I flew to Phoenix this week to get Launa after an airline left her stranded when she really needed to be home. During pre-flight I told her the flight home would be smooth, but to be prepared for turbulence in the climb. She has flown enough that she doesn’t worry about the bumps, knowing from being married to a pilot that turbulence does not bring down airplanes. Actually, the severe turbulence inside thunderstorms can bring down airplanes, but these angry beasts of nature are pretty easy to see and avoid.
The turbulence that is generally harmless, but which causes regular discomfort for passengers, is invisible to both the eye and modern technology. It can be predicted based on other detectable conditions, but such predictions are routinely inaccurate. I have taken off into skies with significant turbulence forecast, only to have a smooth ride the whole way. I have also flown on perfectly calm days and had my headset knocked off by unexpected rough air. After one such surprise event my young son in the back called out, “Dad, did we just hit a Pterodactyl?” That has since been our expression for a really bumpy ride.
If you listened to Air Traffic Control, you would find that a lot of radio time is spent by pilots seeking smoother air. Since you can’t see turbulence, the best way to know where it is, is to listen to reports from other aircraft. Pilots avoid turbulence, not because it is dangerous, but because passengers don’t like it. When I am flying along and the ride gets bumpy, I don’t worry about the turbulence affecting the ultimate outcome of my flight, but I do worry about it making my passengers uncomfortable.
In many ways my career as a CFP® is not a lot different from my being a pilot. My job is to get my passengers to their destination, avoiding as much turbulence as possible along the way. One of the ways I try to avoid turbulence is by encouraging a more moderate allocation; The goal of which is to try and smooth out the bumps. Financial planning should not be about getting the highest possible return if in so doing you create so much stress that you can’t enjoy your life. In fact, at a recent women-only seminar that I teach, I asked the group if they would accept a little less return in exchange for less volatility. They unanimously agreed that they would.
In flying I take many steps to avoid turbulence such as slowing the plane down, diverting around, or climbing above the rough air. Each of these results in arriving at our destination a few minutes later than planned, but when I explain the reason why to my passengers, I have never had anyone complain. Sometimes it pays to slow down a bit. I have learned that in flying and in investing, taking a more moderate course is often the best option, because hitting a pterodactyl is never a pleasant experience.
In my youth my dream car was a Ford Pinto – ok don’t judge me. I was being responsible. A new Pinto back then sold for about $2500, which was still more than I could afford so I came up with $800 and found a really good used one. Well, except for the pink shag carpet the prior owner had installed, but the car usually got me where I needed to go. In those days if you were a teenager, wheels were wheels. We bought what we could afford, spent a lot of time inside the engine keeping it running, and always kept our cars clean. It was better than walking, usually.
My son pointed out that the current entry level model at Ford is the Fiesta. Starting at about $14,500, it is a stark reminder of the effects of inflation. Yes, the Fiesta has more features than the Pinto like airbags, Bluetooth radio and a non-exploding gas tank – all good things – but a seven-fold price increase still is a clear warning about the damaging effects inflation can have on your savings account.
For a number of years, inflation has not really been much of a factor in our economy. The consumer price index (CPI) since 2008 has averaged about 1.6%, which is low by historical standards. Recipients of the annual CPI based social security raise are already well aware of this. These low numbers can benefit investors however, as they need a lower rate of return to see real growth after inflation.
Early in 2018 America, and the stock market, were suddenly awakened to the reality that higher inflation may be on the horizon. Though it startled the markets at first, it shouldn’t cause too much concern since a growing economy needs a certain level of inflation. Inflation encourages spending and spending is good for an economy. The downside is that inflation works on your investments like a hole in a bucket of water. It drains away value that can only be recovered by adding more water to the top faster than it comes out the bottom. With inflation at 1.6% there are many ways to keep the bucket filled, but if we get back to 3% or even 4% rates, investors will have to work harder to keep up.
For most of my life people understood this concept well, but I fear that 10 years of very low CPI numbers may have caused some to forget that inflation poses a real economic risk to investors. It may have been largely in hiding for a decade, but it appears ready to raise its head again. Investors should take time now to review their current investments and consider how each may be affected by rising inflation and make changes if necessary. You don’t want to find yourself 15 years from now trying to maintain your current standard of living with devalued dollars. Although, in a worse case scenario I suppose you may still be able to find an old Ford Pinto lying around.
