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Our daughter Tracie is married and off to finish her final year of school. We visited on the phone this week about her new life, and the many financial surprises that seem to come in those first couple of months. When you are a newlywed, that first trip to the grocery store can be an eye opening experience. Who knew you actually had to buy things like mustard, salt, hand soap and baking soda?
We talked about the importance of creating and living by a budget, establishing good financial habits on which to base their life. Tracie had always saved faithfully while single so she was in a relatively good position for a newlywed, and was hoping to stay that way. We spoke specifically about one of her investments that is currently paying her a monthly dividend check of about $70. She asked about maybe selling some of that $10,000 investment to buy some things for their new apartment. This gave me a chance to visit with her about chickens. As a young teen living in Mississauga, Canada, on a small 10-acre family farm, I decided one day I wanted to raise chickens. So I got one of those cool mail order farm catalogues and picked out 100 chicks of different varieties and sent off my money. In just a couple of weeks a box arrived in the mail, filled with the little baby chicks and I was in business. Six months later the eggs starting arriving and my new business was actually bringing in some cash. I don’t remember exactly how it came about but at some point my Dad, likely tired of driving me to the feed store, suggested turning my business from eggs to meat. Before long he was showing me how to properly prepare a chicken for the table. The crazy thing about eating the chickens however, was that the eggs stopped coming. I told Tracie that her $10,000 investment represented the chickens, and those $70 a month dividend checks were the eggs. For a young couple $70 a month may not seem like much when compared with $10,000, but I assured her that over time those checks would add up. They would buy food, clothing, dinners on the town, movies and a host of other wonderful things. The $10,000 she could spend only once, but the income from that investment could potentially come in her whole life. “Tracie,” I said, “The monthly checks represent the eggs, the investment represents the chickens. Just make sure you don’t eat the chickens.” I have learned there really are just two types of people in life when it comes to money. Those who recognize the value of eggs, and those who prefer to fire up the oven and eat the chickens. The latter have a great feast today, while the former eat well their entire lives.
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As a Boy Scout I loved fishing. One summer my dad took me to the store to buy some new fishing lures. I remember walking the aisle, looking at the hundreds of cool lures. There were jigs, poppers and spinners in all colors and sizes. I was fascinated with the many designs and imagined which one a fish might most likely be attracted to. I settled on one with red stripes and a white plastic tail and asked my dad what he thought of it. My dad did not fish, but he was a brilliant man and I was sure he would know which ones to choose. His simple advice was to remember that most of the lures were never designed to catch fish, but instead were made to catch people. He said a lure manufacturer succeeded if I bought the lure, regardless of whether it worked on fish or not. I have remembered that childhood lesson and have applied it to many other areas of life, particularly ones relating to money and investing.
Today we deal with a different type of fishing, known as “phishing.” This is when a person sends out deceptive emails offering something of perceived value or interest with the goal of getting the unsuspecting victim to open a link or email attachment. If the person takes the bait, the “phisher” can potentially gain access to their personal and financial information. They become helplessly hooked like a fish on a line. Like regular fishing, phishing also involves the use of lures which are designed to attract people. The lures can be very inviting and far too often people are sucked in to taking the bait. Once the lure is bitten, the hooked individual becomes a captive of the internet “phisherman.” Phishing is used to hack personal computers, to take control of bank and credit card accounts, and to access public databases, so that valuable information and resources can be stolen from the victims. It can be very difficult to distinguish a phishing lure from a legitimate email. Like the lures in the store, they can be very convincing, even to someone alert to the risk. In the current and very public Equifax breach, where the company suggests over 100 million people may have their information at risk, some have speculated the breach may have begun with phishing. Phishing emails can even appear to come from known sources. If it looks suspicious, don’t open it. It is better to be safe, and miss out on aunt Maye’s great recipe, or dancing cat video, than to be sorry. As with real fishing, as soon as you take the bait, the battle is over and you have lost. Be careful and never let your guard down. You are like that champion trout, and dozens of anglers who are not interested in your well-being, are continually dangling lures in front of you. If in doubt, be a smart trout and don’t touch it. Aunt Maye’s recipe probably wasn’t that great anyway. Many years ago in my California office a client came in with his son. He had been to an educational meeting the week before at which I had commented that I felt I could make a millionaire out of just about anyone if they would only be willing to follow the plan I laid out for them. On that day he introduced me to his son who had a handicap, consigning him to a life of working at or near the minimum wage. The man asked if I could help make even this son a millionaire.
