I once served on a board that was tasked with helping to grow a business. The members each had special talents they brought to the table and together we hoped we could share our strengths and find success. As time went on it was interesting seeing the different perspectives of each individual and how they worked together, even though not always agreeing, to accomplish the same goal.
It was apparent early on that there was one individual in the group who, despite his qualifications for the position, seemed to struggle to work with the other team members. He was what some might call a real downer. He reminded me of the lonely donkey, Eeyore, in the “Winnie the Pooh” series. When he walked into a meeting, it was as if a little rain cloud followed him and filled the room.
One day this individual announced to the group that due to some life changes, he would no longer be able to serve on the board. In the weeks that followed his departure, the atmosphere in the group changed dramatically and the business we had been building began to flourish in new and exciting ways. It was like that moment after several days of rain when the sun finally peaks through and you had forgotten how beautiful it was.
I have often pondered the negative effect this single individual had on the entire organization. I learned from this experience that one bad apple truly can spoil the whole bunch.
It is normal in every investment portfolio for there to be winners and losers. Often this is the natural result of economic cycles. But sometimes there are investments that are truly bad apples. These things don’t just go down, but they go down a lot and they keep going down. If these “bad apple” investments are allowed to persist they can pull down an otherwise solid portfolio. This might be a poor investment that you own but one you cannot let go of because of some emotional attachment. It may be some get rich quick scheme your crazy uncle or next-door neighbor introduced you to. Or it may just be that “fun money” account you set aside for day-trading that does nothing but lose money.
Whatever the reason, and no matter how you feel about it emotionally, if you have a bad apple investment in your life, get rid of it. It just isn’t worth the cost. I have learned from looking at many portfolios that a single bad investment can pull down an otherwise well-designed retirement account.
It is hard to admit when we make mistakes. It is sometimes difficult to cut things loose in our lives that we are attached to. But no one needs little dark rain clouds in their lives and certainly not in their investment portfolios. And you may just find a little extra sun shining on your portfolio.
I just love a good thunderstorm. Last week we sat on our balcony and watched in awe as one moved across the valley, complete with pounding rain, high winds, lightning and hail. A few days later Launa and I found ourselves boarding a commercial flight from Dallas as storm clouds gathered overhead. The airline told us they were rushing to get out ahead of the storm but I reviewed my own aviation weather sites on my cell phone and told Launa weren’t going to make it.
Within minutes of pushing away from the gate, the rain started and the pilot announced we would not be able to take off until the storm passed. Thunderstorms have a huge amount of energy and no pilot, even in a large commercial jet, would intentionally fly into one. The pilot told us that rather than deplane everyone, he was going to taxi to the end of the runway and wait out the storm. Sitting on the taxiway, with several other jets, we had a front row window seat for the thunderstorm as it pounded the airport and lit up the skies.
Despite how dangerous a thunderstorm can be, they are also very short lived and so after just 45 minutes, the skies had cleared and we all took off for a very uneventful flight home. The pilot knew the storm made it unsafe to fly, but he also knew that it wouldn’t last long so there was no reason to cancel the flight.
In investing we have events similar to thunderstorms that we call recessions. Investors often fear recessions and obsess over when the next one will come. Many refuse to invest at all if they think there is potential for a recession. Such thinking would be like an airline cancelling flights if they thought there was a potential for a thunderstorm. In cities like Dallas in the summertime, you might as well close the airport since there is a potential for thunderstorms every day. Such a fear of thunderstorms would negate all the benefits flying can offer.
Likewise, the fear of these financial thunderstorms, or recessions, can negate the benefits of investing. Like thunderstorms, the potential for recessions always exists, but these very natural occurrences are relatively short lived. Just as an airline won’t cancel a full day of flights over a 45-minute thunderstorm, investors should not let fear of the occasional recession spoil their opportunity to invest. Seasoned investors, like seasoned pilots, just wait them out when they occur.
Thunderstorms and recessions come and go, but I don’t let either spoil my flying or my investing. I have learned to make the most of the more frequent good times and simply be patient for those few moments when the storms are passing through.