We recently decided to take our grandson Braxton on a quick trip to California. We were going to leave right as he got out of school so the night before he had his backpack ready and at the door. We were all so excited. He had never flown in a private plane before so he was especially looking forward to being my co-pilot.
The day of the trip arrived and as he sat in school excitedly watching the clock tick down, I sat in my office watching the weather slowly deteriorate. As the winds, turbulence and icing increased I worried that they would surpass my personal limits. Perhaps the hardest decision for any pilot is to cancel a flight, especially when you have to tell an excited 11-year-old you will have to postpone a trip to Disneyland.
When I made the decision to call a “no-go” on our trip, I knew it would not be easy. Of course there is always the temptation to rationalize and go anyway. After all, my plane is very capable and I am trained for flying in tough weather. If I took the trip it was highly likely we would have had no problems. But there is a reason pilots set rules for themselves and there are very good reasons for never violating those rules, so I made the call. Braxton took the news like a champ and I assured him we would take the trip as soon as it was safe to do so.
One of the most dangerous things that can happen after a “no-go” call is for the weather to improve, leaving a pilot feeling foolish for being over cautious. This can lead him to make a worse decision next time. That is why pilots have a saying. A decision to cancel is always the right decision – period.
Investors often face similar go, no-go decisions. Some investments seem too good to be true. Some are outside an individual’s risk comfort level. Sometimes friends and family pressure us to invest, assuring us that everyone else is making money on it. Whatever the reason, like a wise pilot, investors should set their own standards and then live by them. If a rejected investment ultimately turns out well for others, don’t feel bad about it. Make it a personal policy that every decision to not invest in something, was always the right decision – period.
There is a saying that no pilot ever lost his life in a cancelled flight. Similarly, no one ever lost money in an investment he did not buy. Don’t worry about missed opportunities when you have to call a “no-go” on an investment that does not feel right. Be at peace knowing that, as an investor, you will live to see another day. I have found that the sun will usually come out tomorrow, giving you another chance to take that flight, as it did for us. We ended up having a great trip, and Braxton learned a very important lesson.
Now that’s a headline! I am somewhat of a headline junkie. I enjoy comparing what was said, to what is really going on. This week the stock market generated some great new ones for my collection.
A New York paper stated, “Crashing stock market wipes out all gains for 2018.” Wow, that sounds terrible, until you put it into perspective given the year was only a month old. How about replacing that with, “Stock market retreats to the Fantastic High Point on which it finished 2017 just one month ago.”
The next headline from a major news network read, “Market Suffers biggest one-day Loss in history.” When talking about people’s money, words like “Suffer” and “Loss” can really get your attention. Of course you had to read into the article to get the details that the headline was referring to the point loss, not the percentage loss. Points are important in the World Series and the Super Bowl, but not always so critical on Wall Street.
When I began investing the Dow Jones average was in the 800’s. Back then an 800 point drop would have been, well, the end of the world. An 37 point drop at the time would be similar to an 1100 point drop today. Price movements in investing are really about percentages, not numbers, and in percentages the drop referred to by the headline this week wasn’t even in the top 30. On black Monday in 1987, the Dow average fell 22.6% in one day. By today’s standards that would be over 5,000 points. Now that would be a headline. So my version of this headline would be, “Market dips 4.6% in long anticipated correction.” Ok, so it’s pretty clear I will never get hired to write headlines.
When the local furniture store has a sale, the crowds wrap around the building an hour before opening. When department stores have sales, people get in fights over products. But when Wall Street has a sale people run away, until prices go back to normal, or higher. It’s kind of an interesting phenomena when you think about it.
The causes of the current correction are varied but include a stock market that has gone up for a long time combined with rising interest rates, a strong job market, and concerns about inflation. Remember, these are not signs of a weak economy but usually the symptoms of a strong one. Market corrections are a very normal and healthy part of the process. They can also provide opportunities if the economy stays strong, much like a good storewide sale. Investors will want to be aware though that volatile markets attract speculators, which can bring more volatility with them.