Without hesitation we set to work reviewing his son’s finances and setting up a budget and investment plan which required him to contribute a certain amount from each paycheck throughout his life. We didn’t have a lot to work with but we had a dedicated individual who was willing to follow a plan. That young man was faithful in his contributions and spending and now, in his 40’s, has a significant account and is well on his way to achieving his goals. There are never guarantees in investing but, he may possibly reach that goal early. One of the most common questions I am asked regards my minimum account size for new clients. Most are surprised to learn that I don’t have a firm minimum amount but rather have what I call, a minimum attitude standard. More important than what someone has today is where they want to be tomorrow and if they are willing to pay the price to get there. Investing is a game of numbers but many erroneously assume that you need to start with big numbers, or earn big numbers, in order to win the game. I would gladly take a person with a great attitude over one with a fat paycheck. Money is easily lost or spent, while discipline and a proper attitude towards money can help someone survive and thrive through the many changes and challenges that life throws at you. So what is a proper financial attitude? It is a willingness to accept and follow some basic and natural laws that govern financial success. Too many try to cheat the laws and wind up disappointed. Start by asking yourself some simple questions. Am I willing to follow a budget? Does my budget set aside funds for future needs as well as unforeseen expenses? Can I postpone spending until I can afford it? Do I use debt only for those necessary things that cannot be reasonably obtained without it? Am I willing to live below my income today, so that when I retire I can live above my income? No one knows the long term outcome of any investment plan, but the highest likelihood of success comes to those who first establish a proper attitude towards money. They are the ones who are most able to control money for their own good, rather than being controlled by it. Today’s story began many years ago when a person was referred to me for financial advice. The 70-year-old gentleman had a substantial investment account, accumulated over many years. To say this man lived miserly would be an understatement. Rarely in my life had I seen someone with so much money live in such meager circumstances. It is not unusual for financially successful people to be tight with their money, but this gentleman was an extreme case.
Over the years we had many great conversations and while he continued to live like a pauper, his account grew into many millions. As his age stretched into his 80’s the man, like many, began to exhibit signs of diminished mental capacity. Financial advisors go through annual training to help recognize these situations, which sadly are becoming much more common. Initially I began to discuss with the man the need to bring his only son on board with his finances, and to prepare him in the event he could no longer manage his own affairs. He resisted strongly, not wanting his son or anyone else to know anything about his money. I tried numerous times to convince him that he couldn’t hide his personal information forever, that eventually his son as the only heir would become involved, and suggested it would be far better if that happened while the man was still coherent enough to have a good discussion with him about it. Given the man’s strained and distant relationship with his son, he continually refused my requests to involve him. I also had a business relationship with the son over the years, but strict privacy laws prevented me from discussing anything about his father with him. Thus, I was caught in a very uncomfortable position. My elderly client continued to decline mentally and with the decline he made some rash and often strange decisions. We would often get odd requests to transfer out large sums of money, which the man did not remember making when we called back to verify. When dementia begins it often comes and goes and sometimes this man was as smart as ever so he did not see the problem that I saw. He absolutely refused any recommendation to bring someone else in to help, which left our office in a difficult situation. Our hands were increasingly tied in our efforts to help him, yet we felt a commitment to continue doing all we could to protect his account, usually from his own poor decisions. It is a sad reality that along with living longer comes the increased risk of facing dementia at some point. Before you reach the situation of this gentleman, please find someone you trust, family or otherwise, and involve them in your finances. Give them authority to make decisions. Give your financial advisor permission to share information with them. Failing to do so can bring an unfortunate end to a lifetime of otherwise careful financial planning. A lady came in my office years ago to ask my advice. She had invested a large sum of money into a program that was paying her a rate of return far in excess of what would be reasonable. It was immediately clear she had gotten into a Ponzi scheme. This type of fraud occurs when future investor dollars are used to pay high returns to prior investors. Money just circulates but there is no real product. Eventually the scheme comes crashing down when there is not enough new dollars to keep up with the payments to investors. Many Ponzi schemes successfully run for years because investors are often content to see their “gains” merely posted on a monthly statement rather than delivered to them physically. If too many ask for actual redemptions the scheme will fail.
