Best Financially or Best For You?

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Some people might think my job is to make my clients as much money as possible. Some people might think my job is to make my clients the highest rate of return on their investments as possible. Generating investment returns within a client-agreed-upon degree of risk is the job of an investment advisor, but as a wealth advisor, my job is two-fold. Not only do I serve as my client’s investment advisor, I’m also charged with being my client’s financial advisor. Of course, I’m always plenty focused on investment strategy, but I’m simultaneously focused on helping my clients get what they want out of their lives.

For example:

• How much cash should you hold? From a strictly financial perspective, conventional wisdom says three to six months’ worth of living expenses if you’re still working and one years’ worth of living expenses or more if you are retired. That is my baseline recommendation with my clients, too, but if you find yourself constantly worked up about what is going on in the world and holding a little more cash would lead to less stress during the day and better dreams at night, then go for it! It’s not necessarily best financially, but it may be best for you.
• How should your portfolio be allocated? Based on an investor’s age, stage in life, and withdrawal requirements, historical return patterns generally lead most good investment advisors to roughly the same recommended allocation, but what if bear markets cause you indigestion and angst to almost a medical level? Given current interest rates and bond yields, it is absolutely critical to have enough allocated to stocks to have a chance to sustain or grow a portfolio over the long-term and to have a shot at protecting your purchasing power against inflation, but within reason, if your indigestion and angst could be soothed by having a few more CDs and bonds and a few less stocks, then why not? It’s not necessarily best financially, but it may be best for you.
• How much should you withdraw? Financially speaking, it’s rarely advised to withdraw unnecessarily from your investment assets, but if you don’t, what is going to happen?  You may end up with some slightly happier heirs?  Your favorite charity may one day receive a bigger check? So often I see people do everything in their power not to withdraw money from their hard-earned assets because they are trying to keep their nest egg as big as possible. Now if a client’s financial stability or financial security is even remotely endangered by a potential withdrawal or their rate of withdrawals, I certainly raise the issue, but there are times after people have shared their dreams with me where my advice is for them to simply spend some of their money. You’ve always wanted that sports car? Get the car. You’ve always wanted to take your entire family on a beach vacation? Take the vacation. You want to help your family financially now when they need it versus later after your death when they potentially won’t? Help your family now. You want to give a substantial gift to a charity or cause you support so you can see the impact? Give the gift. It’s not necessarily best financially, but it may be best for you.

In my opinion there are two kinds of returns: your return on your investments and your return on your life. I would advise that you always be reasonably cautious when it comes to your financial situation, but when it comes to your comfort, confidence, happiness, satisfaction, and fulfillment, strongly consider that what may be best for you may not always be best for you financially. Return on investment is important, but so is return on life!

-Tom

What Fuels Your Fire?

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I love fires. There is something about them. They are exciting. They are always changing. They are magical.

I believe our lives are sort of like fires. Life can be exciting. Life is always changing. Life can be magical.

This leads me to a question I was recently asked at a conference I attended, and now I will ask you: What fuels your fire?

I view my fire as one of those nice three-log teepee fires. My “logs” are my faith, my family, and my friends. I have a number of other large “branches” that make up my personal fire including my health and my job. I also have a lot of “twigs” that serve as additional kindling such as my love of sports, music, and theatre, and hobbies I enjoy like reading, travelling, and cooking.

Perhaps your fire looks a lot like mine. Perhaps it doesn’t. Maybe you are a log cabin fire. Maybe you are a parallel fire. Maybe you are a star fire. Your fire is your own, and as long as you stay reasonably well fueled, your flame can remain lit. Just as an actual fire burns a lot better, brighter, and prettier when there are multiple pieces of wood contributing to the flame, I believe “life fires” work the same.

As a financial advisor, I frequently work with people as they navigate through major financial crossroads. The thing is, major financial crossroads typically occur at major life crossroads. Think retirement transition, birth of a child, dual-income to single-income transition, divorce, child going off to college, death of a loved one, etc. That means I don’t just have the opportunity to help people through financial crossroads; I have the opportunity and responsibility to help people through life crossroads. Unfortunately, I’ve found that many major financial/life crossroads involve a significant change in a “log,” “branch,” or a “twig” in my client’s personal fires.

