it is not a federal entitlement.  But wait, you say, how is that so many beneficiaries will take more in income out of the system than they put in?  The answer is Longevity Credits from the funds of those who die prematurely.

Much maligned annuities are similar tools for privately pooling risk and receiving longevity credits.  And they are much more flexible than Social Security:  you can design cash flow just about any way you like, level, increasing with inflation, for certain period of years,just for your lifetime or for the lifetimes of you and your spouse.  Annuities are like the vacation box.  And that's how we account for a lot of the "too good to be true" features they provide.  For example, let's take a couple with $250,000, he's 68 and she's 62.  The cash flow they desire is joint, lifetime income beginning in 10 years to give them an inflation bump up.  Their lifetime payout at that time would be over $25,000/yr.  no matter how long the last surviving person lives.  And in the meantime, unlike with Social Security, they have access to their principal if they need it.

So.  The two financial pillars for 2017, the year of unpredictability (to say the least) are:

• Risk Pooling and
• Longevity Credits

Your Constructive Comments are Welcome!

Follow Your Gut

I want to profusely thank Brian Love for his excellent Behavioral Finance article in the latest issue of Financial Advisor IQ (The Incredible "Shrinking" Advisor).  Love's article reiterates why the most important aspect of our profession is not securities analysis or projecting rates of return.  So I title this post with the myth that you should follow your gut when choosing investment options.  To the contrary.
Shown in the graphic below are the six primary mental and emotional biases investors suffer.  Which cause them to experience worse returns than unmanaged indices.  Wall Street & the financial media primarily exploit these biases rather than curing them.
Personally, I think the most destructive is the 5th one, a preference for Lotteries.  Just look at the billions that flow into national & local government sanctioned lotteries, for example.  Like any other bias-subject commodity on the market, this bias causes lotteries to be way over-valued.


Your Constructive Comments are Welcome!

Annuity Salespeople Are All Honest & Competent Because of Special Licensing

I don't think I have to remind you that this post heading is a MYTH.  What's astonishing with the case below is not so much the jaw-dropping audacity of the crook but the carelessness of his victims.  Here's the story, according to an article by Marlene Y. Satter in ThinkAdvisor.  (See my Dos & Don'ts afterward.)

  Nebaraska Regulator Suspends Omaha Advisor in Annuity Scam

The Nebraska Department of Banking and Finance issued an emergency order against Jerome Bonnett Jr., aka Joe Bonnett, and two of his companies, Bonnett Financial Services Inc., and BWM Advisors LLC of Omaha, revoking Bonnett’s registration as an investment advisor representative and suspending the registration of BWM Advisors LLC for multiple violations of the Securities Act of Nebraska.

In addition, the Nebraska Attorney General’s office, on behalf of NDBF, filed a civil action in Douglas County District Court against Bonnett and his companies alleging violations of the act and misappropriation of client funds. The lawsuit seeks injunctive relief, freezing of assets and the appointment of a receiver.

According to the emergency order, Bonnett had arranged for an annuity for one client, but when the client had attempted to receive payment for the annuity, it developed that there was no such policy and instead Bonnett made a payment to the client from funds he had received from another client [classic Ponzi scheme]

In addition, Bonnett borrowed money from other clients to satisfy his own tax obligations and received numerous checks from other clients for purported sales of various investment products, but had been depositing client checks only to have checks drawn in his own name for withdrawal of funds that were then deposited in his personal accounts and apparently diverted for personal use.

“Based upon the evidence reviewed to date, it appears that Bonnett has borrowed $550,000 from his clients since October 2015, and $500,000 of that debt remains outstanding,” the department said in a statement. “While Bonnett has made $187,602.74 in payments to clients, there remains over $1,350,000 that is unaccounted for.”

How could his victims have avoided  Bonnet's scam?  Here are my suggestions:

• DO a background check at both brokercheck.finra.org and your state's financial regulatory website (here is Oregon's).  Ask your adviser for details of any reported events that show up.
• DON'T ever make investment checks or transfer forms payable to your adviser.  Sure, fees for service are fine.  But not large sums which you are expecting to be reinvested.
• DON'T accept statements produced by your adviser nor mailed from your adviser's address.  Legitimate statements will be issued by verifiable 3rd parties, like Fidelity, Vanguard, American Equity for example.
• DO insist on a contract issued by the company to which you are sending your money.
• DON'T accept statements hand delivered to you by your adviser or his staff.  This could mean they are attempting to circumvent mail fraud statutes.
• DO be suspicious of "annuity" payments directly from your adviser.  These, too, should come from a verifiable 3rd party, i.e. the annuity company from which you received your contract.
• DO take advantage of all the tools available on the Internet.  If you have no computer, smart phone or Internet connection, go to the local library & they'll be happy to help you.
• And finally, to be fair, DO be wary of negative company reviews.  Are they statistically significant?  For example, a couple dozen lousy reviews about a company may be concerning.  Unless they have 500,000 contract holders.