In the case of this lady I was shocked to find out that she was perfectly aware she was involved in such a scheme. She said that she got in early and her goal was to try and get as much money out as she could before it came crashing down, and oddly wanted my opinion on when I thought that might happen. This individual was not an investor but a speculator, in the extreme. Investors look to buy something today whose value will increase over time. Speculators hope to buy something today that they can sell at a higher price tomorrow, with inherent value being secondary or even insignificant. They often don’t even care what the investment is. A good example of speculation is the currently explosive Bitcoin market.* Six years ago you could buy a Bitcoin for 8 cents. Today, and this changes by the minute, they are selling for over $4,000. As more people have been asking me about Bitcoin lately, my first question is, “Can you explain to me what a Bitcoin is?” Very few have been able to give a good answer. Bitcoin mania, with all its media hype, appears to me to be a symptom of a potentially bigger problem. I see a growing number of investors who are starting to talk and act more like speculators. Rather than looking for value, many are looking only at what they think tomorrow’s price might be. Historically markets have often soared and crashed when this speculative attitude manifested itself. Many who are buying Bitcoins and other speculative investments may laugh at me all the way to the bank if they happen to get lucky, but I am an investor, not a speculator. I would rather miss out on a big gain, than risk my hard earned assets in unwise speculation. They say in flying that there are old pilots and there are bold pilots but there are no old bold pilots. I feel the same way about investing. There are investors and there are speculators. Some may have a thrilling ride today, but I prefer to be the one who lives to enjoy tomorrow. Everyone who is successful at managing money will one day face the question of what to do with it when they are gone. Most want to leave something for their children, but in this desire they face a dilemma. Their children who have been financially responsible probably don’t need their money, while the financially irresponsible ones won’t know what to do with it.
There is no easy or best answer to this question so let me just share what we have done. With our large family we face the prospect of leaving some money to kids who don’t need it, and some money to kids who would likely be made worse off if it was just handed to them. We began our decision process by recognizing that few are benefitted by being given a large sum of money that they did not earn. We would rather leave our kids nothing than harm them with money they cannot handle, so we limited how much each can receive, regardless of the size of the estate. The rest would go to charity. To accomplish this, we created a family trust that allows a single, small initial payment to each child. A year later they receive a slightly larger, though not significant, second payment, and so on. The hope is that they might learn to manage smaller amounts at first. Ultimately, using a combination of tools, each receives their allotted inheritance over the course of their lifetimes. In doing so, our plan was to give them enough to make life a little more enjoyable, but not so much that they would become lazy, or wasteful. We are confident some of our kids will be disappointed in our plan, but we are okay with that. I’m sure as parents we disappointed them by not buying them a new car on their 16th birthday, or requiring them to work at the office for their spending money or only allowing them to order waters when we went out to eat. We have always tried to teach our kids personal responsibility and didn’t want our last act as parents to contradict a lifetime of lessons. Ours is not a perfect plan. I haven’t seen a perfect plan, but we feel it best exemplifies our personal mix of parental charity and tough love. We want to bless our kid’s lives, but not cripple them. I have seen far too many people leave large inheritances to financially irresponsible children, thinking they were doing them good, only to watch those same heirs have their lives made worse by money they were not prepared for. When your children were young, hopefully you didn’t hand them the family checkbook as a sign of your love for them. You gave them just enough to get them to where they could help themselves. Those same sound financial principles work well with inheritances. Some may complain at this approach. If they do may I suggest using that time honored parental response, “You’ll thank me for this one day.” Years ago I was driving along a desert road outside of Las Vegas when I came upon a partially framed but abandoned home. I walked around the property, enjoying the wonderful view of the mountains to the west and the Las Vegas skyline to the East. The home had the main floor framed including a stairway to where the unfinished second floor would have been. I tried to imagine what the finished home was intended to look like, and how it would have certainly taken advantage of the amazing views. I climbed the stairs and sat on the edge of the upper deck, thinking about the dreams of the owners who had started