What happens when you retire and your work log goes out? What happens to all your other logs if you gain a son or a daughter and add their log to your fire? What happens if you let your spouse log or a bunch of your friends go from a blaze to some barely glowing embers? What happens when a child leaves the nest or a loved one passes away and their log is removed from your fire? At best, the shape of your life fire changes, and at worst, your fire doesn’t glow as much as it used to, or as much as it could.

My expertise is financial, but my experience is financial and personal. It’s from that experience that I urge you to think about your personal life fire. I’ve seen too many fires get rocked by major life transitions. I’ve seen too many fires that burn dangerously reliant on a single log whether that be a job, a child, or a hobby. I’ve seen too many fires fall over when a log was added. I’ve seen too many fires fall over when a log was removed. I’ve even seen a few fires go out.

Your fire is yours, and yours alone, to tend, but I ask you to consider what your life fire would look like if it was an actual fire. You may need to add some kindling. You may need to revive a log. You may need to relight a log. You may need to snuff out a log. You may need to do nothing other than remain vigilant. I’d just suggest that you strive to make your personal fire resemble an actual fire that you’d be proud to sit around and make some s’mores.

-Tom

What a Year!

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This time last year, my wife and I were trying to decide whether to move or not. This time last year, I was just beginning to actually think about being a dad. This time last year, I was a senior financial planner still learning the ropes.

Now, my wife and I’ve sold our first home and bought our second home. Now, I’m not quite “Superdad,” but I can change diapers faster than a locomotive and I’m able to soothe my teething son in a single bound (well most of the time…). Now, I’m a wealth advisor, and finally doing what I’ve always wanted to do, yet I still learn something new almost every day!

2015 has been a year of change, and for the most part, a year of blessings. There have been a lot of peaks, but there have also been some valleys. Overall, I consider myself pretty lucky. What a year!

During the course of this mania, I learned several financial and life lessons first hand:

• The emotions, stress, and time consumption associated with a real estate transaction is insane. It’s a second job! However much you budget for a move, you’re going to be low. There’s a financial advisor joke out there that goes something to the effect of “What do you call downsizing? Half the house for just about as much money!” I used to laugh, but now I don’t. We weren’t downsizing. We were upsizing to our first house big enough for a family with a yard, and moving ended up costing us significantly more than we expected. All I can say is buy less than you think you can handle and maybe have more than one inspector or buy a home warranty!
• Baby furniture, car seats, strollers, clothes, formula, diapers, toys, and doctor visits can really add up! Remember that old game show Supermarket Sweep? Those people grabbing the expensive turkeys were crazy! Give me a cart on the baby formula and diaper aisle next to the greeting cards and I bet I’d be pretty hard to beat! Adding another mouth to feed does not financially benefit many households (despite the tax deduction), but being a parent is more miraculously wonderful and fulfilling than I ever imagined! In happier financial news, the “going out” expenses and vacation expenses do seem to naturally tick down, partially compensating for the costs associated with the mountains of diapers!
• Earlier in 2015 I was promoted from a senior financial planner to a wealth advisor. That meant that the firm I work for was ready to take off my training wheels and entrust me with working with clients on my own. That is a trust from my employer, and the clients I serve, that I do not take lightly. I continue to encounter new situations, I continue adding experiences, and I continue to learn new techniques and strategies to help people grow and preserve their nest eggs, save a little on taxes, give a little more to their favorite charities, and achieve personal goals. This year I got to be the anchored beacon to clients experiencing their first market correction in almost six years, I got to help a number of people who were in emotional and financial pain from suddenly being laid off, and I got to help a number of widows and children walk through the grieving process and the financial distribution and redeployment process of bequeathed and inherited assets. Money should not be anyone’s life, but money is part of everyone’s life. My job is not always easy and it’s not always fun, but being able to help people when they need it most is what motivates me to do what I do.

