Archive for Financial Education

Annual Scary and Sweet Investment Column

investments, Denver financial planner

As I sit here and eat the Take 5 bars that I will not be giving to trick-or-treaters, it seemed appropriate to offer a quick market commentary about what has been scary and sweet so far in the 2018 investment world.

 

Scary:

 

International stocks, which have been hurt by the rising US dollar and trade tensions.  But, don’t bail out yet!  International was a strong performing asset class in late 2016 and 2017 and will have its day yet again.  If anything, lower short term returns could be a reason to buy on sale.

 

Old Bulls.  There is a general holding of the breath as investors, still scarred by the Great Recession, wait for the bottom to fall out of the current expansion.  I don’t know when or how or how severe it will happen, but worrying (and sitting all in cash) won’t help.  Make sure you are diversified and have risk that makes sense for your time horizon.  Then, turn OFF the financial news and eat some candy.

 

Expensive Chocolate.  Speaking of candy, will these trade wars initiated by the US increase the cost of imports from cars to cocoa?  That seems to be the worry as our trading partners prepare to retaliate against our policies.  So far the results have been mixed with some industries benefiting from the tariff talk and others suffering.  Time will tell how our consumer prices, economy, and investments are affected.  In the meantime, I am hoarding chocolate.

 

Sweet:

 

Tasty Opportunities for Job Seekers.  In June of 2018 the number of job openings in America surpassed the number of people looking for work. That should mean good mobility for workers who want to make a career change.  However, the low unemployment numbers reported are probably not taking into account the many underemployed millennials, gig economy workers, and baby boomers holding on for dear life to their jobs.

 

Consuming Consumers.  The US confidence survey in August reported the highest consumer confidence rates in 18 years.  People are on services and planning to buy homes and other big-ticket items.

 

Corporate Earnings are Up.  All that consuming is helping US companies to continue their earnings growth.  Even perpetual brick-and-mortar retailers saw gains last quarter.  So, even though investors seem to hate this bull market, US stocks have been on the rise without the love of the public.

 

Is our economy a treat to be enjoyed or a trick just waiting to happen?  I won’t predict, but just remind you that expansions last longer than recessions.  Keep enough in savings to cover 3-6 months living expenses, and let your investments do their long-term thing.

 

WTF (What the Finance) is Life Expectancy?

life expectancy, denver financial planner

Life expectancy is a concept that seems basic but is not well understood.  If we all knew the exact date of our death, the whole financial advice industry could cease to exist.  After all, if you know exactly how many more days you need your money to last, all planning can be done with an abacus.

 

It’s the uncertainty of lifespans (and investment markets) that allow me to have a job.

 

What does “life expectancy” mean?

 

Technically, life expectancy is that age at which half of a population (generally defined by country) born in the same year are dead and half are still alive.  It’s not an accurate predictor of your age of death because it’s an average including children who died very young in freak ice fishing accidents or from small pox and those who died very old repeating the same story for the thousandth time to their great-grandkids.

 

Therefore, Life Expectancy is not a number that is very helpful in your spending plan during retirement.

 

What do financial planners worry about?

 

My colleagues and I worry about Longevity Risk. What is the risk that you will run out of money if you live to age 95 or 100?  Truly, the healthy retiree is a nightmare for a financial advisor.  We’d prefer you take up smoking and heavy drinking, so we don’t have to worry about stretching your asset pool for 40 years.

 

If you have some sort of medical condition that will likely shorten your life, tell your financial advisor so he or she can adjust those expectations.  You will be able to spend more money each year if you know your life expectancy is shorter.

 

Conversely, if you are a woman who is healthy and has a history of old women in the family, you may be more comfortable planning for your assets to last 40 years in retirement.  Yikes!  This means less spending now to support that nonagenarian of the future.  You may be a candidate for certain types of longevity annuities, long-term care insurance, or to take a lifetime pension instead of the lump sum option.

 

I hope this little statistics lesson hasn’t been too boring and gives you a peek behind the curtains of one of the many aspects of retirement income planning.

WTF (What the Finance) is…Impact Investing?

impact investing, denver financial advisor

Impact investing has been around for a while.  The idea is to direct your money to causes that are important to you and away from companies with products you dislike.

 

In a December 2017 I gave examples of mutual funds and ETFs that focus on the environment, certain religious beliefs, and gender equality.  I also gave examples of the opposite of impact investing – ETFs and mutual funds that focus on guns, gambling, alcohol, and tobacco sales.  We like to be fair and balanced here at Sullivan Financial Planning.