this project and, for whatever reasons, had given up on it. There was a recession going on at the time so I was sure the two were related. After my initial walk of the property I tracked down the owner who was thrilled that I was willing to take the property off his hands at a much reduced price. I then quickly obtained a construction loan from a bank excited that someone was willing to borrow from them at such a difficult time. Fast forward a few months and there was a beautiful home sitting on the lot and my family was enjoying the views from that now finished second floor deck. We had been able to build the home in record time due to the constant flow of contractors who came by each day looking for work, and willing to work at almost any price. That abandoned, partially built home in the desert was worth double what I had invested into it just three years later. What appeared to be the worst possible time to take out a construction loan, ended up being the best possible time. As a CERTIFIED FINANCIAL PLANNER™ professional I have always emphasized the need for creating a plan and sticking with it. I believe in planning. I believe in living an organized life. But at the same time, being a good investor also requires occasional deviations from our plan. It sometimes means turning right when everyone else is turning left, or seeing the positive when everyone else sees only negative. Investors should make long term plans but they need short term flexibility to take advantage of opportunities that arise. The irony, and the challenge, is that in many cases the best investment opportunities often look like disasters when they first appear. To be very clear, I want to emphasize that a good long term financial plan is a key to financial success, however, every good plan should allow room for deviations. Stick with your plan generally, but also leave room in your plan to stop and look up, at those times when the rest of the world is looking down. Sometimes the best plan of action, is to change your plan. Thomas Edison said that people will go to great lengths to avoid thinking. My Dad quoted this often and told me that learning to think would give a person a great edge in the world. I have always enjoyed thinking. In fact, it is probably one of my favorite pastimes. As a youth, I spent endless hours lying on the lawn looking at the stars. I wasn’t wearing earbuds, or checking my email, or watching for my smart phone to light up. I just lay there, looking and pondering. I have raised enough kids to know that the younger generation struggles with being able to just sit quietly, without distraction, and think. One told me once they couldn’t do their homework without music playing in their ears. I found myself pondering the implications of that comment.
I have been reading lately about the difficulty young people have that have grown up in a video game, smart phone, Facebook, Instagram, action-packed movie world. They are addicted to non-stop stimulation. One psychologist stated that young people today have lost the ability to deal with boredom. The more I contemplated that idea, the more I realized the value that can come from occasionally doing nothing. There is an old Wall Street saying that sometimes the best thing to do is nothing. Wall Street may be on to something here since anyone who spends time with young people today understands their inability to be still, to be quiet, to just sit and do nothing. How can a generation so addicted to stimulation ever be able to sit quietly without distraction and think through a serious lifetime investment plan? As we moved into our new office I was one day, with my son Jared, installing speaker wires for our conference room. A friend stopped by and jokingly asked how much money I was making as a sound technician and whether it might be more profitable to hire an audio person to install the speakers. I told my friend that if every decision was about money, I would probably spend every minute in the office and pay someone to do everything else. But I told him it wasn’t always about money, that it was good to mow the lawn, paint the garage and even install speaker wires once in a while. I felt it would do us some good to put away the smart phones and internet for a while and enjoy some quiet time climbing in a dusty attic while thinking and talking about nothing in particular. I plan to spend more time addressing the investing needs of the rising generation. For a start I will offer the simple advice to practice, once in a while, doing nothing. Learn how to be at peace with boredom. Learn how to ponder. Do something daily that allows you to develop those creative skills that can only be found in silence. In short, be one of the few who learns to enjoy the simple act of thinking. I heard a young man, age 15, give a speech wherein he commented that he was not yet born when the twin towers were attacked in 2001. With the memory of that day so real to me, it was odd to think there are Americans, about 30% of us now, who were either not born or too young at the time to have any memory of that terrible event. I pursued this thought and calculated that about 55% of Americans have no recollection of the Vietnam war. More significantly, the percentage of Americans who can remember World War 2 is in the single digits.
