fbpx

The Free Financial Advisor

You are here: Home / Archives for successful investing

How I Learned to Avoid Bone-Headed Financial Moves

by 36 Comments

Live and Invest in the Now, Not in the I Hope or I Wish.

A good friend told me last week she wanted to buy some Apple stock.

“Why?” I asked, sounding a little more shocked than a good friend should in casual conversation.

Luckily, she didn’t notice. “Well, it’s low now. Don’t you think Apple makes good products? Shouldn’t we buy what we know?”

“Sure,” I said, hoping now to avoid the issue. Why do I say silly things like “Why?” when I don’t really want to hear the answer?

 

Invest in the Now.

 

I love the old line that goes something like, “Deal with reality the way it is, not the way you wish it were.” Investments don’t perform based on what we hope. If they did, Sirius/XM Radio would be in every damned car by now and the stock would trade at $150/share (I can dream). As for my friend’s question…sure I like Apple products. I own so many of them I have to write quickly because I’m sure Tim Cook is calling with a personal “Thank you” any minute. But Apple isn’t the same company they used to be. They seem focused on recovering rather than creating glory. I don’t think Apple’s headed anywhere good (my personal opinion…not a stock tip).

Back in the late 1990s I was heatedly debating the rapid increase in obesity in the United States with another financial planner named Julie. I adamantly pointed to all the infomercials about workout equipment and vehemently proclaimed that this was where investing was headed in the future. In short, people were going to see the light and get fit. We should invest in sporting goods companies.

She laughed. “Workout equipment. You’re so Pollyanna, Joe. I’ll just go with diabetes drugs.” Guess who won? Julie’s diabetes drugs are in more homes than ever, while the “Stepper” is an afterthought.

Julie invested in the Now. I was investing in the I Hope.

 

How to Invest in the Now.

 

I needed to get it through my thick skull that you can’t predict the future. You can’t expect people to change. You can’t know where the market is headed tomorrow. Sure, you can listen to as many points of view as possible, but in the end, investing is still a bet.

Is that a scary thought….that the market could just crap out tomorrow? It should be. I don’t think people get nearly as afraid of investments as they should be, given the daily level of risk in the markets.

Here are five mantras I tell myself that help me deal with risk in the market and save me from making bone-headed financial moves.

 

5 Reminders to Help You Invest in the Now

 

1)   Investment prices sink for a reason

When a stock/real estate/commodity price is down, there’s a reason it’s low. It’s not a “buying opportunity” that the universe created for your get-rich-quick-scheme. Dig deeper. Why is this real estate low? Is it market conditions? What’s creating the problem? Is it a plant closing in the area? Ask questions.

 

2)   Our brains are too small to understand all the reasons a market moves

We can’t possibly know the reason a stock/real estate/commodity rises and falls, no matter how much homework we do. I don’t mention this to negate what I said above in point #1, but to accentuate it. Complete as much homework as possible, so you know as much information as possible before trading. However, realize that sometimes there is still going to be a reason you won’t understand.

Maybe a huge investor in Taiwan decides to buy $5M of your favorite company today because it’s his birthday. Did you know that was coming? What if a big Australian investor needs liquidity and sells $10M of your favorite stock to purchase a different company locally. Could you predict this?

Whenever you trade, there are going to be reasons that fluctuations occur beyond your comprehension and control.

 

3)   We don’t know what “low” means

Saying an investment price is “low” implies that it will recover. How the hell would I ever be able to predict the future? If the price of a piece of real estate drops from $500k to $400k, how do I know it won’t go to $300k? The simple answer: I don’t.

The second I stopped acting like I had a clue where the market was going the following day was the day my investment results began to climb more quickly. I put more defensive measures in place to control my downside and became more attuned to seeking out as much information about a position as possible before I bought.

Once I knew that I didn’t know what “low” was, the harder I searched to find reasons an investment would decline in value. When it did decline, I knew how to respond much more quickly than I had when I’d guess the market direction. By not guessing, I became open to more outcomes.

 

4)   Read about the future, but realize that news changes everything

News is the destroyer of plans. Once news strikes, forget all of your plans. That doesn’t mean it isn’t important to plan.

It’s important then, to ask yourself, what news could occur that would affect this stock/real estate/commodity. Start with the economy. What would affect the price? Then work down. In this industry what could happen? What internal drivers of this company could affect my investment?

See how I began asking questions? Many of these questions I would have never asked in the days that I thought, “Apple stock is low right now.”

 

5)   Set a strategy to sell the moment you buy

Hopefully now you have (as I did), a better feeling for just how risky any investment can be. Once I know many of the risks (and have a better feeling for threats beyond my comprehension), I can put defensive measures in place to make sure I don’t get my ass kicked.

