My dad was an orphan and spent his youth in the St. Francis home for boys in Detroit. The home was a safety net for boys, but it was far from an ideal upbringing. The trials, loneliness and sometimes abuses of that home left indelible marks on his life and taught lessons he worked tirelessly to teach his children.
When I left for the university my dad encouraged me to study history and philosophy. He said that philosophy would teach me how to think, and history would teach me what I should be thinking about. I followed that advice and one day in philosophy class my professor asked us to come up with a single phrase that could be applied to every aspect of our lives. The following week I turned in my assignment with this phrase, “Everything has its price.”
My dad taught that every decision had a price and that every action required giving up something else. In investing we call that “Opportunity cost,” meaning when you spend $10 on a meal you have given up whatever else that $10 might have done for you. The price of the meal is the loss of the $10 while the price of not buying the meal may be hunger. It is our choice which price we pay.
When people retire they bring with them the evidences of the various prices they have paid throughout their lives. Some have paid the price of sacrifice, having faithfully put off current wants for a better future. Others, for whatever reasons, decided they could not “afford” to set aside money in their youth, or they did not have the discipline to do so. They failed to pay the price to assure their financial future, and so in their old age they are paying a different price. Young people often mistakenly think that financial planning is optional. Barring a personal disaster, your future will absolutely come. The question is, do you want to plan for it or do you want to let life plan it for you? In either case there will be a price to pay.
History shows a strong tendency for people to seek returns without paying the full price. Our national obsession with gambling is clear evidence of this. Politically we continue to run up massive deficits, giving further evidence of our thirst to obtain benefits we aren’t willing to pay for. Even intelligent and successful investors are not immune to this human tendency.
We must be ever on our guard against the temptation to try and obtain something we haven’t fully paid for. It is one reason even successful individuals can make bad investments decisions or even worse, get sucked into fraudulent schemes. Always remember that everything in life has a price. If you are tempted to try and bypass the price, or take a short cut, be aware that some other price for your decision awaits down the road and you may find it is more than you want to pay.
A couple years ago the Department of Labor issued the Fiduciary ruling. The purpose of the ruling was simple; to require financial advisors to act in best interest of their clients. Unfortunately, the politics involved took a reasonable idea and created a confusing policy that is still tied up in the courts.
I support regulations that protect investors but I also recognize we must each take responsibility for our own financial safety as no level of regulation can stop all fraud. Here are just a few ideas I shared at a recent fraud seminar to assist in the effort to protect your money.
Understand that white collar criminals are called wolves in sheep’s clothing for a reason. They try very hard to look like one of the sheep as they blend in with the flock. They join clubs, service organizations and even church groups to gain credibility with other members. Do not trust someone just because they belong to a group whose members are generally trustworthy.
Investigate claims of credibility. Criminals may use impressive titles or official looking designations to create the appearance of importance. Not all titles and designations are the same and many have little or no value. Do some research to find out what a designation means and the qualifications to obtain it. Also make sure the person is actually an expert in the particular field in which you are investing. ie., I respect my CPA as my tax expert but I wouldn’t go to him for foot surgery.
Be careful of strangers bearing gifts. Timeshare salesmen skillfully use the law of reciprocity to make prospects feel obligated to buy their product. It’s ok to take a free meal or small gift from someone in exchange for listening to their pitch, but never let that make you feel obligated to buy anything.
Avoid the pressure of scarcity. Being made to believe that you have somehow been singled out for a special opportunity, or that an investment may not last long, is a definite red flag. If you don’t have time to do your proper research, then just say “no.” It is better to miss a few good ships if it means protecting you from boarding the Titanic in a last minute rush.
Finally, never become a gold-rusher. If you are being told that everyone else is making money on an investment except for you, slow down and do your own homework. Never invest just because someone else did or because others are seemingly making money without you. Make each investment decision based on its suitability to your unique situation. As with most gold rushes, when it’s over far more money is usually made by the guys selling the shovels.
Hopefully, as the Fiduciary rule gets sorted out, some solid investor protections will come from it. Remember however that no one, not even Washington, cares more about your money than you do and therefore you must be your own first line of defense in the battle against fraud.