As a teenager, my dad told me that sometimes there is no substitute for the education that comes with age. He said that age “brings perspective.” As I considered this young man who was speaking I thought a lot about perspective. As time builds distance between us and some of the terrible human caused disasters of the past, we slowly lose some of our perspective. Perspective is equally valuable in investing. Nearly ten years ago on October 9, 2007, the Dow Jones average hit an all-time high just above 14,000, and then two days later began its collapse to near 6500 just 17 months later. At the time there was panic, frustration and uncertainty. Now, with that same Dow again in record territory having surpassed 22,000, we have a little better perspective. The fear of those days has been swallowed up in nearly 8 full years of market growth. At a recent financial advisor conference, the presenter asked for a show of hands of all those who had been in the business less than 8 years. Remarkably, a large percentage raised their hands. I suddenly realized that a large number of current financial advisors have never seen what a down market looks like. They have studied it, but have never felt it, or looked a client in the eye who was suffering under it. My own kids who work with me have not, and so I spend a great deal of time trying to help them gain some perspective. If you are just getting started in investing, I suggest spending some time visiting with someone much older than you are. Ask about inflation and the high interest rates of the early 80’s, or the bond market crash of the 90’s. Get them talking about how great everyone felt in the late 90’s when the markets could do no wrong, and then ask what it was like in 2000 when it all came crashing down. The equity markets have generated great wealth over the years, but like all investments they have their risks. A good way to assist in managing for that risk is to spend some time talking with someone old enough to have lived through a few financial disasters. They may not know all the technical textbook terms, but they can certainly provide perspective and in my experience, that is often much better. This week I received an email brochure offering for sale a beautiful Cessna Citation Jet. Of course I am not now nor will I ever be in the market for a jet, but they are fun to look at. The brochure showed a gorgeous 1999 model and the asking price was just a fraction of what it sold for originally. In fact, this beautiful jet could be picked up for less than the cost of many single engine piston airplanes.
I showed the brochure to Launa and jokingly asked if she was ready to move up to a jet. She was in disbelief at the low price and wondered what the reason might be. I explained to her what all pilots and plane owners know about planes, and jets in particular, especially 18-year-old ones. It isn’t about the cost to buy, it’s about the cost to own. As jets age, the cost to maintain them grows dramatically until the point where it simply is more cost effective to buy a new one. Airplane magazines are riddled with beautiful older jets that are basically being given away because the owners can no longer justify the maintenance costs. An unsuspecting owner who is taken in by the cheap price tag may be in for a very expensive surprise. I recently worked with a client who had purchased an investment years ago from an advisor who made a point of emphasizing the low acquisition cost. Unfortunately, the ongoing high cost of ownership had been a serious drag on performance. This individual had failed to account for, or not been properly advised on, these high long term costs. Investments have costs associated with them. Sometimes these costs come in the form of upfront commissions and sometimes they are charged by the advisor as annual management fees. Many wonder which method of paying for services is better for the client. With each situation I encourage people to consider the overall cost of ownership, and the expectations of the advisor involvement. If an investment is long term and requires little management, an upfront commission may be the most cost effective option. If you are going to want ongoing management and advice, it may be better to consider a fee-based structure that encourages an active relationship with your advisor. Far too many investors have made the mistake of trying to save a few bucks up front in exchange for getting themselves into a situation with higher ongoing costs. Like the beautiful Cessna Citation in the brochure, the initial price seems very attractive, but failing to take into account the long term high operating costs could doom an unsuspecting buyer. In airplanes and investing, we must always consider not only the cost to buy, but maybe the even more important issue, the long term cost to own. |
AuthorHi, I'm Dan. I'm a CFP® Professional. Archives
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