Investing is often as much about avoiding huge losses as it is about gathering big wins. Think about banks. What makes many banks successful isn’t that they score big on the wins. It’s that they make at least a little money on every deal. Think of all the ways banks protect their downside. Wouldn’t it be great to be in their shoes?

 

Start acting like the bank by practicing these mantras to experience better investment success.

Photo: kenteegardin

What are your mantras and reminders?

5 Great Stock Buying Tips To Practice Today

by 36 Comments

Care enough about your portfolio to practice, practice, practice.

Small investors are a mess. Too many of us want to have a portfolio that looks clean and tidy, but we don’t want to be bothered to practice learning the skills it’ll take. Why not? I just left the Texas High School State Swim Championships, where my kids both swam with the best of the best. Do you know how they got there? Would it surprise you if I told you that it wasn’t walking around saying, “I think I can swim a really fast time this meet?”

Of course it wouldn’t surprise you. People who don’t care don’t read financial blogs, do they? You’re ready to rock!

Since they were 7 years old, my kids have been in the water practicing for this last weekend. Sure, at the time they were just looking to get through the next meet, but because they’re seniors in high school, there’s a big chance that neither will go beyond the speeds they swam in the pool this weekend ever again. All of that work culminated in this last chance at the pool. My daughter swam her fastest time ever and my son swam in 2nd fastest times in all of his 4 events. Practice didn’t make perfect. Perfect practice made perfect. Lots of hours of perfect practice.

 

What does this have to do with stocks?

 

When I see failing investors, it’s often because they want success in the moment. Because anyone can buy a stock, it looks easy, doesn’t it? Who can’t pick the next big winner?

Watching pros trade and then observing Main Street trade you begin to understand the difference. The pro takes a ton more time and care when picking than just asking the dude next to him at work what’s rockin’ for him!

You too can become a better stock picker if you take the time to learn identifiers of a reliable investment. You can pull the trigger on your investments in a better way once you’ve picked the stock.

 

5 stock buying tips to practice today to become a better investor:

 

1)   Practice comparing stocks in a category and read the annual report. I actually love to read the message at the beginning of annual reports. Why? I get a feeling for the business and their focus. You’ll learn who the competitors are, what the product does, and what their concerns are.

Several years ago I happened to be reading the annual reports of GE and a casino back-to-back. Jack Welch, then CEO of GE, wrote about how the company needed to improve on all fronts. He wrote about how empowering their workforce was the #1 goal of the company. He also wrote that someone asked him about the end customer, and why that wasn’t his focus. He said that if he focused on his people, they’d do a better job with customers, and everyone would win. The casino? They talked about the current economic climate and how it was difficult to do anything when people weren’t gambling. They focused on regulatory changes and travel costs. Guess which one won my hard earned money that day?

Don’t stop at the fluff messages written by PR people, though. Take one statistic each week and become familiar with it. Start with PE ratio, then Price-to-Book. Learn to compare revenue and earnings numbers. Dive into insider trades (not the illegal variety…stick with watching what the “big wigs” at the company are purchasing).

2)   Learn to make watch lists, and watch them.  When I created my first watch lists, they were WAY too long and unorganized. I learned through my experience, though. Good stock picking is about creating crude systems and then working your system to improve.

3)   Buy stocks at the market, and avoid the open. How egotistical is it to think that a stock that’s been rocketing (those are the ones you should focus on, by the way), will turn around and reverse course just long enough to descend to YOUR CHOSEN SPOT and then turn around again and shoot to the moon? How omniscient do you think you are?

A key part in realizing the danger of the market is in knowing that you are a little itty-bitty part of a much bigger financial market that you cannot possibly understand. As much as CNBC and Fox Business try to tell you “why” the stock market moved, they have no clue. If you understand that you have no idea where the market is going to go tomorrow you’ll do two things better: 1) you’ll buy stocks you really like on an up-trend, and 2) you’ll pay a hell of a lot more attention to your downside risk.

4)   Buy an option. One time, write a covered call. We’ve written about how these work already. If you haven’t done it yet, what are you waiting for? Sure, you may lose a dollar or two, but what’s the price of education? You’ll never know how it works REALLY until you REALLY do it. Jump in and sell a covered call. It’s the least risky option available.

5)   When you screw up (and you will), don’t think “I’m never doing that again.” Sadly, that’s the message most investors receive when markets turn against them. This is the market teaching you a lesson! Use the lesson! Don’t go off and mess up some other area where you’re clueless!

Photo: Jim Bahn

What “Golden Rules” do you practice when investing outside of “buy and hold?” Put your 5 Stock Buying Tips out there so others can learn!

Is It Time for the Market to Crash?

by 27 Comments

Every once in a while, I like to shake the Magic 8 Ball to see what might happen next.  Recently, I’ve been getting a lot of “Reply Hazy.  Try Again” and “Cannot Predict Now.”  This is very frustrating, since I’m supposedly a ‘professional.’ I’ve taken those answers to mean that I need to do a bit more research on my own.