Volatility that is normal to markets can be made to look much worse given the larger numbers we are working with now. As always, do your homework and keep a cool head. Oh, and let me know if you see any more great headlines to add to my collection.
Through much of my life I maintained some sort of garden, even enjoying sprouting vegetables from seed in a small greenhouse so as to have the full experience. Though I tried all sorts of crops, I always loved tomatoes the best and felt I could be happy just living on them entirely. One year I made the decision to plant only tomatoes, concluding that even though I enjoyed the peas, carrots and zucchini, in my relatively small garden spot I had been wasting valuable real estate on those less desirable options. Besides, in my neighborhood there always seemed to be plenty of extra zucchini to go around.
So I planted my six garden boxes with four different varieties of tomatoes, each designed to bring forth ripe crop at different times during the growing season. I thoroughly enjoyed working on that garden each day, pulling weeds and carefully watering each plant, then sitting in my swing to enjoy the lovely smell of growing tomato plants. I could hardly wait to taste those delicious home grown tomatoes and when those early cherry tomatoes started ripening, I knew my reward was near at hand.
Then one day I went out to my garden to find my plants covered with dying leaves. I was devastated and went to my expert gardening neighbors for advice. They told me of a disease that sometimes came through the area affecting only tomatoes, and that essentially, there was nothing that could be done about it at this point. Despite valiant efforts, I lost almost the whole crop.
Gardening is uncertain, with unpredictable weather conditions, insect populations and disease patterns. Conditions favor, or attack various vegetables differently. A good year for tomatoes may be bad for corn and vice versa. I learned that having a good variety will reduce the overall potential tomato crop, but increases the likelihood that at harvest time I will not be empty-handed. It is a worthwhile trade off.
Investments have their seasons and cycles as well. When we say “The market is up” that expression can be deceiving because the parts that make up the “Market” can move in their own unique cycles. I am pretty sure that on the best of days for the stock market, I can find individual investments that have not done so well. As with gardens, conditions which favor one sector of investing may punish another.
If you allocate too much of your investment garden to a single crop, or a few, you may increase profits in some years, but suffer devastating losses in others when the season turns against you. Take an investing lesson from a part time gardener and keep planting a variety of financial crops. They may not all be your favorites but at least you will increase the likelihood of not being wiped out if a particularly tough year should hit a certain part of your garden.
When I was learning to fly, a client who was a retired air force pilot told me he was selling his airplane. He was sad about it because he loved to fly and his family loved flying with him. When I asked the reason he said that he was no longer able to commit to the level of professionalism in training that safe flight required. “Flying is for professionals” he said, “and when the day comes that you are no longer willing or able to act like one, it’s time to turn in your wings.” I promised him that I would remember and one day follow his example. I have never been a professional pilot, but I have always acted like one.
Like flying, there are also principles that govern the management of money that should be adhered to regardless of your situation in life. I teach young married couples to live within their means, avoid unnecessary debt and spend money wisely and many are very committed to doing just that. Like professionals they set up budgets, shop sales, and live within their means. Unfortunately, as income levels increase and money begins to flow more freely, too many begin to abandon the principles they once lived by and get careless with their money. This often results in learning the hard lesson that there is no amount of money that can’t be spent if it is not managed properly.
Investors likewise are subject to the temptation to deviate from principles of investing they have learned and once lived by. In 2008 many abandoned their financial plans and sold out at perhaps the worst possible time. Professionalism turned into fear which ultimately led many to make mistakes which in some instances cost more than the temporary market losses they were afraid of. Professionals are human too, but they temper fear with knowledge and discipline.
Now in 2018 we face an opposite situation. I have had investors in their 70’s and 80’s ask about aggressive investments they would have never considered when they were younger. It’s been 10 years since the last crash and maybe they have forgotten what a down market feels like. It may not help that according to FINRA, over 60% of currently registered financial advisors were licensed after 2007, meaning the next market crash will be their first as advisors.