 

Those December blogs may have been putting the cart before the horse. Here are some definitions of various kinds of impact investing.*

 

Socially Responsible Investing

Socially Responsible Investing (SRI) is the avoidance of harm in your investments.  Harm to whom?  The environment, employees, public health are some examples.

 

Impact Investing

Impact Investing is a subset of SRI, requires investors to consider a company’s commitment to corporate social responsibility (CSR), or the sense of duty to positively serve society as a whole.  Some examples include giving back to the community by helping the less fortunate or investing in sustainable energy practices.

Gender Lens Investing

Gender Lens Investing has investors concentrate on finding companies whose policies benefit women and girls. Often, there are scores given to companies based on hiring practices, promotions, and the executive presence of women in the organization.

 

In the old days when I first started in the investment business, Socially Responsible Investing was considered a nice concept, but one in which returns were compromised by the philosophy.  These days, SRI is gaining steam both from a philosophical standpoint and a good showing for risk and return.  The idea is that by doing good, these companies can be sustainable and profitable for the long haul.  For example, a company that isn’t polluting the oceans is less likely to face government fines or class action lawsuits.  Same for companies where the products don’t cause cancer or other public health problems.

 

There are more options than ever in the realm of Socially Responsible Investing.  However, it may be tough to create a complete diversified portfolio using only these funds.  Small and Mid-Cap funds, bond funds, and international funds are not too plentiful yet.  Stay tuned, though.  There is bound to be growth in this area.

 

*Source:  https://www.investopedia.com/terms/i/impact-investing.asp

Can Change Change Your Life?

change, denver financial planner

No, the title isn’t a typo!  Recently two concepts have been in the news that make me ponder how much small change can change your future.  The first is a poll conducted by YouGov Omnibus in January of 2018 which found that 89% of Americans would stop to pick up a coin off the ground.

 

Of course, everyone has their price. 56% would pick up a penny, 11% a nickel, 6% a dime, and 14% need at least a quarter to bother bending down. 6% wouldn’t pick up a coin at all – germaphobes!  5% don’t know.  How hard is it to answer that question?

 

Next, I keep reading articles featuring apps that round up your purchases to the nearest dollar and deposit to your savings accounts.  I admit, I find this a little ridiculous.  I’ve always been a saver, even as a kid, and sometimes get frustrated that every 23-year-old doesn’t sign up for the maximum percentage allowed in their 401(k) like I did. Now is the time!  It’s not like you have kids bleeding your bank account dry yet.

 

But, hey, those were different days.  I didn’t have student debt (thanks, Mom and Dad!) and housing was much less expensive when I was starting out.  So, maybe I shouldn’t be so self-righteous at the thought of building a nest egg with small change, either on the street or through your phone.

 

The question is, does it work?

Any chance to break out my financial calculator gets me all giddy, so let’s run some numbers, shall we?

 

Let’s say Esther, 23-years old, earns $40,000/year.   She has two options to save:  One is to pick up loose change from the ground and round up all of her purchases to the next dollar and have it deposited to a savings account.  The other is to sign up for automatic deductions from her checking account to her Roth IRA.

 

Option 1:

Esther makes on average 5 purchases per day and rounds up her purchases to the nearest dollar.  Say the round-up averages 50 cents per purchase.  She also is very observant and picks up an average of 5 cents per day from the street.  This adds up to $2.55 per day that is deposited in Esther’s savings account earning 1% per year.  Through the magic of the HP 12-C calculator I can tell you that age 65, Esther would have $35,100.

 

Option 2:

Esther arranges for $229 per paycheck to be deposited in her Roth IRA, reaching the maximum of $5,500/year for contributions.  The Roth IRA is held in an investment account.  With a diversified mix of mutual funds (that she doesn’t mess around with and trade at the wrong times), Esther averages 6.5%/year on her Roth IRA investments until age 65.  Esther’s nest egg would be $550,000.

 

Yep, my way is $514,900 better, but it requires more sacrifice from Esther up front.  Fewer dinners out, more years with a roommate, driving an older car.  All those pesky grown up decisions.  I promise this $229 per paycheck habit will get easier over time as Esther’s earning power grows.

 

Esther’s older self will be so grateful for this early habit of being serious about saving and not just treating it like a rounding error.

 

WTF (What the Finance) is…Asset Allocation?

A term we financial planners throw at our clients a lot is Asset Allocation.  What does that even mean?  Well, it’s only the most important decision you make with your investments!