I have been concerned about the messages being delivered to the youth of the rising generations. Many young people live in a “virtual” world, a world of fake reality. It is a world where there are no losers because everyone gets a trophy, and where self-worth is determined by social media “likes” and “shares.” It is a protective world that in many ways does not require enough of its youth and sadly, a world that has very little resemblance to the adult one that awaits them.
I grew up in a much different world. I ran my first lemonade stand with my brother at age six and have had a job ever since. I learned lessons of life by living life, and those lessons were sometimes painful. In High School I was very small (only 5’1” and 85 lbs. on my first driver’s license) which meant gym day held the time honored tradition of shoving the little guy in the locker. Bullying back then was common and in P.E., almost encouraged. (I still harbor negative feelings towards anyone whose name starts with “Coach.”) Though I support anti-bulling efforts today, I still learned a great deal from those trials. I learned that I wanted to go to college and be very successful so bullies couldn’t push me around anymore. It’s seems a bit odd that the older generation credits the “hard knocks” of life with teaching them many valuable lessons, yet sometimes goes to great lengths to protect their kids from the same.
When my Little League team lost the championship game in a heart-breaker, we cried a bit while watching the winners get the only trophy, then went back to the ball field the next day and practiced all the harder. Yes, failure was painful, but it was often our best teacher. I didn’t receive nearly as many trophies as my kids, but mine sure meant a lot to me.
I recently released my first children’s book (under my pen name Ule B. Wise) and a client asked why I was writing books for children. I responded that in my years of teaching thousands of individuals about investing I have come to a stark reality. The people best prepared for retirement, the ones who live the most financially sound lives, are usually the ones who have done so all along. For the most part being financially wise is a lifelong habit formed in the early years. So I decided I needed to start the education, not with 50 year olds, but with five and ten year olds. I also decided to begin, not with financial concepts, but with teaching some of the basic values of life such as discipline, determination, courage, patience and other qualities that if learned, have the potential to benefit all areas of their lives. If they can learn these principles, then showing them how to save and invest and manage money will be so much easier. Then, if they like, they can go out and buy their own trophies.
Let me take you briefly into the cockpit of a modern airplane. Most can picture the massive array of instruments. As a young boy flying commercially I remember looking into the cockpit and thinking that pilots must be the smartest people on earth. I have seen the eyes go wide when people fly co-pilot with me and see all that impressive technology I control. They are usually surprised to learn that most airplanes only operate on six basic instruments. To a large degree, that confusing and crowded panel is filled with various iterations of those same six instruments.
My airplane has four attitude indicators (five if you count the one on my cell phone) and each one does exactly the same thing. I have six airspeed indicators and five heading indicators. The reason for all this redundancy is that airplanes have to be pretty self-sufficient once in the air, so having a lot of backup is important. As an example, with five heading indicators, it is highly unlikely to imagine a scenario where I won’t know which direction I am going.
All of this redundancy is great for safety but there is a cost. Airplane technology is expensive and each of those instruments has to be maintained. The additional equipment also ads quite a bit of weight which increases fuel costs while lowering cargo capacity.
If I only carried one of each instrument I could fly faster and farther and haul more passengers at a lower cost. It would be my dream airplane, until my single heading indicator failed, in which case it would become a nightmare. The complex panel array in a modern airplane is a pilot’s version of diversification.
I looked up diversification on Investopedia and found this incorrect description relating to investing: “(Diversification) contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” That generally accepted description is inaccurate because it is mathematically impossible. An average of any sample can not exceed all of the parts. Unfortunately, bad investing often starts with bad math.
So then why diversify? Though it offers no guarantees, the usual goal of diversification is to seek a reasonable return with an acceptable level of risk. Diversification, done properly, is not designed to be the most profitable option for investors, but the more responsible one. I would suggest that Mark Zuckerberg, Bill Gates and the late Steve Jobs, did not become some of the richest people in history by diversifying their stock portfolios. But few investors are willing, or should even consider, the levels of risk they took.
Having a diversity of instruments in my plane slows me down and costs me more, but it also greatly increases the likelihood that I will arrive at my destination in safety. And ultimately, that is my most important goal every time I fly, or invest.