On a complete side note: You now can just use the internet to “shake” the Magic 8 Ball: http://8ball.tridelphia.net/  Too funny.

Whenever we trend up to either a new high, all-time high, or a cyclic high, I start to get a little antsy…almost like the sensation right before you go over the big hill on the new rollercoaster.  Unfortunately, that analogy works too well.  It seems like whenever we go higher – whenever you start hearing Jim Cramer, etc. telling us all to BUY BUY BUY – a big pullback happens.  Let’s look at where we are today:

This is a Year-to-date chart of the S&P 500.  Up, up, and up some more. (Up 5.35% YTD)

Here’s a chart for the 1-year S&P 500 (Up 10.37%)

And another 5-year chart (Up 11.29% – which also includes the 2008 recession)

And finally, a 10 year chart – up an astonishing 77.14%

Since March 13, 2009, the S&P 500 is up over 119%!  This is wonderful!

But it makes me pause.

As I look through history, and it’s the only guide we have, it seems like every 5-7 years something comes along and knocks the wind out of our sails.  It’s 2013, five years ago was 2008.  Before that was 2000-2002.  Before that was the LTCM mess is 1998.  Then the recession in 1991.  Black Monday in 1987.  Are we on the verge of another recession?  Worse maybe?  A depression?

If you listen to the news, or better yet, the commercials on satellite radio, the answer is an unequivocal “yes!” (I’m talking to you, Mr. “Critical Warning number 6”  guy).

So, what do all the recessions, depressions, declines, flash-crashes, etc. have in common?  The market has always rebounded from them all.  Each an every one.  Ask your grandparents what they thought of investing in stocks in 1940.  Or your parents and grandparents about investing in the 70s.  They’d all say the same thing…”This time is different.”

This time isn’t different.  Today’s apocalypse du-jour is tomorrow’s back page story.

You might think, then, that I must be all smiles all the time and a traditional buy-and-hold forever type of investor.  I’m not.  But neither am I chicken little.  At times like these – when the market’s doubled in just inside 4 years – you must plan for dark days ahead.  If you do, and you make logical, fact-based plans today, when the markets turn tumultuous, you can just pull out the plan you made when you were level headed.

 

Here’s what might be in your “Time for the Market to Crash” plan:

 

1.  A profit maximization strategy.  If you’re like some investors, you’ve continued to buy your bi-weekly allotment of 401(k) funds and Roth IRA stocks over the past several years.  That has served you well. It’s time to make sure you have a profit strategy in place.  If you own individual stocks, set a stop-loss price on your positions.  If you have mutual funds, set a day every two weeks or so to review the price.  Write down at what price you’ll sell to lock in some profits.  In my business we try to aim for a trailing 10% stop loss.  For example, if I bought GE at $7, and today it’s at $23, my stop-loss might be at $20.  I’ll continue to adjust that upward as the stock moves higher.

2.  A cash accumulation plan.  Investors who were well prepared for 2008 weren’t prepared by selling all their positions in 2007, but rather they had accumulated a large cash position so that when GE was trading at $6 a share and Warren Buffet plunked down $5 billion, they could do the same.  Since the market’s near an all-time high, it may be time to start directing some of your monthly savings into a pure cash position – ready to strike when the fire sale happens.  Whenever it happens.

3.  A plan for choppy markets.  What happens if the market doesn’t do anything, a la 2011?  Can you still make money?  You sure can.  Consider investing in options, high dividend paying stocks and bonds, as well as investments that profit from volatility.

4.  A plan to educate yourself.  It amazes me how many people I see and talk to each and every day who are completely OK with being an idiot.  You don’t have to go get a master’s degree in actuarial sciences, but it doesn’t hurt to read a little (unbiased) commentary about stocks, investing, the markets, and the history of all those things.  Being prepared for the next “event” whatever it is, means more than just having money set aside in the right places.  It means having a prepared mind as well.

No one knows what’s going to happen tomorrow in the market.  Anyone who says they have even the faintest idea are fooling themselves.  But, that doesn’t mean you should just throw in the towel and bury your head in the sand.  Winston Churchill once said, “Plans are of little importance, but planning is essential”

Make sure you take time this weekend to do a little planning.  Your investment portfolio will thank you later.

All charts from Big Charts

Stock Market Punishment: The First Lesson of 2013

by 38 Comments

The podcast team is giving the interns a well-deserved week off, so lucky reader….YOU get a FREE extra blog post from Average Joe. I know. Pinch yourself. It’s real. Almost like our awesome rare Saturday post this week.

Look at what the media did to you again.

The sky is falling! Fiscal cliff! Doom! Stock market will be in shambles! Hide your children!

Big ratings for the financial channels, huh?