I read an interesting description of procrastination. It said procrastination is the result of the human inability to accurately predict how we’ll feel tomorrow. For example, when I get up in the morning I know I need to exercise but I don’t always feel like it so occasionally I put it off until later. I guess I assume that sometime in the future I will feel more like exercising. But when “later” comes I still don’t want to exercise and get frustrated with myself for putting it off. Procrastinating a necessary but unpleasant activity like exercise in hopes that it will be more pleasant later is to deceive oneself.
For most people saving money is not nearly as fun and spending it. Yet wisdom dictates we should save money, so we set goals to do so. Then when the paycheck comes we look at our bills and think, “This is too hard today. I will just save some from my next paycheck instead.” But when the next paycheck comes, setting aside money for savings will not have become any easier. Your procrastination in this case is based on the incorrect assumption that you would feel differently about saving in the future, but you won’t.
In a recent poll conducted by the Fidelity company, the average American estimated they would need about $1.7 million in savings for a good retirement. Surprisingly 2/3rds of those polled felt pretty good about their prospects of achieving that goal, even though very few were on track to do so. Their justification for the optimism was that they intended to increase their savings rate at some future time, when they could afford it.
My own meetings with thousands of retirees have shown that very few retire with as much money as they had planned on. Many have unrealistic expectations about retirement because in reality, the money they are setting aside simply does not add up to the nest egg they believe they will need. Countless people have likewise told me they intend to increase their retirement savings at some future point, but just can’t do so right now. They have fallen into the trap of inaccurately predicting how they will feel about saving money tomorrow. Like most procrastinators, they fail to realize that sacrifice doesn’t get any easier by putting it off.
If you want to increase your odds of a good retirement I suggest doing the math and then committing to start saving today, whatever amount is necessary. I am always happy to sit down at no cost with any person, at any stage in life, and help them put together a plan. Putting it off until tomorrow will only make it more difficult, not less. People often come to a financial advisor for investment advice, but no amount of brilliant investing can make up for a person who is unwilling to commit to a disciplined savings plan. Don’t procrastinate your retirement planning because every day you wait, your likelihood of success becomes increasingly more difficult.
When I was young I purchased a lot of model airplanes. I bought them at the local hobby shop, which was my only option back then. Their selection and prices were all I had to choose from.
Today’s consumers have access to products from almost unlimited sources. If I wanted a model plane today I could find hundreds online and then arrange my options using that amazing tool known as the “sort by cheapest” button.
This same tool is used millions of times a day by people looking for things such as clothing, hotels, toys and airline tickets. Once the list of options is sorted, the decision process becomes very personal. There are some who buy the cheapest as a matter of habit. Others may scroll down to consider if value increases with price. Unfortunately, there is not yet a “sort by quality” option.
Airline tickets are a unique example of the emotional struggle the “sort by” button has created. In a recent study, one of the most popular airlines in the country was also listed as the cheapest. That comes as no surprise since everyone loves a bargain. But in the same study travellers revealed that this very same airline was also the worst to fly on. What this survey revealed was that much of the travelling public will buy the cheapest seats, then complain that they have no legroom, no snacks, and have to pay extra for luggage. I wonder, just what part of “You get what you pay for,” do American travellers not understand? Apparently, the flying public is fine with being disappointed so long as they get a good deal. I however, am personally familiar with the costs to own, maintain, and safely operate an airplane and this is one area of my life where I would never “sort by cheapest.”
There is another area of life where I have personal experience, and would never “sort by cheapest,” although I know many who are regularly tempted to do so. It is in investing. When you sort investments, what constitutes the “cheapest” options? From a purely mathematical point of view it would be the highest rate of return. So, an investment that paid 10% annually would be cheaper than one that paid 5% annually since you would only need to invest half the amount of money for the same return. But the cheapest investments are rarely the best since there is a higher risk that you may not actually obtain the promised higher return.
Though investors are tempted to chase high returns, they must remember that in almost all areas of life, “sorting by cheapest” will result in an inferior product and increase the likelihood of disappointment. If you buy the cheapest airline ticket, be prepared to be uncomfortable in your seat. If you buy the cheapest investments (those with the highest returns) be prepared for the increased likelihood of being disappointed. Like most shopping experiences, a wise investor can usually find a happy balance of quality and price between the two extremes.