 

Asset Allocation

Asset Allocation is simply the percentage of your money you decide to put into different areas of the investment markets.  A diversified portfolio will have representatives from the following:  US Big Company Stocks, US Middle and Small Company Stocks, International Stocks, Bonds, and International investments.

 

Asset Allocation usually is represented in a pie chart.  Because everyone loves pie, even if they don’t love talking about investments!  Like this:

asset allocation denver financial planner

 

Notice I used actual PIE instead of investments, so you couldn’t mistake this for investment advice!

 

Asset Allocation is said by many studies to represent 90% of the reasons your investments return what they return.  Others dispute that, but let’s just agree that it’s super-important.  If nothing else, starting your investment decisions with an asset allocation model can help you avoid some bonehead mistakes such as:

 

  • Buying a bunch of investments that are all in the same asset class. Putting you at risk for huge losses when that area of the market doesn’t do well.
  • Selling investments low and buying them high. Staying true to your asset allocation plan allows you to rebalance in a thoughtful way – not panic.

 

What’s the right asset mix (or allocation, if you must be fancy) for you?  It depends largely on the time horizon you have for your investments and somewhat on your risk tolerance.  Working with a financial advisor should help you find a good mix for your situation.

 

Streamlining for Health and Wealth: An Interview with Tam John

I’m happy to welcome back Certified Nutritionist and author of A Fresh Wellness Mindset, Tam John.  Our theme this month, in honor of Spring Cleaning, is Streamlining, both physical and financial wellness.  Let’s start with Tam’s 3 tips to get more of what you want, with financial comments from Kristi thrown in:

 

  1. Let go of what isn’t serving you. Whether it is an unproductive habit like getting cheap chemically laden pizza on Friday night or wolfing down your food standing up, or something else, stop hurting yourself.  As with these examples, you don’t need to cook dinner Friday night but there are many more healthful and satisfying choices.  Inner dialogue that you don’t have time to sit down and chew your food is nonsense.

 

Financial – If you have old investments that you don’t remember why you bought them or what purpose they serve in your portfolio, it may be time to let go.  Ask yourself, would I buy this again today if I had the chance?  If the answer is no, it may be time to sell.

 

  1. Let food fuel you. You won’t need so many extras when you choose food, drink and lifestyle that nourishes you.  Lose coffee drinks, supplements that you really don’t know they benefit you or their quality isn’t assured.  Choosing simple real lively food can be very satisfying and nourishing.  Simple choices allow you to taste the true nature of the food.

 

Financial – Get excited about your savings milestones!  If you set up automatic savings to your emergency fund or kids’ 529 college accounts, pat yourself on the back!  Let your good financial process fuel your excitement for the goals you will reach.

 

  1. Lose perfect. Everybody is perfect as they truly are.  Find your beautiful truth by slowing to your own breath for 10 minutes each day.  Pay attention to how your body feels with your choices of food and drink.  Heed the messages your body is giving you.  Its intelligence will guide you to your beautiful truth.

 

Financial – We’ve all made investments we wish we didn’t or spent money foolishly.  Let those past mistakes go and just focus on what you need to do to get on track for your future financial stability.

 

Tam JohnAre you interested in learning to make restorative choices aligned with your body’s natural design for wellness is transformational for life?  Tam offers a complimentary conversation to find out if her approach is a fit for you.  www.TamJohn.com  Also, check out Tam’s book, A Fresh Wellness Mindset, at Barnesandnoble.com, Amazon, Tattered Cover Bookstores, or Douglas County Libraries.

 

This article is for informational purposes only. It is not intended to treat, diagnose, cure, or prevent disease. This article has not been reviewed by the FDA. Always consult with your primary care Physician or Naturopathic Doctor before making any significant changes to your health and wellness routine.

ALL RIGHTS RESERVED © 2018 EatRight-LiveWell ™ & Tam John  

 

Mind over Money with Dr. Alec Baker – Part Three

Alec Baker, Denver Financial Planner

Welcome to Part 3 of my interview with Dr. Alec Baker of Peak Living Psychology.   To finish off Dr. Baker’s interview, I wanted to end on a positive note.

 

KS:  What are some shared characteristics you see of individuals who are good with their money?

 

AB:  People who are good with their money are self-aware – they know their core beliefs around money and manage their emotional responses to make good choices. They are practiced at saying “no” to both themselves and to others.

 

These individuals have core beliefs that are firm, but flexible.  They also have a solid grasp on their risk tolerance and manage anxiety rather than either being governed by it or ignoring it completely.  If these individuals are part of a couple they have good communication with their partner that helps them make money a functional part of their relationship.