Every airplane owner is familiar with the annual inspection. Required by the FAA to promote safety, every airplane must be taken annually to a qualified shop to be inspected. The procedure is quite involved, and can be a little discomforting when viewed for the first time.
During the process the shop essentially opens the whole machine up to take a look inside. The goal is to basically inspect every piece of the airplane to assure it complies with very strict guidelines. Some parts are repaired or replaced based on standards of wear and others simply because their stated useful life is up. The idea being that parts should be replaced before they fail because a pilot does not have the convenience of being able to call a tow truck if a fuel pump gives out in flight.
All of this abundance of caution with airplanes comes at a cost. Annuals are expensive, and so are those brakes and tires and miscellaneous parts that are replaced when they still have life left in them. Additionally, there is an inherent risk in taking apart something so complex and then putting it back together again, because mistakes are sometimes made. The challenge for the shop, the owner and the FAA is to balance the risk and cost of inspecting and replacing parts, against the risk of not doing so.
An investment portfolio can also be very complex. Created over many years, a retiree may have a multitude of intertwined investments, each performing a different and hopefully complimentary role in the total retirement plan. These accounts, like an airplane, need regular service to keep them running properly, but the very act of servicing them can create its own additional problems.
An area of concern is when someone has a major life change. A death, sickness, marriage, divorce, or other event can lead to advice to make sweeping changes in the portfolio mix. Although ongoing financial tune-ups are appropriate, making extreme investment changes all at once can be unnecessary and expensive. As with an airplane, sometimes the risk of replacing a working part is higher than the risk of leaving it alone.
I am thankful the FAA requires an annual inspection of my airplane, even if I don’t like paying for it. I am also thankful for the great relationship I have with my shop. After the annual inspection they call to discuss with me those repairs that are safety related, those that are desirable but not necessary, and those that are merely cosmetic. They often recommend that in some of the latter two it is safer to just leave things alone.
Before making major changes to your portfolio, make sure you understand the difference between what is necessary, and what may be merely cosmetic. Doing a full rebuild can be costly and unnecessary, for both an airplane and your portfolio.
We took the kids to Disneyland one year and gave each child $20 to spend on non-food items. When we returned home all of the kids had spent their money except for Natali who reported that she had $22 left. Thinking she needed a math lesson we asked her to explain. She told us that one of her sisters had spent her allotted amount and then found something that she just had to have, so she had borrowed $16 with a promise to pay the money with an additional $4 fee on arriving home. Natali explained that she had splurged and bought herself a $2 pickle, leaving her with $22 after the loan to her sister had been repaid. Apparently I was looking to teach the math lesson to the wrong daughter.
Financial acumen comes naturally to some people and with great effort to others. The ones who struggle often blame society, personal limitations, upbringing, or education opportunities. Although those all play a significant role, in my experience, most people have the power to rise above their challenges and live financially responsible lives if they really want to. I have worked with many families who once struggled but after a concerted effort, made the decision to change their bad money habits. It isn’t easy but it can be done.
Every year the Federal Reserve issues its annual report on the financial health of American families. With the last recession almost 10 years away, a strong economy and very low unemployment, you would expect this report to contain great news. Unfortunately, though there has been some improvement, far too many families continue to struggle. The 2017 report found that 44% of American families could not cover a $400 emergency expense. The reason for this is found in another question where 53% of respondents stated they spent more in the prior year than they earned. If half of the country can’t save even a few dollars during all these good years, what will happen to them when the next recession hits?
Many people blame lack of income on their inability to save. They think if they could just make a little more money it would solve the problem. I have always maintained that living within your means is a behavioral issue, not a financial one. My experience is that a person who can’t live on $30,000 a year could not live on $3 million a year either. Although I am sure many would volunteer to try and prove me wrong.
If you are part of the 44% club, make a commitment today to not renew your membership next year. Start by saving a little something each month. It doesn’t have to be a lot, but it has to be something. The important thing is to create a habit of saving. Stop looking to your shortage of income and focus instead on your current behavior. Failing to do so may lead to another painful math lesson when the next economic downturn hits.