Last week I discussed how some investors perceive more risk in the stock market than may actually exist. I compared them to a nervous passenger grabbing a parachute and jumping out of a sound airplane because they feared otherwise harmless turbulence. There is another side to the incorrect perception of risk and I can illustrate it with an aviation example. About 20 years ago, brothers Alan and Dale Klapmeier began producing the Cirrus line of small aircraft. These planes were groundbreaking because they contained a parachute that could float the entire plane and its passengers safely back to earth in an emergcncy.
The plane became a hot seller as it gave a great sense of peace to pilots and their passengers. The parachute changed the way people perceived the risk of flying in small planes. Surprisingly however, for the first several years the Cirrus’ fatal accident levels came in much higher than other non-parachute airplanes. It was determined that, among other things, having a full plane parachute to fall back on gave the pilot a greater perceived sense of safety. This resulted in some pilots taking more risks, mostly in poor weather conditions, than they would otherwise take. Thus, the perceived “safety” of the parachute had the potential to make the plane less safe. Cirrus eventually turned their safety record around through intensive pilot training.
Investors who perceive the stock market as having too much risk often move their assets into the bond markets. Others might just put their money in bank savings accounts and CD’s. They do this because they perceive these income products as having less, or even no risk at all. This is incorrect thinking since every possible place you could put your money has risk. To not recognize that is to become like one of those early Cirrus pilots who thought the airplane parachute could get them safely out of any bad situation.
We live in a time of very low interest rates, especially when it comes to government insured products such as CD’s, Treasuries and the like. Consider this. The largest debtor in the world is the U.S. government. If interest rates can be kept very low it will save the government billions of dollars. Since it is the savers who provide the money to fund that debt, it is those savers who are also helping to shoulder much of the cost of that debt. They do so by accepting interest payments that don’t even keep up with inflation. Thus, low interest rates actually become a stealth tax on savers and puts them at risk of not being able to fund their own retirement.
So beware of the perception of too much risk, but also be cautious of investments that you perceive to have little or no risk, because there may be more risk than you realize. It just comes in another form. Financial parachutes can be a great thing, but don’t let them lull you into thinking they will eliminate all risk.
I looked out the doorway of my hangar on a hot Saturday afternoon, watching another Regional Jet depart as I did some cleaning. I knew from years of experience that those summer thermals were creating a turbulent ride for the passengers in that plane, yet as I watched from the ground the flight looked as smooth as glass. As always, I found myself wishing I was in the air, while on that hot day I was certain many of the passengers experiencing the turbulence in that plane were wishing they were on the ground. From where I stood the flight looked smooth and controlled. For the passengers if would have felt unstable and even frightening. Perception can be so different based on your point of view.
During the first ten years of this century the investment world went through what became known as the “Lost Decade.” Lost, because many of the major market indexes ended the decade about where they started. During that time there was a money manager who ran a fund that defied all odds and turned in an annual rate of return slightly above 17%. The manager was heralded for his brilliance in the face of enormous odds, and was highlighted on talk shows, in newspapers, and national magazines. His returns would have been great even in good years, but they were miraculous during bad ones. And of course, investors nationwide wished they could have been invested in his amazing fund – or did they?
Behind the phenomenal returns lay a dark reality. In a study conducted by Morningstar®, they calculated that despite the funds 17% annual return over 10 years, the average investor in this particular fund actually lost 11% per year. The surprising conclusion was that investors in the fund were behaving like nervous passengers on a bumpy airplane. The rough economy of that decade created a turbulent ride for investors who would jump out of the fund whenever they perceived danger, and then back in when things calmed down. This led to a continual “Buy high, Sell low” cycle. As the fund headed for a record-breaking decade, the perception of danger kept most investors from enjoying it.
It’s a good thing airplanes don’t offer parachutes to passengers, otherwise they might be landing with a lot of empty seats. Many passengers perceive far more danger in turbulence than actually exists. Investors likewise constantly talk of volatile, uncertain and crazy markets as if today’s movements are unique. Unlike airplane passengers however, investors do have “investment” parachutes, and they often use them to abandon an otherwise sound financial plan(e).
There are real risks in investing, but one of the greatest is the human aspect that often perceives danger and acts on it, and in so doing might create an even greater risk. Think carefully before deciding to use that investment parachute. You may be departing a sound financial aircraft while at the same time jumping to a new uncertainty below.