If you listened and moved your money out of the market, it destroyed your chances for a great return in 2013.

MAYBE you’ll recover if you jumped out before the big two-day run up in stocks. The chances, though, are against you: historically, if you miss the 10 best days in the stock market, you lose about 5.18%, or nearly half your return for the year. If you paid trading fees to avoid the “fiscal cliff disaster,” this only exacerbated your problem.

Here’s what the panicked investor missed in the S&P 500 last week:

December 31: 1.7%

January 2: 2.5%

January 3: –.03%

January 4: .05%

In short, if you missed two days last week you lost out on 4.2%. Those types of returns don’t come around often.

By the way, don’t go in the comments and tell me that “all you lost was a little time….” go back and read the stats above first. You lost a ton.

 

let’s calculate the cost of listening to the media on this one

 

Suppose you’re 25 years old and you have managed to save $10,000 into your 401k plan. You lost out on $420. Sounds like no big deal, right?

Let’s use the rule of 72 to determine just how much you really lost:

The rule of 72 says that if you divide the interest rate you think you’ll achieve into 72, you’ll come up with the approximate number of years it’ll take your money to double. Cool, huh?

Assuming that you wanted this money for retirement (401k, right? That’s not your “mad money” account….I hope), we’ll use age 70 for your withdrawal. We’ll also use a realistic return assumption of 8%.

8% / 72 = 9 years for your money to double.

So, that $420 you lost wasn’t really $420, was it?

It would have doubled when you were 34, 43, 52, 61, 70.

Your “little” $420 wasn’t $420. By 32 it was $820. At 41 it was $1,640. By age 50 you’d lost $3,280. At 59 the gap was $6,560. When you went for the money at 69 you had $13,200 less.

 

it gets worse

 

If you’re 30 and gambled $50,000 that the market would tank, it’s uglier. Let’s also use 9% rather than 8%, since people looking long term historically have used 10% as their assumption (which I believe is too high, BTW).

Check out what more money and a “little” one percent difference do to your loss:

Rule of 72 = 8 years for money to double.

Funds double at 38, 46, 54, 62, 70

$2,100 lost during two day run-up in market.

= 4,200 loss at 38, 8,400 loss at 46, 16,800 at 54, 33,600 at 62 and

…$67,200 at age 70.

On our “What Did We Learn in 2012” podcast, expert after expert told you the same thing: don’t listen to national media finance porn and don’t chase short term results.

If you did, I’m going to play Dr. Phil now: How’s that workin’ out for ya?

 

Photo: Joe Shlabotnik

Investing Myths: Four Traps That Catch Amateurs

by 24 Comments

Why do so many do-it-yourself investors perform far worse than they should? How do you make sure and avoid some of the potholes that most amateurs seem to step in?

In theory, people managing their own funds should do well. Today’s investor has access to more tools, more research, and more information than ever before.  You can easily view data in near-real time, putting the average person on par with professional brokers and large brokerage businesses on Wall Street.  It’s easy to track company performance, get up-to-date and late breaking information just by opening an app on your phone.  What a world!

But, with all this information available, you’ll need to filter out truisms, half-truths and outdated ideas. Managing your own money isn’t tough, but it’s easy to fall into traps.

Let’ s walk through some top myths today’s investors need to realize aren’t true anymore.

First, a diamond may mean forever, but buy and hold isn’t.  You shouldn’t just buy a stock and close your eyes.  Occasionally, good companies have badly performing stocks.  Instead of “buy and hold” investors should “buy and pay attention.”  You should carefully select your positions based on the information at hand, but be sure to have a well-thought out exit plan before you buy the stock.

Second, performance isn’t the only thing that matters….and I’m not just saying that because I’m a guy. Historical performance is worth noting, but it’s not, as they say, indicative of future performance.  We do believe, however, that performance does persist – there is investment momentum.  What matters more than past performance? Simply put, volatility, tax considerations and overall asset allocation should be equally considered. It’s paramount to create a portfolio that compliments your long-term investing goals. Remember that the ones that shoot up fast are also the ones that crash quickly. Volatility is a two way street.

Listen to ways your investments could be more successful on our podcast: 2 Guys & Your Money Episode 15: Top 5 Ways to Improve Your Investment Returns

Third, charts don’t only make sense for professionals.  Some people believe only “technical traders” use charts or that they’re somehow outdated relics from a bygone era.  Not true.  Charts can tell investors a great deal about what’s going on in the markets and with any particular holding.  Charts aren’t crystal balls – but they can help you manage risk. How much volatility has a position had in the past? How does today’s price compare with past prices? When does the position pay dividends? How has this position grown relative to its peers? All of these are easily answered by reviewing a few charts.

