The Right Answer

Credit: nongpimmy

With all of the great college football bowl games that have been on television recently, I have seen a lot of fans doing some pretty strange things. Some fans are flat out in costume. Some are chanting the same words over and over, while some are constantly jumping in place, and some even make animal sounds during kickoffs! I can’t help but think of that old Bud Light commercial showing fans doing similarly strange things in an effort to somehow help their teams win the game. The slogan reads, “It’s only weird if it doesn’t work.”

In my world of financial advice, people ask me questions all the time. Sometimes I know or can find the “correct” financial answer pretty quickly, but most of the time I need to develop some sort of probability analysis or perform a calculation or projection before I can offer the “correct” numerical solution. The thing is, my initial “correct” financial answer or “correct” numerical solution isn’t always right for the client who asked the question, and it’s not because of faulty research or incorrect math; it’s because it doesn’t yet factor in my client’s feelings or emotions. The slogan for the financial advice I try to give to people would read, “It’s only correct if it works for you.”

Let’s say someone has $10,000 to invest and asks me if they should invest it all in gold. Let’s say a retired person who has more assets than they likely need to continue to live comfortably is really concerned about the world situation and asks me if they should invest $10,000 of their assets in gold coins to put in their safe deposit box. My long-term investment advice would probably be the same to both parties, but it might not be the right answer for both parties.

One of the questions I’m asked most frequently is when someone should begin drawing their Social Security. Someone can choose to start at age 62 or wait until age 70 and likely receive a higher benefit for each year they waited, but it is not always an easy question to answer. If two 62-year-old clients with the exact same assets and retirement incomes asked me if they should start Social Security, but one of them is losing sleep because they are concerned that the government might change their benefits if they wait to start drawing Social Security, my Social Security advice would probably be the same to both clients, but it might not be the right answer for both clients.

If two people can finally pay off their low-interest student loans or make their annual IRA contributions, but one of them has really been struggling with the fact that they still have student debt, my cash utilization advice would probably be the same to both people, but it might not be the right answer for both people.

My point is that almost all financial decisions are double-edged. There is often an analytical or numerical “correct” answer and an emotional “correct” answer. When those are the same, it’s easy to decide what to do, but when they are different, it can be quite the conundrum. Some of the deepest and most meaningful conversations I’ve ever had with clients have come from discussions where financial expertise seemed to suggest one thing and emotional credence seemed to suggest another. I take the privilege of being a part of such conversations very seriously, and it is because of conversations like these that I know no software, no app, no robo-advisor, and no strictly commission-based broker can completely replace my role in helping people think through the tough financial decisions to find their right answer.

When you find yourself facing a tough decision where your emotions and finances seem to be pushing you in two different directions, proceed with caution! Be careful relying on what you’ve read, what you’ve heard, what your computer says, and what Bob told you he did that time in the break room. Remember, it’s only correct if it works for you, and I’m happy to try to help you find your right answer.

-Tom

Mary, Mary, Quite Contrarian

Credit: africa

Mary, Mary, quite contrary. How does your garden grow? No, I haven’t lost it or begun experiencing some sort of Benjamin Button-like reverse-aging process. I just think this old, English nursery rhyme might have a little more to do with successful long-term investing than you might think! Let me explain.

Have you ever jumped on a sports team’s bandwagon? Have you ever jumped off and been accused of being a “fair weather” fan? Have you ever resisted a trend, such as smartphones or Facebook, and eventually come around? Did you by chance donate your seersucker suit or throw away your boat shoes right before they came back in style? I’m a loyal sports fan, and the day I wear a seersucker suit will be quite a day, but I must admit that I can think of several times in my life where I arrived a little late to the metaphorical party, and even a few occasions when I rode a trend, a belief, or an idea all the way down the metaphorical flagpole. I usually stick to my guns, and I will always stand up for what I truly believe in, but it is often much easier to get caught up in what everyone else is doing and follow the crowd. It’s often warmer in the herd, so to speak.

Unfortunately, the bandwagon doesn’t always lead to successful investing. I’ve heard it jokingly said that if someone continuously buys stocks high and sells stocks low, they will repeat their actions until they are broke. It’s a witty and true statement, but it’s definitely not funny. I’ve also heard it said that any stock tip you hear is already too late, and unless you know something you probably shouldn’t know, I tend to believe that is pretty accurate. In my book, successful investing is about developing a prudent, long-term investment strategy with an appropriate mix of stocks, bonds, cash, and other investments for your risk tolerance and age/stage in life, and sticking with it. Successful investing is about investing, not trading. It’s about not chasing past performance and trying to repeat recent results with last year’s hottest industry, sector, or stock. Successful investing is about avoiding the temptation of a $700 “poison” apple (or should I say AAPL?), and at the same time, knowing to ignore the same overly sardonic radio host who has been telling you to go to all cash or gold for the last five years. Sometimes you can buy a stock high and ride it higher or sell a stock low and it will still go lower. However, I have come to believe that successful portfolio management is usually about investing in a diversified strategy filled with quality companies; buying some positions for value and some positions for growth; watching closely and looking for occasional tactical opportunities; and riding the market volatility as if it were a cross between a mechanical bull and an eventually upward-headed escalator.