With all this talk about building walls, I thought I might share my own experience with walls. When I was 25 I decided to build a block wall around my yard. I wasn’t skilled in masonry, so it took a long time to lay each row. I built the wall in 20-foot sections and installed rebar every four feet so that I could pour concrete down the holes in the cinder block, which would tie the whole structure to its footings.
When I had finished the first 20-foot section I stood back and admired my work. It gave me a great sense of accomplishment. Now it was time to fill the rebar cores with concrete. As I thought about all the work involved in mixing that much concrete, and then trying to pour it down those holes, the tops of which were six feet high, my enthusiasm for the project waned. There was so much more excitement in seeing the new sections of wall go up that I decided to continue on with the next row. I figured that at some time in the future I would find a friend to help me fill the cores.
Working in the evenings over the next six months I managed to finish eight more sections of wall, giving me significant privacy around my yard. The more sections I completed, the more excited I got with my beautiful wall, and the more pride I took in my masonry skills. The hard and unappreciated task of filling the cores could wait.
Then it happened. I awoke one morning to one of those horrible Las Vegas windstorms. After one huge gust shook the house, I looked out my window to see my entire six foot high cinder block wall laying in pieces in my yard. The painful lesson of that image will never be forgotten.
A good portfolio, like a block wall, needs a core of solid holdings to anchor it in times of storm. Core investments are long term, sometimes slower moving investments, that often pay steady dividends. They are not sexy and rarely make the “pick of the day” in those monthly newsletters, but they play a critical role in long term financial planning. Plodding along in the background, the core provides consistency and stability that helps to protect you when market winds blow.
After years of market growth, investors sometimes allow their more aggressive assets to begin dominating their portfolios and forget to keep adding those less exciting, but very important, core holdings. One way to know if you are getting out of balance is how closely your account tracks the daily market movements. If your account balance is highly correlated to the stock market, you may want to consider making some changes before the next economic wind storm comes barreling through. Those who patiently hold a good core of sometimes less exciting investments are more likely to wake up the next day and find their financial walls still standing.
A kind couple was opening an investment account and when the question came up about giving them online access they responded emphatically, “No, we don’t want any of our information available online in any form.” I remember thinking of the best way to let them know that their information was already on the internet in many forms and from many sources. It is the nature of the digital world in which we live.
News of Cyber-attacks have become commonplace. Computer hackers were once the 14-year-old next door just having fun, but more often the attacks now come from highly sophisticated criminal enterprises, many sponsored by foreign governments with enormous resources. It sometimes leaves people wondering what to do.
It is unknown how many people have had their online information compromised but in 2017 the Equifax hack alone exposed roughly 150 million Americans to cyber criminals. Keep in mind that a hacker is like an old-fashioned burglar. When the door is broken down you know he was in the house, but you may not know which rooms he went in. When there is a cyber-attack, notification is sent to every “potential” victim, but that does not mean your information was actually stolen or will be used.
I have decided that the best course is to assume that your personal information has been stolen, and act accordingly. What a cybercriminal wants is largely two-fold; To get access to your existing financial accounts, or to open new credit lines in your name that you don’t know about. Protecting against the first comes from personally monitoring your bank, investment and credit card accounts for suspicious activity. If you deal with an institution that carries insurance such as FDIC or SIPC or others, then losses will largely be protected against. (check with your institution for specific guarantees)
To protect against unauthorized credit lines, I highly recommend employing a credit monitoring service of some sort. These are designed to alert you anytime a credit line is opened, allowing you time to notify the institution if it was unauthorized. Some people don’t want to pay the monthly fee. I am reminded that when I grew up I don’t think my parents even had a key to our house. It was certainly never locked. Today it would be unreasonable to not pay for good locks and even security systems to protect our homes. Today, your greatest financial assets are generally not kept in your home, such as your good name and credit rating. It would be unreasonable to not spend the money and effort to protect those assets.
Governments and institutions spend enormous money to protect your personal information, but all their efforts cannot, and never will, be a perfect solution. In this digital age it is critical that individuals make the effort to monitor their own personal situation so that when a theft occurs, they will know about it and can act to protect themselves. Cyber thieves thrive on those who don’t pay attention. Don’t be that victim.