 

In 2016, my wife and I are going to go on the offensive against our mortgage and pay a little more than we have to so we can be debt-free a little sooner. In 2016, my wife and I are going to contribute a little more to our 401(k)s and continue to make our annual Roth IRA contributions so we can build up a reasonable retirement nest egg as soon as we can. In 2016, we’re going to save week after week and finish furnishing our new home. Those are our financial goals. What are your financial resolutions?

 

If you’re one of my loyal readers, you probably noticed that I didn’t post quite as much as I have in previous years. If you wondered why, now you know (move, baby, job responsibilities, etc.). Still, 28 posts in 2015 isn’t too bad, and I promise you, I have just as much energy and excitement about 2MuchCents as I ever have. Life happens, but I’m going to try to average at least two posts every month. And as always, if you have a question or an issue that you think I could help you with, please reach out to me. I’ll make time for you!

 

2016 posts will include why you should unplug from work, some things you need to consider if you or a loved one are considering a move to a retirement center, how to live in harmony if you and your spouse have very different incomes, some suggestions on what you need to teach children about money, a look at some financial mistakes we all make, and how to make sure you don’t face any tax penalties by hitting a “safe harbor.” I hope you’ll check them out!

 

Merry Christmas to all, and to all, a good 2016!

 

-Tom

The Lightning Round: Round 4

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Thanks to all of you who submitted a question. Now, without further ado, here are my responses to five of your questions...

1.) I am looking at getting a new car, but I can’t decide how much I should spend. Do you have any tips?                                                                                                       
                                                                                                                                           - Hayley

How much to spend on a car or how much not to spend on a car, that is your question, and it’s a good one! Strictly financially speaking, I’d recommend you take a close look at your monthly income and your monthly expenses, and see how much extra cash flow you usually have on hand at the end of each month. Let’s say you find that number to be around $500. Then I would recommend you make sure you buy a car that allows you to have a monthly loan payment of less than $500. You should talk to the dealership or your local bank to see what kind of car loans and interest rates you could qualify for. That will help you calculate how much car you can probably afford to buy and still make financial progress month to month. If you are one of those people who saves up to buy a car and doesn’t need a loan, I’d recommend that you make sure you will have enough cash in the bank after your purchase to cover somewhere around three to six months’ worth of your living expenses.

 

Outside of the financial nuts and bolts, I would like to share a couple of other thoughts. First, it may not make sense to get a certain brand or a certain model if it costs a lot more than a very similar brand’s equivalent or the next best model. For example, my Jeep is a souped-up less expensive model that has almost everything the more expensive model has on it except the model name. Second, it may not make sense to go with a lesser brand or lesser model than you really want if you can afford it and the savings are only a few thousand dollars. A few thousand dollars is nothing to sneeze at, but if you will be driving your car for the next 10 years (like most people are these days) it might be nice to drive something you are excited about and proud of!

 

Please let me know if you would like to discuss this further or talk about your specific situation.

 

2. Other than a will, what are some other things someone can do to be prepared if they pass away?
                                                                                                                                        - M. Tyler

So often when someone passes away they leave behind a very large and time-consuming mess for their loved ones. This is not intentional, but throw in a few surprise accounts or insurance policies, a few calls to Social Security, and a house full of possessions, and a monumental task is often what heirs, and certainly the executor, inherit first!

Outside of a current and well-drafted will, there are a few things you can do. One, you can make sure you have your primary and contingent beneficiaries in place for any insurance policies, annuities, and retirement accounts you may have. Remember, this is critical, as beneficiary designations trump a will, and if there is no beneficiary designation in place, assets might not be distributed how you want or intend. Second, you can give away special possessions/heirlooms that are below the annual gift exemption ($14,000 for 2015) while you’re still alive to make sure they end up where you want them. You could also potentially direct the distribution of certain special possessions in writing after death as long as your will allows it (consult with your estate attorney to make sure you have the proper language). This can help reduce the chance that two sisters will be fighting over a plate “mother wanted them to have.” Third, having a list of who you want as pallbearers, who you want to officiate your services, what hymns you want sung, and what you would like your obituary to say can also be of great benefit and relief to your grieving survivors. Fourth, having a list of important people to contact in the event of your death with their applicable information can really help your family, too. Finally, selecting and prepaying for your burial/cremation arrangements can also ensure that you get what you want and you don’t create an immediate financial burden on your loved ones at the time of your passing.