Finally, don’t try to always buy at the bottom.  This one’s really dangerous.  How do you know it’s the bottom?  Investors are egotistical beasts; we think that because it looks like the stock/bond/real estate/whatever is going to turn around, our few dollars are boing to be perfectly placed. We’ve seen investors buy stocks at $10 that once were $100, only to find out that they were not even close to the bottom.  Remember two things: 1) you’re nobody in the market, and your brain is too small to call the bottom of the market (sorry if that offends you); and 2) investment prices fall for a reason. If a position is “on sale,” it’s important to know why it’s fell before you make a bet that it will rise again from the ashes. The person who buys a stock that’s near its yearly low is betting their purchase is going to be the reason it turns around.  Unless you’re Warren Buffet, I wouldn’t be too sure.

The biggest rule when it comes to investing is not to try to ”win big” but rather “lose small.”  Manage and know your risk before establishing a position and you’ll go a long way toward becoming a more successful investor.

A Look Into the Post-Election Crystal Ball

by 17 Comments

The votes are in and I’d like to congratulate President Obama on his re-election.

This was a hard-fought campaign on both sides, and since we now know who will occupy the White House for the next four years and the Senate and House for the next two years, some of the uncertainty we’ve been experiencing in the stock market should finally begin to dissipate.

Many of you are wondering what the future holds for stocks and the market – and while no one knows for sure – including me, I do have a couple of themes that I think will emerge (or continue) over the next few years.

Theme #1 – Corporate Cash on balance sheets

There are trillions of dollars sitting on corporation’s balance sheets that were awaiting the outcome of the election.  Many were anticipating a Romney election which would’ve brought with it likely corporate easing, but now these large multi-national companies have to do something else with the cash sitting overseas.  If they repatriate it, they’ll be subject to double taxation, much like they are when they issue dividends, and at the highest corporate tax rate in the world.  What I expect in the near term is an increase in company stock buy-backs, which have the immediate impact of lowering supply of that company’s corporate stock.

Immediate effect: Stocks with large cash positions might be worthy investment positions and short term winners.

Theme #2 – CNBC’s Fiscal Cliff

The producers at CNBC can’t help themselves. The phrase “Fiscal Cliff” sells heaps of advertising, so you’ll hear this over and over in the upcoming weeks.  Since the House controls the country’s purse strings, and the President and the House have very different ideas on how to spend money, I expect continued gridlock up to and through the so-called “fiscal cliff.”  Obviously, this will be resolved at some point, but it will provide uneasiness in the markets until it’s behind us.

Immediate effect: Lots of waves in the financial markets. Probably higher VIX (volatility) index.

Theme #2 ½  – Budgetary Issues Related to the Above

I don’t know if it will be a retaliatory-type reaction, or just purely out of ideology, but I expect the continued gridlock in Washington to impact all of the sun setting provisions that have been put in different tax-law extension bills over the last several years.  For example, I think the severe defense cuts will take effect at the beginning of the year and the entitlement spending to continue.

Immediate effect: See Theme #2.

Theme #3 – Weak Dollar and Quantitative Easing

The U.S.’s credit has been downgraded twice already, and it appears headed for another downgrade as we reach our self-imposed borrowing limit of $16 trillion.  Obviously, the Congress and the President will just kick that down the road a bit, but that means continued weakness of the dollar compared to other currencies worldwide.  This is bad news if you’re travelling to Japan or Europe for vacation, because our weak dollar buys less Euros and Yen, but the large, multi-national companies we discussed earlier will benefit from a weak U.S. dollar since they make money in all currencies.  Secondly, our fearless economic leader, Big Ben, has promised to continue to print vast amounts of dollars as long as the government continues to run deficits.  Looks like Ben’s printing money for a long, long time…which could lead to inflation

Potential Headwinds

If there are any market headwinds, it will be the short-term issues relating to the pending fiscal cliff and their respective tax increases.  Undoubtedly, the 3.8% tax on interest, dividends and capital gains that takes effect in 2013 will have an impact as well as the continued implementation of Obamacare.  Since healthcare is mandatory for those employees who work over 30 hours per week, expect to see companies continue to reduce their workforce’s hours to 29,as the CEO of Darden Restaurants (Olive Garden, Red Lobster, etc.) has already announced.

So What Does That Mean for Me?

I think the best bet for many investors is to continue to chase yield.  With bank accounts earning nearly 0% and no rate increase on the horizon, the fact that the S&P 500 averages 2.2% will provide some base level of market support over the coming years.  As confidence comes back, the market should also bounce back accordingly.  It’s sad, but President Obama is probably a “lame duck” president, at least over the next two years, as the House will continue to block all attempts he makes at advancing his agenda.

Ultimately, it’s more of the same.  The uncertainty should be ending, the weak dollar means good things for the large multi-national companies.  I know many were surprised by the outcome, but we are a country that comes together.  Let’s focus on the future and not on the past.