 

Imagine a 28-year-old single man who makes about $80k per year.  He goes out on the weekends and especially likes to go to sporting events. He’s at an age where people are getting married, which means 3-4 invites to bachelor parties and weddings each year.  This young man hates to say no, but he has a spending plan that he consults regularly.

 

It helps him know when skipping a night out or passing on tickets to the Broncos game will help him say “yes” to bigger events without creating credit card debt.  When the 4th invite to a bachelor party for the year rolls around and he sees that it will cost him $1500 for the weekend, he consults his spending plan and declines the invitation because he only has $500 left in savings.  He focuses on seeing everyone at the wedding and knows that good friends won’t hold it against him.

 

In a different demographic, imagine a family of 4 with two working parents.  The parents have a detailed spending plan that includes individual spending for each person and money for the children’s sports and music lessons. They sit down once each month to go over the plan, evaluate where they stand, and make small adjustments as needed.

 

They are open and honest about their spending patterns and their incomes while having a mutually agreed upon arrangement for how each of them contributes to the family finances.  They have spent time learning about each other’s core beliefs around money how it impacts their choices so that they can be compassionate with one another about mistakes and supportive around making necessary changes when they become obvious.  Lastly, they work with a financial planner who can provide them with support and advice around long term planning and their financial legacy.

 

KS:  This concludes our series with Dr. Alec Baker.  What I have taken away is that problems and success with money is often not about money at all, but believes, values, and communication.  Thanks to Dr. Baker for participating!

 

Dr. Alec BakerDr. Alec Baker owns and operates Peak Living Psychology – a full service psychological services practice located in South Denver.  Peak Living Psychology offers financial therapy, traditional psychotherapy, and psychological assessment services to the Denver metro area with a focus on helping individuals and families cultivate the best things in life.  More information can be found at alecbakerpsyd.com

WTF (What the Finance) is Blockchain?

blockchain, denver financial planner

Continuing with my new WTF series that started last month with Bitcoin, today’s explanation (attempt!) is about Blockchain.  A lot of people have been using Bitcoin/cryptocurrency/blockchain as interchangeable words, but they are not the same thing.

 

Cryptocurrency

 

Cryptocurrency is a way for paying for goods and services with money that somebody made up and that is not backed by any country or central bank.  Its value is the perception that it has value, not backed by any actual thing or taxing authority.

 

Bitcoin

 

Bitcoin is a brand of cryptocurrency.  There are many others.  They include Litecoin, Ethereum, Zcash, Ripple, and Monero.  Is cryptocurrency the money of the future?  Maybe.  Is Bitcoin the one that will last?  Hard to say.  Think of the early players of the internet age (AOL, Pets.com) that seemed like such giants at the time, but are no longer as relevant.

 

Blockchain

 

This brings us to the title of the blog – Blockchain.  Blockchain is the method by which cryptocurrency transactions are tracked.  But, blockchain can be used for many other things besides cryptocurrency transactions.  In other words, Bitcoin needs Blockchain to function, but blockchain does not need Bitcoin.

 

Blockchain is Distributed Ledger Technology.  It’s a way to track transactions that’s different from the currently used Centralized Ledger.  With a centralized ledger, a trusted third-party controls data and sends that data out to the interested parties.  What could possibly go wrong?  Ask Target, Equifax, or any other large firm whose centralized data has been breached and sold on the black market to identity thieves.

 

With Distributed Ledger Technology, the transaction (purchase, contract, transportation, etc.) each party to the transaction has a copy of the data.  The shared infrastructure is more transparent and the processing more automated.  Each transaction has its own special code and cannot be deleted from storage.  Data can be added to the Distributed Ledger, but not deleted.

Who is using this?

 

Companies as diverse as Walmart, L.L. Bean, Bank of America, Nasdaq, and, yes, Bitcoin are using blockchain technology to speed up transactions and safeguard data.

 

Here is an example.  Say a large grocery chain has a report in the Denver area of tainted eggs that made some customers sick.  With centralized ledger technology tracking transportation of the eggs, the origin of the tainted egg can’t be specifically pinpointed beyond the most local distribution center.  Every egg from that supplier in the Denver area stores must be pulled from the shelves.

 

Using blockchain technology, each egg carton is tagged with a sensor that has a unique code.  The sensor tracks the transportation of that carton to its final destination.  The egg bought by the sick person can be traced back to the specific batch and supplier it came from.  Only those eggs can be destroyed, saving time, money, and waste.

 

While Bitcoin futures would not be an investment recommendation from most long-term financial planners, watching the future of blockchain technology may be a more worthwhile use of research.