I hope this is what you were looking for. Not a happy topic, but certainly one worth considering.

3. What do you think about what’s going on in Greece? Will the European Union last?
                                                                                                                                               - John

I’ll be happy to share some thoughts on this, but this is obviously just my opinion.

I forget exactly what I was reading or where I was, but someone once explained the Eurozone problems to me with a very powerful example that I’d like to now share with you. Essentially think about the United States, a union of states, versus the European Union (EU), a union of nations. If you were to stop and ask a stranger from Georgia and a stranger from North Carolina what they are, what would they tell you? They would probably both say they were Americans; not Georgians or North Carolinians. If you were to stop and ask a stranger from Germany and a stranger from France what they are, what would they tell you? The German would tell you he is a German, and the Frenchman would tell you he is French. See the difference? This is why I think the EU may always have some serious problems.

I think the situation with Greece is too far gone to be worked out unless the rest of the Eurozone just flat out forgives their debts. The Greeks are tired of the austerity measures, and the Germans are tired of loaning money to the Greeks. Greek and German politicians know this. They keep kicking the can down the road and putting band aid after band aid on the problem, but eventually I think there will be a “Grexit,” a humorous and witty term that many have already come up with for Greece’s eventual exit from the EU. I guess we'll have to wait and see what this next round of called Greek elections holds.

As far as the EU, there are a lot of powerful people and countries that really want this to work, so it may continue to exist for quite a while. Personally, as I read about the unemployment and economic contractions going on in other counties such as Spain, Italy, and Portugal, Greece looks a little like the first domino to me. I think Great Britain may have been very wise to have joined the political union, but to have stayed out of the currency union when they joined the EU. There are simply too many little economies and country-specific industries in play. That said, there are still high-quality and thriving companies in Europe, and some countries such as Germany are still doing very well. My best guess, however, is more political, economic, and currency storms are on the horizon. Stay tuned!

4. Are you worried about robo-advisors?               
                                                                                                                                   - Anonymous

A timely question, and one being discussed by many in my industry. For those of you not familiar with the term “robo-advisor,” a robo-advisor is an investment platform that allows an investor to have their portfolio managed online with little to no human intervention. Robo-advisor platforms, such as Betterment or Wealthfront, have made a splash in the brokerage industry by being less expensive, more user-friendly, and more interactive than most of the traditional investment management platforms offered by human advisors.

Am I worried about robo-advisors? Not really. I think their popularity may cause human advisors to step up their game, but as braggadocios as this may sound, I really don’t think a computer can do all that I do. Investment allocation is just a piece of what I help clients with (there’s also tax planning, cash flow planning, estate planning, insurance planning, scenario analysis, and lots of decisions where both finances and emotions both need to be considered), so I really don’t feel that threatened. I’m also very curious to see how robo-advisors do when we get a cyclical market downturn, and investors want to be reassured that the sky is not falling. I want to see what robo-advisors say when a client needs to decide whether to save for their children’s education or retirement. I want to see what robo-advisors say to a son trying to gain control of his late father’s account. If the robo-advisors’ support staffs start taking client calls – and I think they will have to – they will have to raise their prices, and suddenly, they won’t be so robo anymore!

I am also skeptical of robo-advisors because I’ve already seen some of their shortfalls first hand. For example, I had an individual bring me an account that they had elected to rebalance after every deposit. Well, with a little bit from each paycheck going into their account, that meant they rebalanced 24 times in a year, resulting in a lot of tiny, annoying, and tax-inefficient short-term capital gains having to be recognized at ordinary income tax rates. By selecting a friendly looking box to rebalance offered by the robo-advisor, this investor incurred additional trading fees, higher taxes, and a much more complicated tax return than was likely necessary. The investor meant well and knew it was prudent to rebalance his portfolio periodically, but any decent human advisor wouldn’t have allowed a portfolio to be rebalanced twice a month!