Five Money-Saving Tasks That’ll Help You Cha-Ching! in the 4th Quarter

by 28 Comments

I love the sound of the cash register ringing, don’t you?

If you’re going to be successful in your financial life, treat it as if it’s a business and you’re trying to hear that awesome cash register sound. If you don’t, you’ll always prioritize yourself behind more “important” activities like your job (nevermind that the job is there to help your net worth…that’s probably the subject of another post).

Every business has a mandatory list of activities that can’t be ignored. So does your financial life.

Here are five items that MUST be on that list this quarter:

1) Mutual fund capital gains. Even if you don’t have mutual funds outside of an IRA now, you should learn how these rules work. When the manager (or system, for an index fund) trades stocks or bonds inside of the fund a capital gain is generated. Someone has to pay it, and there’s no real fair method, so the mutual fund company declares a date and divides the gain among shareholders of record. Even if you didn’t sell the fund, you’re responsible for your portion of the manager’s buying and selling.

With results so far in 2012 looking up, there’s a good chance you might get hit with a tax bill this year. Avoiding this tax is legal and easy. Find the dates the fund declares capital gains and transfer your money to a different fund in the same family. This avoids fees for switching and the manager’s capital gains tax.

Grab a calculator before you move any money. You’ll still be on the hook for capital gains taxes you generate by selling as well. The cost of switching might outweigh the savings you’ll realize from avoiding any taxes created by the fund manager.

2) The lemon drop. Hoping to skim off some of that skyrocketing Apple stock? Cover a portion of your capital gain by also selling your brother in law’s “can’t lose” loser. There’s no time like now to weed your portfolio of positions that aren’t going anywhere. Although you’re only allowed to show $3k in net capital losses each year, leftovers can be carried over to deduct in future years.

3) Charitable giving. Hopefully you’ve given to your favorite community non-profits throughout the year, but if not (and especially if you itemize), you’ll want to make cash and in-kind donations in before December 31. Keep receipts for your gifts. The IRS has tightened charitable giving laws in recent years.

4) Estimate your taxes and decide when to pay property taxes. If you own a home winter taxes are deductible either in December or January, your choice. Did you receive a big bonus this year? Take the extra deduction now to help lower your tax due. If you make too much, it might be a better idea to wait until next year. High income earners aren’t allowed to claim all of their itemized deductions (ask your accountant about whether you’re subject to phaseouts).

5) Goal evaluation and setting. The 4th quarter is the perfect time to begin thinking about your short and long term goals. Did you hit your benchmark in 2012? If not, what are you going to change in 2013?

While people generally talk a good game about benchmarking, most of my clients were surprised when I pulled the actual number out of their plan to see if they’d hit the mark during a year. By sticking with actual data and avoiding the “Yeah, it feels like I had a good year” you’ll be able to make the necessary course corrections to save the right amount of money in the upcoming year.

I’ll be addressing each of these areas in more detail during the course of the quarter, but do yourself a favor and schedule these tasks now. These are five activities that you don’t want to miss!

What other events are on your 4th quarter financial calendar?

Enhanced by Zemanta

Old Savings Bonds Might Be Your Most Valuable Investment

by 14 Comments

It’s Thursday. I’m grabbin’ some coffee while OG takes the driver’s seat….

Recently, a client emailed me a peculiar list of dollar amounts and dates. Each was followed by a one or two letter symbol.

What the heck?

Finally the lightbulb went off – this was a list of US Savings Bonds we’d discussed months earlier that she’d “found” in her safety deposit box. Her question: What to do with all those bonds?  Cash them in?  Keep them?

 

The Savings Bond Conundrum

 

Clients raise this question at least once every couple months – and I’ll bet as more and more baby-boomers head into retirement the frequency is only going to increase.  For some reason, people seem to think analyzing savings bond interest is a complicated financial problem that only the best advisors can solve.  Nothing could be further from the truth – let me show you exactly how I determine whether to keep or cash in each bond.

Small Numbers of Bonds

If you own only a few bonds, I’d recommend using the US Treasury’s savings bond calculator. This tool helps you  quickly estimate the value, interest accumulated, yield, next interest payment date, and final payment date.  All you’ll need is the issue type (E, EE, or I), face amount, and the month and year.  All of that information is found on the face of the bond.

Lots of Bonds?

If you’re the Donald Trump of savings bonds, or if you want to track the bond’s value over longer periods, you should download the government’s Savings Bond Wizard tool found at http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm.  The Savings Bond Wizard allows you to save the file and refresh it each month with the most updated values. Here you can store information about each of your bonds and easily compare interest rates and the total value of your savings bond empire.

Is Your Bond Still Making Money?

Here’s a tip: don’t hold on to bonds that no longer pay interest.

After thirty years, US Savings Bonds mature and the government shuts you off like a disinherited trust fund baby.  Most bonds reach their face value somewhere between 12 and 15 years after issue and continue to pay interest until year 30.