I am certainly not predicting a market crash, but I am confident one will come eventually and wish to offer the same advice my pilot friend gave me. Investing is for professionals and all investors should act like one. Establish investing principles that are suitable for your situation and commit to living by them. Do not make emotional decisions that violate those principles regardless of the current economic situation. These are great times for investors, but also important times to remember that whether you are a professional investor or not, you should always act like one. Your financial survival may depend on it.
I address my words today to the younger generation, those who still have time left to prepare for their retirement. You are growing up in a confusing world but there are some facts of life that do not change, and if you are to survive and thrive, you need to accept them.
I begin with the pile of participation trophies that cover your dresser. I know your coaches wanted you to feel good about yourself but let me tell you something from a business owner’s perspective. In the adult world, no one will pay you just to show up. If you don’t bring valuable skills and a solid education to the table, you will have great difficulty finding an employer willing to offer you a decent job. The soccer coach didn’t want to hurt your feelings by saying you weren’t really good enough for the team. Any good company will have no problem sending you packing if you don’t bring value to their team. And if you want to be paid more, become worth more.
Next, the country in which you live provides many safety nets to prevent you from falling into total disaster. Be aware that a safety net is just that; a bare minimum system put in place to keep you alive. If you think retiring on social security or whatever other assistance program the government may offer is the American dream, you have been sorely misled.
Young marrieds often tell me their budget is too tight to set aside money for retirement. They say they need every dollar they make. This is false and dangerous thinking. The truth is that one day you will no longer be able to work and the cost of those retirement years is just as essential today as your food and power bill. You simply must include it. We all know the story of the ants and the grasshopper. It is as true as it always was that the winter absolutely will come. When it does you will need to have set something aside.
During the hurricanes last year, I saw a disturbing scene on a news report. A lady was leaving a cleaned out grocery store when she began screaming at a reporter saying, “They have no water. How can they not have water? How am I supposed to survive this storm without water?” I felt sorry for her but was amazed that a person could live in a disaster prone area without even having a couple days of water stored. Maybe she thought her budget couldn’t afford it.
My young readers, there are many systems and people in place to help you through your lives but ultimately, you must take personal responsibility for your own future. To coin a phrase from your generation, you need to “own” your future. It’s your future and no one will care more about it, or be more affected by it, than you. The good news is; you have time to do this if you start now.
After school one day my friend and I were bored so we slipped over to the Circus Circus casino to play some slot machines. For high school kids raised in Vegas in those days this was not an unusual activity. My friend was very tall and easily passed for 21, but at 16 years old I was only 5’ 1” and weighed just 85 lbs. I could barely pass for 12 so I watched jealously from the corner while he sat at the 21 table with the adults.
As I waited, I noticed right next to me an electronic keno machine that was calling my name. I looked around and saw no casino employees paying attention so, acting like a secret agent I snuck over, slipped in a quarter, hit eight quick numbers and then retreated quickly to my innocent spot in the corner.
Much to my surprise, I watched as the machine began to hit my numbers, first one, then three, then six of the eight lit up. The bells started ringing, the lights flashed, and 100 quarters poured into the tray that, as everyone knows, is designed to make the most noise possible. I was filled with both elation and sheer panic as I rushed to scoop up my winnings before someone caught me. The only thing greater than my fear was the thrill of all that free money. I couldn’t believe my good fortune. While leaving the casino a little later I was sure every security guard I passed could hear those quarters jingling in my bulging pockets.
I went home that evening and laid out my treasure on my bedroom floor. I counted it again and again, carefully stacking each coin and running them through my fingers. For two weeks I counted those coins and relived with great excitement that moment in my mind. But unfortunately my victorious adventure had a final chapter. Some weeks later I returned to that same keno machine, determined to turn my 100 quarters into a thousand, but instead I watched as that same machine gobbled up every single one of them. I went home that night a sorrowful young man who had learned some very painful lessons.
One of those lessons is that when you have a profitable investment or a succesful year, there can be great value in taking some of those profits off the table and putting them elsewhere. Had I done that after my Circus Circus experience I might have at least had a record album, a new shirt or even a bag of treats to show for my success and to enjoy for some time to come.
The investing markets in recent years have been good for many and we are hopeful for more, but I think this may be a good time to consider taking some of those profits off the table and putting them elsewhere. I wasn’t very happy while learning that lesson at 16, but today I am thankful I did.