I may be in the minority of financial advisors out there who think this, but I’m sort of excited about robo-advisors. I think they can be a helpful tool so people invest sooner rather than later. I think they can make basic analytics more available to more people. I think their gadgets and apps will help modernize some of the ancient and confusing monthly statements being generated by large investment custodians. As a CPA who lived in the world of Turbo Tax and now a CFP in the world of robo-advisors, I welcome the technology and I encourage you to carefully try it, but my caring, easy-to-understand, and customized-to-working-with-you human self will still be ready to take your call when you need me!

5. What about you? What are you most worried about as far as your finances?                
                                                                                                                                    -Kristin

Hey now! I’ll be the one asking questions around here. Just kidding! Thanks for the question!

I’m worried about a lot of things. I’m worried about the new expenses my son just brought into my monthly budget. I’m worried about the mortgage my wife and I took on when we moved. I’m worried if we’re saving enough for retirement considering neither one of us has a job that offers a pension, and I’m less than bullish on the chance of us receiving any meaningful Social Security income by the time we qualify.

How do I sleep with those worries? We spend less than we make. We save as much as we can. By growing our family and buying a house we’ve made a bet on ourselves, and I have faith we can do it.
Sure, there will be hard times and bumps in the road, but I believe we can do it. And I might or might not have a pretty sophisticated financial progress spreadsheet somewhere...

If you build up an adequate rainy day fund, you adequately insure your family should there be an unexpected death, disability, long-term illness, or liability, and you have an adequate estate plan in place to execute your wishes and desires, there’s really not much left to do. Do the best you can, live below (or at least within) your means while still making memories and enjoying experiences, and carry on. Monitor your progress and adjust your strategy as necessary. That’s what I tell clients, and that’s what I do myself.

Still, I do savor diaper coupons, I can’t wait to be debt-free, and I’m not above picking up pennies in the parking lot (heads or tails).

Thanks again for all the questions. Remember, our series on “Normal Investors” starts next week. I hope you’ll check it out because I’d be willing to bet that there is a pretty good chance you aren’t as normal as you might think. Just saying!

-Tom

Why You Need to Rebalance



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Suppose you invested $100,000 on January 1st, 1995. You invested $50,000 in the Barclays U.S. Aggregate Bond Index and $50,000 in the S&P 500 (U.S. stocks). Between January 1st, 1995 and December 31st, 2002, you were in for quite a ride as the Dotcom Bubble expanded and eventually popped. Your bonds would have offered annual returns of 18.46%, 3.64%, 9.64%, 8.70%, -0.82%, 11.63%, 8.43%, and 10.26%. Your stocks would have offered annual returns of 37.58%, 22.96%, 33.36%, 28.58%, 21.04%, -9.11%, -11.89%, and -22.10%. Declining interest rates and the mania surrounding Internet-based companies fueled some really good returns during that period. In fact, if you didn’t touch your $100,000 portfolio at all during that period, I’d estimate you would have had around $206,000 by the end of 2002.

Do you notice how the last three years of S&P 500 returns from 2000 – 2002 were negative as the bubble popped and a recession began? Wouldn’t it have been nice to have liquidated your portfolio on December 31, 1999 and missed the stock market pullback? If you had, your portfolio would have been around $248,000 on December 31, 1999; $42,000 better than it would have been worth three years later!

By now I hope you know me well enough to know I’m not the type to ever advise you going all in or all out of the market. When it comes to market timing like that, I’m just not that smart, and I don’t think anyone else is, either. I believe in calculated tactical adjustments to a portfolio if you see a medium to long-term trend, but I do not believe in ultra-short-term trading and all-in / all-out investing. There's just too much uncertainty!

Some of you that were investing back in the late 1990s and early 2000s may be able to remember how hard it would have been to sell out of your high-flying stock portfolio on December 31, 1999. That was a time (like many times before) where the sky felt like the limit.