“How much money do I need to retire?” is a very common question I am asked. When I turn it back on the client I get varied responses but my favorite is, “I want just enough so that my last check bounces, and hopefully it’s made out to the IRS.” Sadly, some retirees spend money as if this is really their goal.
How much you need to retire is very personal and has a lot to do with how you live before retirement. Some do just fine on a few thousand a month. Others live extravagant lives they would have difficulty giving up. So looking at today’s expenses is a great place to start.
A rule of thumb says you need 70% of your “working years” living expenses, but that is often a poor guideline. This rule assumes you won’t have kids or a house payment. The problem is that just because your kids become adults doesn’t mean they stop costing you money. Some of you readers know exactly what I mean.
Though many retirees don’t have a house payment, they often replace it with higher travel costs, medical needs, eating out, and grandkids. The truth is, retirees often spend as much, or even more than they spent when they were raising a family. So, the best rule of thumb is to ask what you want your retirement to look like and create an honest budget for it. When you come up with an annual amount, subtract your planned fixed income such as social security and pensions, and what’s left over is what you will have to save for.
If you can assemble a nest egg about 25 times bigger than the amount you need annually, you will be well on your way to a successful retirement. So, if your shortfall is $24,000 a year, then I would suggest $600,000 as a starting figure. The biggest unknown in retirement is how long you will live, otherwise bouncing your last check would be much easier.
Retirement is like planning a flight to a distant city. Planes are weight-limited, so you rarely fill up the tank like you do with a car. You only carry as much fuel as you need. My rule of thumb is to figure the amount to get to my destination, include a safety margin for winds and ATC diversions, and then add enough extra to stay in the air for at least another hour, just in case. Launa has never complained at seeing 30 gallons in the tank upon landing. Unfortunately, countless pilots have died from running out of fuel, with many of those accidents happening within sight of the runway.
The “bounced check” planning model is terrible in aviation and just as dangerous in retirement. When you plan your life’s financial journey, make sure you build in a generous safety margin for the unexpected, and if you get to your destination with some fuel left in the tanks, I promise your heirs will not complain.
Most people are defensive by nature. They are primarily interested in protecting against risk. An example of this was my daughter’s recent visit to the rim of the Grand Canyon. Her two small boys, who are still too young to properly understand danger, were anxious to run over to the unprotected edge to see the exciting view below. Despite the unparalleled beauty of the canyon, our daughter struggled to enjoy it as she focused all her attention on keeping the boys safe. Rather than linger and enjoy the moment I think she was relieved to be safely back in the car with the boys comfortably in their seat belts.
Her experience is very similar to the way many view the investing world. They stand at the edge of endless opportunity, but have a difficult time enjoying it as their minds worry so much about falling.
At a recent business conference, we discussed the state of the economy and, as usual, considered the risks we face going forward. Few times in my career do I remember a more positive outlook. It is difficult right now to find any area of real concern in our economy or the investment markets. And yet there is a major risk to investors that we discussed and, ironically, it has nothing to do with the economy. This risk, which could pose serious problems for our economy, is political.
Politics have always played an important role for investors, but never before can I remember a time when the long-term risk has been so great. For most of my life, both political parties argued and debated openly but then sat down behind closed doors and worked out compromises to keep the country moving forward. Unfortunately, in our current environment, it appears that compromise is no longer possible. If you take time to examine the votes coming from both sides of the aisle over the past 10 years, you see a growing gap between the two parties that shows no sign of narrowing.
One of the biggest current issues is the national budget and debt ceilings. These matters must be addressed and under the current hostile environment it is very possible that no agreements will be reached. If that happens we could be looking at a government shutdown that could dwarf the ones of the past. Now some may joke that we should just let it shutdown, and certainly some areas of government are more critical than others, but if it lasts for an extended period it could do long term damage to parts of our economy. I don’t sound many alarms in my practice, but I am sounding one now. I remain fully invested and optimistic but if our government freezes again due to the stubborn attitudes in Washington, there are some specific areas of the investing markets that I will be moving my clients out of. Politicians, in pursuing their own interests, keep selfishly pushing us closer to the edge, which could change a beautiful view into a terrible fall.
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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