The National Board of Realtors reported that average home prices have finally returned to their 2006 pre-crash highs. That means theoretically speaking, that if you bought a home at the peak you are now back to even. This good news for the housing market is also a sober reminder of how long it can take to recover from a bad investment.
In an effort to chase hot returns, investors sometimes make mistakes that take years to recover. The math of investing works against you when you lose, meaning that if you are down 20% it takes more than a 20% gain to get back to even. With the stock market at an all-time high, it might be a good time to make some new year’s resolutions to help avoid another painful future event.
As I have stated before, I think 2018 has some big positives in its favor, but that is no reason to let optimistic expectations tempt us to abandon some basic principles of investing. Doing so is often the very essence of what precedes a crash. So here are some principles we might want to resolve to follow this year.
1 -Avoid investing in things you do not understand. New technologies are very tempting but remember the dot.com bust of 2000. Some of those companies have become huge but most of them disappeared. Be very careful as you delve into new investing ideas, no matter how much others may appear to be making on them. Understand the risks before you invest.
2- There is a reason why advisors have recommended for ages to follow an intelligent asset allocation plan, also known as diversification. Although diversification does not guarantee less risk, it has historically shown an ability to help weather market storms. During hot markets, many start to develop an “everything on red” attitude. If you do this you move from being an investor to a gambler.
3 – Think very carefully before borrowing money to invest. Mortgaging your home for speculation may not end well.
4 – Don’t chase returns. Don’t invest based on how well something did last year, or even last week.
When markets are hot, investors need to be aware of the risks of becoming over confident. Investing always requires careful thought and firm discipline, but great markets tend to make everyone think they are an expert. Be aware of the risk that greed may sneak in to your investment decisions in times like these.
The housing crash of 2007 was largely the result of a booming real estate market that investors allowed to get out of control, as they got caught up in the excitement. Today we see a similar situation developing in several investment markets. Investors will certainly want to thoughtfully consider the opportunities that exist, but with a keen awareness of the power greed has to overcome common sense. As we say in our office, “Be Wise,” especially in 2018, and stay true to the investing principles that got you here.
I start 2018 with valuable lessons taught me by two special individuals. One was the head waiter on our family Christmas cruise. Cruise ship employees tend to be good natured and service-oriented, but this man was above and beyond the standard. He was so cheerful and always willing to do whatever was needed to make our day pleasant. He was not our specific waiter but went out of his way to make sure one of our daughters, who had special dietary needs, was well cared for.
On the last day of our cruise I asked him why it was that he was always so happy. He responded that happiness had always been part of his nature; that when he awakes in the morning and sees that he is still alive, he knows it is going to be a good day. He is not from a country with all the great blessings we enjoy here, but he found joy in every moment of life and with his presence lighted the lives of all around him. He told me that his motto was, “Life is like a bowl of ice cream. You need to eat it before it melts.” This man had a great attitude, especially for someone who spent most of his Christmases away from his own family.
The second man is one I met on Christmas Eve. We had been travelling all day to get home from our trip and on the way out of Vegas we were so starved we stopped to grab something to eat. The best option we could find was a fast food restaurant in a less than desirable part of town. While standing in line inside the store for our hamburgers, a disheveled man came up beside me to await his order. I could tell by his appearance and smell that he was not in the best phase of his life. I began making some light conversation with the man and joked, “Look at us here, pretty sad we find ourselves enjoying our traditional Christmas Eve dinner at a cheap fast food restaurant.” The man smiled and surprised me with his response when he said, “I think this is a great place for a Christmas Eve dinner. I am sure there are many in the world eating much less tonight.” I have had many wonderful Christmas Eve dinners but I will always remember this one, and the smile that man had as he sat down to his feast.
So many investment mistakes come from greed or a desire to get too much, too fast. It is good to grow your wealth but if your happiness is based on your net worth, it is possible you may always be disappointed. Let’s make 2018 a year to begin our investing plans with gratitude for what we already have, then if something greater comes it will be all the more appreciated. Either way, if we start with gratitude, it will definitely be a Happy New Year.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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