Most lifelong investors have had the opportunity to hit a home run or two. Most have also experienced a few strikeouts in their investing career. Sometimes the timing is just right, and sometimes it can be really bad. As is human nature, I suspect most talk more about their home runs than their strikeouts. Yet, in my experience neither one, though dramatic at the time, determines the long term success or failure of a portfolio.
I was reminded of this in a situation this week that had nothing to do with investing, but the lesson was the same. Launa and I were in San Clemente, California and decided to meet up with some friends at one of our favorite quickserve Italian restaurants. Our friends were regular customers and had introduced us to the place a couple of years ago. We then became regular customers ourselves, stopping in many times during our frequent business trips to the area.
After meeting up with our friends, we visited for a bit while waiting to place our order. When we reached the front of the line the cashier told us they would not be able to serve us because a large phone order had just come in and they would need to spend at least an hour filling that order first. A moment later the owner appeared and confirmed what we had been told – that due to the phone order, they would not be able to serve us for at least an hour.
We were confused as to why he would not serve customers standing at his counter because of a phone order that had just been placed. Though we were there first, we were being pushed to the back of the line. The owner explained that though he sympathized with our situation, the phone order was worth over $500 so as a businessman he was giving it priority. To our amazement he actually said to us, “Don’t take it personal, it’s just business.” As one who makes his living analyzing business models I found this man’s treatment of us, and several other customers standing with us, quite unbelievable. For a mere $500 he was willing to destroy several long term client relationships that were worth far more. In disbelief we left, and promptly found our new favorite Italian restaurant.
People, like this business owner, often make very poor financial decisions when faced with the prospect of a possible home run. He may have gotten a big hit that day, but it came at the expense of a lifetime of profitable singles that he will miss out on.
Investors as well can get caught up in the excitement of swinging for the fences. In so doing they often overlook that the real driver of most successful investment portfolios are those consistent investments that plod along, day after day, quietly building a lifetime of true wealth. Remember, to succeed in business and in investing focus on winning the game, not just on getting a big hit now and then.
I have thoroughly enjoyed teaching a series of investment classes exclusively for women. Their thirst for knowledge and desire to take control of their financial lives is exciting. As women continue to assert their economic power, the world in which we live and the investors who live in it, need to be prepared for the changes that will come.
Women now surpass men in obtaining new college bachelor degrees, and even more so with graduate degrees. As they do so they are becoming an increasingly powerful force in business and in government. In 2015 I read a study by Morgan Stanley that found women, as investors, were interested in investing their money with companies they perceived as having a positive influence on society.
Along those lines I attended an investor forum focused on the relatively new concept of “Purpose Driven Companies.” We are all aware of the practice of posting a “Mission Statement” on a company wall. These statements often talk about promising great customer service, high quality products and integrity in operations. Sometimes they can become a bit repetitive with many feeling like they were written from the same template. I wonder how often a customer decides to do business with a company based upon the ubiquitous mission statement posted on the front lobby wall.
In the forum I attended the speaker went beyond a company mission and focused on a company’s purpose for existing. He pondered exactly what value the company actually brought to society over and above the obvious goal of keeping customers happy and providing profits to shareholders. He ended his message with this soul searching question. He asked, “If your company ceased to exist, would anyone care?”
I was fascinated with the concept. I started asking that question quietly to myself when I analyzed companies for potential investments. I began looking at companies differently, looking beyond their financial health and considering whether their products or services were even needed. And if not needed, how long could it possibly survive? Pet Rocks came to mind, along with a huge list of ridiculous products that seem to appear at Christmas time.
There are certainly many long standing and successful companies that produce products the world could do without, and several that produce products and services that the world would be better without. As women rise in economic power, and who by most estimates will dwarf men in a decade or so in their control of wealth, it would be foolish not to consider how this might affect the companies many are investing in today. If it’s true that women tend to favor companies that provide a positive influence on society, then a purpose-driven approach to business and investing would seem to make sense.
Women will change the way the world invests. Investors who cannot keep up with that change may one day find themselves holding a portfolio full of pet rocks, about which, though profitable for a time, no one cared when they faded away.
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.
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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