It’s foolish to keep a bond past 30 years.  Don’t do it.

One client brought in a savings bond that stopped paying interest before Kennedy was president! Imagine how much money that’s cost him.

 

The Moment of Truth

After you’ve used all of your fingers and toes (AND one and a half neighbors’ fingers and toes) to determined whether or not it’s still paying interest (let’s assume it is), now it’s judgment time:

Can you invest the proceeds at a better rate of return than you’re receiving from the government?  

The yield on your savings bond is risk free.  Those two words are hard to beat.  I’ve seen bonds from the 80’s paying 6%. Can’t beat that. I’d keep those.

Final Step

Set a reminder to review your bonds again a few years down the line.  If you have a bond or two that you’d like to redeem, schedule it in advance.  Don’t forfeit interest because you procrastinated.  Keep an updated bond inventory and review it periodically just as you would any other part of your portfolio.

Savings bonds are one of the best ways to lock in guaranteed interest – especially if you have some from ten or twenty years ago.  Many clients are surprised when I tell them to keep their bonds; sometimes it’s in their best interest to do so!  Many times people think savings bonds are a waste of time and money. My take:  In today’s low interest rate environment yesterday’s bonds may just be a gold mine.

Why You Shouldn’t Invest Like President Obama

by 25 Comments

Imagine my surprise over the weekend when I discovered President Obama’s portfolio holdings. Although I’m crafty, I didn’t sneak into the West Wing; the President is required to file tax returns and investment documentation. Most investment strategies show up on these forms.

The biggest surprise?

The President can pick fights with Wall Street because he largely doesn’t rely on them for investment returns. Less than 10% of his portfolio is in equity investments, far less than is recommended for most people his age.

After fighting in the trenches as a financial advisor for well over a decade, I can see the method behind his madness. Don’t try to invest like he does. It probably won’t improve your retirement.

Let’s review:

The President’s Portfolio

– Around $500k in cash

– Between $50k and $100k in Vanguard S&P 500 Fund

– Over $1M in Treasury Bills and Notes

– 529 College Savings Plans

 

Here are the top five take aways:

1) His version of “safety” and yours probably aren’t the same. The President’s massive investment in Treasury Bills suggests that he’s looking to preserve capital, not grow his nest egg. Treasuries are among the lowest risk/lowest reward investments available.

Why he’s different than you:

You probably can’t afford to keep such a large percentage of your portfolio in low-earning investments. A President stands to make millions in the future on book deals, speaking engagements and consulting. His future investment plan can easily include some HUGE assumptions for future cash infusions.

If you’ve calculated your personal returns based on future income, are you sure that your numbers are realistic? I often see plans showing individuals working well into their 70s. Even if you’re healthy enough to work that late in life, do you want to include it in your plan? My clients working in their 70s largely did so because they enjoyed it, not because they needed some benjamins to pay the electric bill.

2) You can tweak your returns without adding much risk. He helps his anemic rate of return by moving some of his huge government bond exposure to Treasury Notes. The difference between treasury bill and treasury note gives him an extra 0.5% in this climate because of the longer duration.

How this applies to you:

For you and I, an extra 0.5% doesn’t help, but we can take similar steps. I wrote this spring about how adding high yield bonds can boost returns while not appreciably increasing risk. Look for investments where the perceived risk is higher than the actual risk and find greater returns. (I’d also put GNMA bonds in this category. They garner a much higher return than Treasuries and the actual risk, while greater than Treasuries, isn’t appreciably higher for the average investor).

3) Watch your fees. The President bets on the US economy by investing in the S&P 500. Instead of relying on investment managers for a return, he uses the Vanguard S&P 500 Index mutual fund.

Here’s a better method than the President uses:

In some cases, an exchange traded fund can lower fees even further. The iShares ETF version of the S&P 500, IVV, features an incredibly low 0.09% cost ratio, while the Vanguard fund the President uses has a still-low internal expense of 0.17%. The only difference? You’ll probably pay trading costs to buy the iShares ETF, while the Vanguard fund is free to purchase in most brokerage accounts. If you’re buying over only a few trades and plan to hold the fund for a long period of time, IVV might be a more cost-effective option.

4) He keeps a large cash reserve. $500k in cash is clearly too large for the average person, but that would be nice, wouldn’t it? Conservative investors should keep enough money to endure a long layoff in money market accounts.

Check out Don’t Be the Emperor With No Emergency Fund for more details on why this is important.

5) Invest in what you know. The President is betting big on future income streams, not on investment returns. As it sits, his portfolio isn’t huge for a man of his office, but I’m sure he knows that it will be in the future. Speaking engagements, consulting and book deals should allow him access to plenty of money without risking his investments in the stock, real estate, or commodities markets.