Ideas to protect yourself from a stock market drop

stock market drop, denver financial planner

This 9-year rise in the stock market has been called “the most hated stock rally ever.”  Maybe people are so scarred by the Great Recession that they can’t believe good news will ever happen again in the stock market.  Even though it’s been happening (at least in the U.S. with only minor hiccups) for 9 years.

Here’s the reality.

People are always telling me the stock market is getting ready to drop.  “It CAN’T go any higher,” the people tell me.  Well, guess what – it CAN go higher, and in fact historically, it HAS always gone higher.  In general.  And with some recessions along the way.

 

stock market drop, denver financial planner

 

Hey, I’m not suggesting we will never have another recession.  We will, and they will happen about every 7-8 years and last about 12-18 months.  For the REST of your LIFE.  So stop being so hysterical.

Is this fluctuation normal??

Just like summers are followed by hurricane seasons, the economy is cyclical.  Do you quit enjoying summers because it may rain later?  No!  The best thing to do is get your portfolio ready, and be prepared to ride out the rough seas to get to the lovely tropical island on the other side.

Get your portfolio ready.

The first method to getting your portfolio ready for the next U.S. recession is good old-fashioned diversification.  By that, I mean owning investments that don’t behave the same as the U.S. stock market.  These can be things like bonds, real estate, international stocks.  Even small and medium sized U.S. companies have different price swings that large U.S. companies.  Work with your financial advisor (or even online tools) to come up with a mix of investment types that makes sense for your time horizon.

 

Another old idea is called the Anchor Strategy.  This is useful for money that you’d like to see grow, but have a very specific time horizon for it’s use.  For example, let’s say you want to buy a second home in 10 years and you have $50,000 saved.  You don’t want to put your $50,000 at risk, but you’d like to see some growth.

 

The Anchor Strategy has you buying enough Zero-Coupon Bonds to grow back to your original $50,000 in 10 years.  You could buy 50 10-year maturity zero-coupon Coca Cola bonds at $948.00 each or $49,200 (quote from Fidelity.com on January 17, 2018).  That investment should grow back to the original $50,000 in 10 years, assuming Coca Cola stays in business.

 

The remaining $10,100, you could put into an S&P 500 index fund.  Say, you averaged 7%/year over the next 10 years on the Index Fund investment.  You’d have $19,800 from that part of the investment pool. The total investment in this example would grow to just under $70,000 with very low risk.  Granted, the return isn’t all that great, either, but the peace of mind is there.

 

Again, none of this is personalized investment advice to you, but could provide some talking points the next time you meet with your financial adviser.

Do you REALLY know the difference between tax-free and tax-deferred?

tax-deferred

What’s the difference?

 

Often people need help deciding whether to save for retirement in a Traditional or Roth-type of account; another way to put that is do you want tax-free or tax-deferred?  This question can come up when you are signing up for your retirement plan at work or when you are deciding to open your own Individual IRA.

The brick wall is that most people don’t understand the difference, so how can they make an informed decision?  I am here to help!

Taxes and Savings

Cast your memory back to when your savings account at the bank earned something called “interest.”  Yes, I know it was long ago. But, do you remember that at the end of the year, you would get a 1099 for interest earned? You would add that dollar amount to your income for the year and pay taxes on it.

The same process happens in your non-retirement and non-college investment accounts.  Every year you get a 1099 from your investment company reporting dividends, interest, and capital gains earned in the account.  That income is taxable to you in that year.  These are called “taxable” accounts.

Retirement accounts give us a break from those pesky annual 1099s and tax payments.  This is to encourage us to save for our old age by giving us tax incentives.

 

Tax-Deferred

In a tax-deferred account (Traditional IRAs, Traditional 401(k)s), you get to shelter your annual contribution from income taxes and not pay yearly taxes on interest/dividends/capital gains.  When you take the money out for retirement spending, you will owe income taxes on the withdrawals you make each year from the accounts.

Tax-Free

In a tax-free account (Roth IRAs, Roth 401(k)s), you do NOT get a tax deduction for the amounts you add to the account each year.  The account grows without annual taxes like the Traditional accounts above.  The big difference here is on the withdrawals.  When you take money out of Roth accounts in retirement, you will owe NO income taxes.

The difference.

So, the difference in a nutshell is do you want a tax break now (Traditional) or tax break in retirement (Roth)?  There is no right or wrong answer since we don’t know if your taxes are higher now or later.  Sometimes the best solution is to diversify – use a little of both.

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