I sat on my porch one day and looked over at the lights and noticed they were covered in spider webs. I grumbled to myself about those dumb spiders and how I would need to clean those webs off yet again. Then I promptly forgot about it.
A few nights later I was sitting on my porch looking out at the beautiful city and noticed the normal activity of bugs swirling around the porch lights. Suddenly a light went on in my own head, as I came to two realizations. The spiders were certainly not dumb at all. Even though lights are not part of their natural habitat, they had learned that they did a great job of attracting dinner. The second thing I learned was that nature had not been so kind to the insects who, after almost 200 years have still not learned that flying into lightbulbs rarely ends well for them. This brought me to the very unscientific conclusion that spiders are much smarter than insects.
I considered, from an investor point of view, what are some of the lightbulbs out there that might attract investors and that could be used by ill-meaning financial spiders to trap their next victim? Immediately I remembered a comment a client had just made to me. “Dan, we seniors love free food.” And so it is that free food does a great job of attracting retirees. There is nothing inherently wrong with offering food as a legitimate advertising tool, but investors would be wise to be aware of the potential for spiders to be spinning webs in the vicinity of any free meal.
Clubs and other affinity organizations attract a lot of good people, and successful people, but are also known to be places where financial spiders may hang out. They act like a part of the group, appearing to have honorable intentions, while quietly spinning webs to trap unsuspecting victims. It is sad but true that many frauds are perpetrated by those who have worked themselves in to a position of trust.
The next thing that came to mind oddly was church, of all places. Many good people are attracted to church and they view themselves, and others who attend, as being honorable and trustworthy. This natural sense of trust has occasionally also attracted a few spiders. I say this carefully so as not to offend, but it is well known that ill-meaning people sometimes take advantage of the inherent trust that exists among church members.
If you read the regular fraud reports from the State Division of Securities you will find that after all these years of investor education, the financial spiders continue to attract victims to their webs. Let’s learn a lesson from real spiders and always be on the lookout for their creepy financial counterparts. There is nothing wrong with going towards the light, but anything good that attracts people can also be used by unscrupulous spiders who are just looking for their next meal.
Launa and I recently watched an old movie classic, Frequency. In this movie the main player finds a way to communicate with his friend who is living 30 years earlier. Among the advice he gives his friend of the past is to remember one word, “Yahoo.” The friend is confused but as the movie ends, this same friend has become very wealthy and is shown driving a car whose license plate reads “I Yahoo.” Of course the irony of the movie was that just as it was being released in early 2000, Yahoo’s high flying stock was crashing down with the dot.com bubble collapse. Too bad the guy from the future didn’t alert his friend of when to sell.
When you consider the great stock disasters of the past, names like Worldcom, Enron, Lehman Brothers and Washington Mutual come to mind. We make fun of these companies today, but often forget that each was once an icon in their field. Worldcom was a huge success until antitrust law investigations exposed one of the biggest corporate frauds in history. Lehman Brothers was respected and considered by some too big to fail, just before their demise brought the financial world to its knees. Washington Mutual became the biggest bank failure in history after being one of the nation’s most successful banks. And finally Enron, the iconic symbol of corruption and failure, was named by Fortune magazine, not once but several times, "America's most innovative company.”
So what company do you own in your portfolio that you feel is too big to fail? Could such a company even exist? One mistake investors make is to own too much of a single company. This can be especially true if you own a significant amount of stock in the company you get your paycheck or your pension from. One of the great tragedies of the Enron failure was that so many of its employees and pensioners had large portions of their retirement also tied up in the company stock. I run into this same situation with retirees quite regularly, which can result in the classic case of having too many eggs in one basket, and experience teaches us that there is no one corporate basket too big to fail.
As we study stock market history we find many examples of failures of once great companies. These should remind us that no matter how good it may look today, be very cautious about having too much of your retirement dependent upon a single company. Remember that historic corporate failures usually became historic because the thought of failure was so out of the question at the time.
Look at your portfolio and carefully consider every position. Ask yourself a simple question. What would happen to me if this single company were to fail? If the answer to that question scares you, I would consider reducing the position regardless of how much I loved the company.