An example that might be closer to home:

I had clients once who herded cattle. They earned a 10% return year-over-year on their herd, without a ton of variation. We kept that the centerpiece of their portfolio, while creating a diverse mix of other investments to round out their returns. They were surprised I wanted them to continue buying cows. “Investment advisors want you to only use stocks,” Bryan said. I agreed with him. “I’m a fee-based advisor. You paid me money to give you the right direction. I don’t need to make money on convincing you to invest through my firm. If I were you, I’d stick with cattle because it earns a great return and it’s what you know.”

My last takeaway (and I won’t number this one):

The President appears to need a good investment advisor. He either isn’t comfortable with a suitably well-rounded portfolio or just doesn’t have the time. Either way, he’s lost considerable money to either not being educated in investments or to being too busy to care. The right advisor can help him boost returns, tweak his tax strategy and still focus on his “day job” so he doesn’t feel like a Wall Street trader. Investment advisors aren’t for everyone, but in this case, I think it’s warranted and a great idea.

Mr. President, although I’m no longer practicing, I’m ready if you need help. I’m sure the Secret Service can figure out my phone number.

 

That’s my story, now it’s your turn: What investments could you improve in your portfolio?

So You Want to Manage Your Own Money?

by 29 Comments

A friend texted me this morning.

“We should talk soon. Julie is coming around to the idea of us managing our own money.”

It seems easy, right? My initial reaction to my friend was, “That’s awesome!” because it is. There are few things more satisfying than achieving your financial dreams and knowing that you climbed the money management mountain yourself.

No “money-god” came down and did it for you.

You didn’t need the Powerball numbers.

You actually plotted a financial course and landed safely at your destination.

For my friend, and for you if you’re about to embark on this journey, there’s good news and bad news: the good news is that it isn’t difficult to manage your own money.

The bad news is that to effectively manage your own money you’ll need to be ready to face some fairly difficult tasks.

 

Two Types of People

 

When I was a professional advisor, I’d meet some smart people who wanted to jump into their own money management and wanted an expert with an opinion to look over their shoulder, hold them accountable, and make sure they didn’t miss any “I” dotting or “T” crossing.

…and then there were other, often equally-smart people who wanted to hand it over to me and have someone else take care of it for them.

Believe it or not, most advisors I knew preferred the latter type of client and loathed the first one. Someone questioning their motives? Someone asking “why are we doing it this way?” all the time? That’s preposterous!

But if you’re going to ever learn how to manage your own money, you’ll need to be the first type, not the latter.

The steps aren’t difficult:

 

The Steps to Managing Your Own Money

 

My kids are reading myths in school. In the story of Hercules, he faces a series of challenges to achieve is goal.

I look remarkably like the guy on top, but I’m a little paler and not quite as naked. And I have less hair.

You’ll have a series of gauntlets in your way too, if you want to manage your own money.

1) Write out your goals. I’m not talking about writing:

Retirement

College

New Boat

Fall Deeper in Love

Real goal writing has a specific time, dollar amount and vision attached.

I want to be able to live on $65,000 per year (in today’s dollars) by age 65 without having to work every day. With this money I’d like to: (here you write your bucket list, which should include visiting every NASCAR track in the country).

That’s a goal you can shoot for and be excited about (except for visiting the track at Pocono, which I thought was pretty overrated).

2) Next, you write out all the hurdles in your way.

– I have $25,000 in credit card debt (separate by interest rate, term, amount)

– I have to put two children through college

– I know nothing about money management

3) Then, you find one of the nearly bazillion financial calculators online (you can use our powerful little PlanWise calculator here on the site!) and figure out how much you need to save to reach your goal.

– I need to save $250 per month to reach my dream if I achieve an 8% return.

Armed with your money management return information, now you figure out how to come up with $250 per month.

– Tweak your budget

– Pay down debt

– Take on more work

4) Before investing, though, you have a big problem. You have to insure yourself against some of the huge “what if’s” out there for you and your family:

What if you die?

What if you are disabled?

What if you have a car accident?

You’ll need to create a will and evaluate insurances.

5) Finally, you begin the heavy task of research to find investments that have historically achieved 8%.

 

No Step is Difficult, You Just Shouldn’t Miss One

 

As you can see, when you take on the hard task and decide to manage your own money, getting it right will be difficult. Each area demands time and energy:

– Planning, milestones and tracking

– Budget, income advancement and debt reduction

– Insurance need projection and comparison analysis

– Estate planning

– Investment allocation, picking and monitoring

These are five basic money management steps, but each packs a punch!

 

I Don’t Mean To Imply You Can’t Do It

 

As soon as I finish this piece I’m calling my buddy and talking him through these points. Before he takes on the task, he should know how long the financial security road really is. Going in with your eyes wide open is half the battle if you plan to win the “manage your own money” game.

He can do it, and so can you!

Enhanced by Zemanta