Archive for Financial Education

It’s Not Me, It’s You: Why your financial planner is crabby

financial planner

Since the stock market volatility of October, my financial planner friends and I have been pretty crabby.  “Well, of course,” you say, “down stock markets are terrible for investment advisors.”

 

Nope, that’s not the problem at all.  Getting mad at the stock market for going down is like being angry at a toddler whose nap you skipped to run errands and is now having a meltdown at the grocery store.  It’s the grown-up’s reaction that needs to be managed.

 

Who is the grocery store grown-up in the down stock market analogy?  Hopefully it’s the investor.  Handling the temporary fit in a calm manner and going about her business. But some days I have my doubts.

 

The stock market goes down some years/months/days/hours/weeks.  It MUST go down occasionally in order for it to go up.  Down stock markets are healthy, regular, and to be expected for good overall economic health.

 

If there is no risk, there is no reward.

 

If you don’t experience losses sometimes, there is no reason to expect gains.  You’ve heard it all before.  You tell your financial advisor that you are ready to take risk and get growth in your investments.  And yet..

 

You still are tempted to make the same bonehead moves every time the stock market experiences a down day.  You call your advisor and ask to move all your money to cash when the US stock market goes down by 3%.  When, of course, your advisor didn’t have you in all US stocks to begin with because he forced you into a diversified portfolio even though you WANTED to be all in US stocks 3 months ago because that’s what has performed the best the last 2 years.  Geesh!  You see where this is going?

 

It’s not the market, it’s the investor that is the problem.

 

So, please, for the sake of your investment advisor’s sanity, remember just two factoids:

 

In the twenty years preceding 12/31/2015, the S&P 500 averaged 9.85%/year compared to the average investor return of 5.19%/year. *  This is because investors tend to put more money into investments when they are high and pull money out when markets are low.  Buying high and selling low is no way to make money – ask any store owner.

 

You never know when to get back in after you’ve bailed out.  Missing a few great days can lead to sub-par performance over decades.  For example, a hypothetical (because it NEVER happens) investor remained invested in the S&P 500 Index from 1998 to 2017 (5,036 trading days) would have earned a 7.20% annualized return. Miss the 5 best performing days and the annual return shrank to 5.02%. Miss the 20 days best days, the returns were cut down to just 1.15%. If the 40 best-performing days were missed, an investment in the S&P 500 turned negative, with $10,000 dropping to $5,670. **

 

If you’d like a professional to help you craft a diversified portfolio you can live with for the long run, with occasional rebalancing, e-mail me to set up an appointment.

 

Just not right now.  I’m in a bad mood.

 

*Source:  https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519

 

**Sourcehttps://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

 

Defined Maturity Bond Funds: A New(ish) Investment Option

maturity bond funds, denver financial planner

In times of uncertainty (rising interest rates, tariff wars), investors understandably want predictability, even if it means sacrificing return.

 

Cash (savings accounts, money markets) offer stability, but not much interest.  For people who are working, I suggest you keep 3-6 months of expenses in cash for emergencies and invest the rest for longer term growth.  For retirees, a bigger cash cushion (1-2 years of expenses needed from your portfolio) makes more sense to insulate your need to pay bills from a recession.

 

Bonds offer better interest than cash, less volatility than stocks, but still do rise and fall in value.  Buying individual bonds can relieve some of this uncertainty.  Bonds mature at a pre-determined date and pay a set amount of interest in the meantime.  However, bonds sell in $1,000 increments, so it can take a lot of money to build a diversified bond portfolio.

 

Just as with stocks, most investors get their exposure to the bond market through bond mutual funds.  Unlike individual bonds, bond funds invest in a large pool of bonds.  As bonds in the mutual fund mature to cash, the fund manager buys more bonds.  These products don’t have a set maturity date.  The interest earned is usually better than money markets, and the principal of your bond fund can grow over time.  The principal can also drop, with no set date when it might come back up.

 

Here’s another option

Enter a new-ish investment option:  Defined Maturity Bond Funds.  Sometimes they are also referred to as Target Maturity Bond Funds.  These mutual funds invest in bond that all mature in the same year.  As the bonds in the fund mature to cash, they are not reinvested to buy more bonds.  At the end of the defined year, the whole fund will be in cash, effectively maturing like an individual bond.

 

These products offer an interesting way to take some of the uncertainty out of bond investing without the hassle and high capital need of creating your own bond ladder or bond portfolio.

 

In researching the investment firms offering Defined Maturity Bond products, I’ve seen some things to look out for:

 

 1. Not all of the big brands are offering them. And those who do can have a limited selection.  For example, Fidelity offers municipal defined maturity bond funds, but those aren’t great for IRA investors.    Vanguard, an investor favorite, doesn’t seem to be offering the products at all.

 

 2. Much of the inventory in this space is sold as ETFs (Exchange Traded Funds), not mutual funds. This means that prior to maturity, the shares of your bond ETF trade back and forth between investors like a stock or bond.  The perception of the value of the ETF, not its net asset value (NAV) is what determines an ETFs pricing before maturity.  With a Defined Maturity Bond ETF, after the holdings all mature to cash, the cash is sent to shareholders and the fund is liquidated.

 

If you have questions about how different bond products fit into your portfolio, contact me for an appointment!

 

WTF (What the Finance) is a Roth 401(k)?

roth, denver financial planner

More and more employers are making the Roth option available in their 401(k), 403(b), and 457 plans.

 

What does this mean?

 

Well, the default contribution to retirement plans has always been tax-deferred.  Meaning, you are legally hiding income for the current year, enjoying paying no taxes on the dividends and capital gains on the account, but pay income taxes on the withdrawals at retirement.  Basically, kicking the tax can down the road on retirement investments.

 

In the mid-90s the Roth IRA was invented to allow contributions to an IRA where you didn’t tax an up-front tax deduction, but growth in the account could be withdrawn tax-free at retirement.  Great deal!

 

In 2006, Roth contributions to 401(k)s became available.  This allowed the saver to choose to save tax-deferred, tax-free, or a combination of both.  Adoption has been slow, but now about 70% of employers offer the Roth option in their retirement plans.

 

Why consider using a Roth 401(k)?

 

First, the pesky income limitations that keep those earning over $133,000/year ($186,000 for couples) from contributing to a Roth IRA are non-existent in a Roth 401(k).  Any plan participant can elect the Roth option.  Also, while a Roth IRA has a $5,500/year ($6,500 for ages 50+) contribution limit, the Roth 401(k) allows up to $18,500/year ($24,500 for 50+) so you can really build that tax-free retirement asset.

 

It’s hard to think about giving up your nice top-line income reduction from a tax-deferred 401(k) contribution but consider this:  If all of your money is saved tax-deferred, every time you withdraw in retirement a tax bill is triggered.  Roth distributions create no tax bill, and when you are retired, you will love having a pool of money that is available tax-free.

 

And remember, it’s not an all-or-nothing decision.  If you are interested in the idea of the Roth 401(k) but worried how losing the deferred benefit will affect your paycheck, start with just a little at a time to Roth.  You may decide to increase the percentage going forward.

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

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