The Saint George Marathon is one of the premier marathons in the nation, and certainly one of the most beautiful. It’s a point to point run through some of the most amazing scenery in the world. For several years I had the privilege of working at the marathon, sometimes spending time with the athletes before the race and sometimes greeting, and often catching them, at the finish line.
This year I waited with my family at the finish line for two of our boys who were running for the first time. I watched as hundreds of runners, having just run 26 miles, plodded past us. I could only imagine what they must be feeling. The look on their faces told the story of perseverance against great opposition, mixed with a glimmer of hope at the end in sight.
Marathon runners are a unique group. Unlike other sports where the athletes tend to have similar builds, long distance runners come in all shapes and sizes. Some of the folks I saw running across that finish line, I would have never expected to see accomplishing such a feat. I have learned over the years that finishing the race is less about size and strength than it is about commitment and perseverance. A marathon runner doesn’t need to have the body of an athlete; they just need the heart of one.
It has been said that investing for retirement is a marathon, not a sprint. It is wrong to think that in order to be financially successful you have to have a six figure paycheck, or a rich uncle, or be born in the right neighborhood. You don’t need to be a top financial athlete, you only need to have a strong commitment, and persevere.
Another thing I love about marathons is how victory is measured. Since it was their first marathon, our two boys measured success by their ability to finish the race. In a marathon with thousands of entrants, only a very small handful are actually trying to come in first. The rest are competing against no one but themselves, and measure success by how they personally finish the race. It is an odd sport where victory even comes to he who finishes last.
I asked one of my sons his secret for completing the race. His simple answer was, “I just kept on running.” And so it is for those who want to retire successfully. You don’t need to be the fastest, you don’t need to be the smartest, and you don’t need to be in the best shape to begin with, you just need to keep running. Keep doing those little things that lead to financial success, and one day you will see the finish line in sight. It won’t matter how anyone else finishes, it just matters how you finish.
I did a lot of cooking as a child. It wasn’t so much that I liked cooking but more that I just liked to not be hungry, and with 10 brothers and sisters around, and being a growing teenage boy, I was always hungry. As a side note, I have raised enough teenage boys myself now to realize that hunger is not dependent on their environment but rather is a constant state of being. Perhaps that is what the teenage Rene’ Descartes meant when he famously said, “I am, therefore I am hungry,” or something like that.
In my efforts to satisfy my constant need for nourishment, I learned to cook. On one occasion I was helping my mom with dinner as she was preparing a rice dish. Wanting to make sure things were progressing I removed the lid from the rice and began stirring it. She quickly corrected me, saying that with some foods, like rice, you are not supposed to touch it once it is on the stove. “Sometimes,” she said, “being a good cook means leaving things alone.”
I was at a training seminar for financial advisors and the speaker was talking about what it means to actively manage an investment account. He talked about doing frequent and appropriate research. He discussed client involvement and reporting. He taught portfolio allocation to maintain risk levels at proper suitability standards. And then he explained that after all the work, one of the most difficult tasks for an advisor would be knowing when to leave things alone. “Active management” he said, “often means the best thing to do is nothing.”
There is a temptation for financial advisors to show they are doing their job by moving things around. There is also a temptation for clients to feel they are getting their money’s worth if they see active buying and selling in their managed accounts. When nothing happens for a while, clients may feel the advisor has stopped managing the account. Much like cooking rice, just because my mom stopped touching it didn’t mean she had left the kitchen.
I have seen clients change advisors only to have the new advisor recommend a full liquidation of all positions and start over. Not only does this risk tax consequences, but often the goals of a client can be met just as well with many of the existing positions. Different is not always better.
My mom taught me that cooking required constant attention, but not always constant action. Sometimes it required patience to allow things to come together. Lessons learned in my childhood kitchen can be applied to the investing markets. Change is not always good. As an investor, do not assume that just because your advisor has made the decision to stay the course, that they are not doing what you paid them to do. In fact, they may actually be doing exactly what you paid them to do. Sometimes the best thing, is to do nothing.
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.
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.”
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, 1173 S. 250 W. Suite 505, St. George, UT 84770.
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