Your Constructive Comments are Welcome!

THE DEVIL IS IN THE DETAILS

This blog heading is colloquially true, especially when it comes to Investment Adviser contracts.  A recent review of compliance violations found- first of all- that 22% of advisers didn't have contracts with their clients.  A contract isn't required unless a fee of some kind is collected from or owed by a client.  So if you are paying a fee of any kind- flat, hourly, percent of assets, performance based -a contract is required.

So what devilish details should you watch for in an advisory contractual relationship?  Here's a short list:

• First and foremost:  The absence of a contract altogether!  Do you really want to work with and pay someone without formalizing rights and expectations on paper?
• Any provision that compensates the adviser based on "a share of capital gains upon, or capital appreciation of, the funds- or any portion of the funds -of the client. (Sec. 205(a)(1) of the Investment Advisers Act).  I see these so-called performance fees in contracts all the time.
• Mandatory arbitration clauses.  These have become so common that the average person doesn't blink an eye signing them.  By doing so, you're giving up- in most cases -the right to sue individually or to be party to a class action against the adviser.  My contract only has a voluntary mediation clause; we agree to sit down and talk about a dispute before consigning our souls to the lawyers.  Never had to use it.
• Be aware of with whom it is you're actually contracting.  Is it the adviser himself or some obscure LLC or other obfuscatory entity that your adviser can hide behind?  My clients contract with me, and only me, directly.

Your Constructive Comments are Welcome!

Sometimes The Best Action is Inaction

This is one of those interesting post titles that is both true and a myth, depending on who is reading it.  Hence the danger of mass financial advice directed at the "average person".
 
As a fan of Vanguard and it's founder, John Bogle, I want to share their recent timely article on market volatility.  And I also must add my caveat about rules of thumb and averages.  Here's the link to their three "Rules", which I'll summarize and supplement below:
https://personal.vanguard.com/us/insights/article/market-volatility-082015

Rule #1- Recognize that volatility and periodic corrections are common in equity markets.  You'd have to be Rip VanWinkle to not be aware of this rule.  Most of us are painfully recognizant of the roller coaster ride.  And I would add bond markets too because as we saw in 2009 they are no longer the safe hedge against equity risk.  Hell, any market these days, whether it's real estate or precious metals, is volatile because of the craziness with which investors are chasing returns.

Rule #2- Tune out the noise and remove emotion from investing.  I'm on board with this.  The two most common- and destructive -investor motivators are (1)Fear and (2)Greed.  A realistic, well conceived Cash Flow Plan should be primary.  As an adviser who constantly seeks to understand what has happened and will happen in the markets, I'm weary of all the retroactive blather from my colleagues claiming to explain the past while failing to predict the future.  So yes, tune out the noise.
But I also believe emotions must be taken into account.  Life is more than a math problem.  It is more than just getting as much as you can.  It is more than a fancy pie chart.  A good adviser will use a process to ferret out and give shape to clients' true feelings about their situation and the future and then build a plan accordingly.  The goal should be to feel safer and happier!

Rule #3- Make volatility work for you.  This rule appears to be directed at younger investors who have time to dollar cost average into the market.  At least it had better be, because for the retiree drawing down assets, volatility is a retirement killer due to sequence of returns risk.  To apply this rule to retirees it should be stated as "Keep volatility from destroying you".  Here's the difference and how to avoid getting stung by volatility in both cases:

• Dollar cost averaging for Accumulators- By investing the same fixed amount every month, volatility becomes your buddy.  When, for example, a fund costs $100/share this month and you are investing $500/mo. you'll buy 5 shares this month.  But if the fund price drops to $50 next month, hurray!  You buy 10 of the now cheaper shares.  If the price then rises to $250 three months from now, you only buy 2 shares.  So dollar cost averaging neutralizes the two destructive investor emotions, fear and greed, by making you act counter to your intuition:  when shares increase you buy fewer, when they decrease you buy more.  Dollar cost averaging alone can increase your returns 30% or more over the long term.  But, there is . . .
• Sequence of Returns risk for Decumulators- On the other hand, if you are decumulating you need to adopt the opposite tactic.  Instead of a fixed dollar amount you should withdraw only a fixed percentage of your total assets.  That way when the market is down your withdrawals will be less, when it's up you can take out more or- better yet -leave more in the market for further growth.  Why this is important:  Imagine a 57% decline in your retirement account in the same year that you've also taken out 5% to meet your budget.  To recover, you would need a 263% rate of return the following year!  Which is impossible.  This is why losses in the early years of retirement must be avoided, unless you have excess assets you can leave untouched for at least 10 years.  Unnlike Vanguard's "inaction plan", in this case it is absolutely not "okay to ignore volatility".

Your Constructive Comments are Welcome!