Great, Tom. You’ve told me this story about how I would have been better off selling my January 1st, 1995 portfolio on December 31st, 1999 versus holding it until December 31st, 2002, but then you told me no one can know exactly what the future holds and not to invest all-in or all-out. What can I do? You can rebalance.

Rebalancing your portfolio is something you should periodically do to bring your portfolio strategy back in line with your initial investment strategy. Sure, it can be a hassle, it can generate some capital gains taxes, and it can generate some trading fees, but oftentimes, it’s worth it. Hopping back to our 50% bonds and 50% stocks January 1st, 1995 portfolio example, did you know that by December 31st, 1999 your portfolio would have only had 29% bonds and would have swelled to 71% stocks? Would you be happy if the portfolio strategy you agreed to in 1995 drifted that much? I don’t know many investors who would be pleased with a divergence from their investment strategy of that magnitude. That’s why in the spirit of trying to more closely maintain your investment strategy and hedge your bets on the markets continuing to roar upward vs. correct downward, periodically rebalancing your portfolio is the way to go. Excluding taxes and fees, if you would have rebalanced your January 1st, 1995 portfolio at the end of every year back to a 50% bonds and 50% stocks portfolio, your portfolio would have had around $216,000 by then end of 2002; $10,000 better than if you had done nothing at all. Rebalancing your portfolio can generate taxes and transaction costs, but it also, and more importantly, allows you to not drift too far from your investment strategy. Rebalancing is a prudent way to hedge your bets on the market going up or down in the future.

I don’t often trade a portfolio, but when I do, I prefer to rebalance. Does that make me the most interesting wealth advisor in the world?

-Tom

Questions You Should Be Asking Your Financial Advisor

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A friend of mine posed an interesting question to me the other day. His parents are beginning to think about retiring in the next few years, and they didn’t leave their recent meeting with their financial advisor feeling overly confident that they were in good hands, so he asked me what questions they should be asking. I may get tarred and feathered by others in my line of work for sharing this, but today I offer you some of the questions I think you should be asking your current or prospective financial advisor.

• Do you feel my investments are appropriate (particularly if it has been a while since you met or your investment accounts were rebalanced/reallocated)? If the response you get is only a “Yes,” you should follow up with “Why?” I really think that having a general understanding of why you are invested the way you are is important. It gives you confidence through the market's ups and downs, and it ensures that your advisor’s strategy is in line with your goals and your objectives.
• What fees have I paid you? An advisor may not be able to rattle this off on the spot, but if they can’t get you a clear answer pretty quickly, this may be a red flag. Contrary to how some practice in the industry, fees and expenses don’t have to be hidden. It also doesn’t hurt to ask an advisor how they get paid based on the investments they recommend. If you hear the word “commission,” you need to at least consider the possibility that your advisor could have a conflict of interest.
• What licenses and credentials do you hold? There is so much alphabet soup out there that I don’t even know what some of the acronyms stand for! That being said, some licenses and credentials are impressive and should be confidence-inspiring, but some, not so much. You’re looking for things like CFP®, CFA®, and CIMA® from an investment advisor in addition to advanced degrees from respected business schools.
• How can I access my funds and my information? In today’s world, you should have the ability to view your account any time and withdraw money within a few days. If you don’t, you may want to see if your advisor has booked a one-way trip to the Caribbean…
• Who is your typical client? What’s good for one type of client is often good for another, but not always. If your advisor is used to working with people with backgrounds, needs, and amounts of money drastically different than your profile, you may want to find an advisor better suited to work with you. You want to be your advisor’s "bread and butter" and a client that is right in their wheelhouse!

 

I’ve been asked lots of crazy questions from clients including why I couldn’t guarantee an 8% return every year, why a particular beverage wasn’t for sale in their local grocery store, and if I was dating anyone (because their granddaughter liked blondes), so my proposed questions should be softballs for your current advisor. If your advisor's answers leave a lot to be desired, I’d suggest you ask these very same questions when you are interviewing candidates to be your new advisor.

 

-Tom