I cannot tell you how many potential clients and friends have come to me recently ready to get back in the market now that the market has been on a fairly steady upward climb for almost five years. Unfortunately, they’ve been on the sidelines, primarily invested in what they put their temporarily battered portfolios in near the bottom of the last real market downturn. In the long term, it’s good that they are getting back in, but I can tell you right now that we are closer to the next temporary downturn today than we were yesterday. I just hope they don’t sell at the next bottom and repeat until they are…

So many people cheer for a winning team and so few for a losing team. As I said earlier, it’s natural and easy to do, but successful investing is about having a really good strategy in place that you understand, believe in, and have confidence in. It’s about digging in for the long haul and letting your portfolio do its job. It’s sometimes about selling when the tide is coming in and buying when the tide is going out. It’s about cautiously looking around when the masses are stampeding in one direction into all stocks or all bonds or all cash or all precious metals and at least considering the road less travelled. Now don’t take this strategy to the extreme and sell a bunch of good stocks so you can buy a bunch of “stinkers,” but rather reflect on where markets are going, not where they have been.

I’m not asking you to do anything in particular. I’m just asking you to think about being a little contrary to a majority of the bandwagon investors out there. Think about being a little contrarian.

Mary, Mary, quite contrarian. How does your portfolio grow?

-Tom

Two Years Down, Many More to Go!

Credit: Stuart Miles

It’s hard to believe almost two years have passed since we dove into the personal finance world together with a crazy story about considering opportunity costs in terms of junior bacon cheeseburgers. I guess time flies when you're having fun. I have enjoyed 2MuchCents, and I hope you have as well. 2MuchCents.com will close out 2013 with almost 14,000 views spread over 14 countries! For that, I thank you.

A lot of bloggers start strong, but run out of ideas. I admit I have some spells where I battle writer’s cramp a bit more than I would like, but I’m definitely not afraid of topics drying up. Between your questions, your friends’ questions, your family members’ questions, new things I learn and experience, and never-ending changes and developments in this crazy world we live in, I think I could probably write forever. I already have plans in 2014 to post about why you need to save now as opposed to later, how you can keep as much of your family’s money in your family as possible, and why I think you should be a “contrary” investor. I also want to take a close look at index funds, offer some tips on buying a car, do another lighting round (where all I do is answer your questions), and write a short series on how I would advise someone to position themselves so they can retire early. (You’re not interested in retiring early are you?) Despite my plans and future posts already in progress, please know I get the most joy out of directly helping people like you by answering your questions; whether it gives me an opportunity to do a blog about your topic or not.

In case you missed any posts, the five most popular posts of the year were:

1. This Diamond Ring
2. It Happens
3. Last Call
4. The Homemaker Retirement Plan
5. All That Glitters Is Not Gold

I think one more blog post is worth mentioning, My Uncle’s Living Expenses, because I got a lot of in-person comments on that one. After mentioning it again, maybe I’ll get more!

Let me once again thank Mr. Andrew Davis for his tireless edits and content advice. I also need to thank my special lady, Mrs. Lindley Presley, for her continued encouragement, social media guidance, and grammatical expertise. I could not produce 2MuchCents without those two individuals.

Here’s to a healthy, happy, and financially successful 2014!

-Tom

All That Glitters Is Not Gold

Credit: Stuart Miles

Remember a few months ago when you kept hearing about gold, gold, and more gold? The guy on the television commercial was telling you that you needed it, the guy on the radio was telling you that you had to have it, and the talented teenager on the street corner twirling the giant sign kept telling you where you could easily buy and sell this magical metal. As the price of gold has fallen a fair amount since the fourth quarter of 2012, the “gold fever” seems to have calmed down a little as well, so I think while everyone is in a little less of a “gold rush” state of mind, it makes sense for us to closely examine gold. After all, gold is an investment, insurance, and currency, right?

• Is gold an investment?
• Below, please find a chart showing the history of the price of gold per ounce from 1970 to the present.
  
  Other than the spike in 1980, there’s really not a lot of action in the price of gold until 2005. I’ll grant you that gold looks like a pretty good investment if it was acquired around 1978 (and you sold in 1980) or acquired right before 2005, but what about all those years of close to no action? When asked why he has some reservations about gold as an investment, renowned investor Warren Buffett said, “If you buy an ounce of gold today and you hold it a hundred years, you can go to it every day and you could coo to it and fondle it, and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farmland and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years… So a decent productive asset will kill an unproductive asset.” I think Mr. Buffett has a point, and if I was a gold investor, I’d probably be looking at this historical price chart pretty closely. Also, please understand that investing in gold mining companies and gold ETFs (Exchange Traded Funds) is not the same thing as investing in gold. An investment in a gold mining company would be influenced by the company’s management and performance itself (versus just gold, the asset), and an investment in a gold ETF does not allow you to take possession of the actual gold if you are also viewing your investment as some sort of insurance against the U.S. Dollar.
• Is gold insurance?
• If you’re buying gold for insurance against some doomsday scenario you’re worried about, then shouldn’t it be inversely correlated with the market? In English, don’t you want gold to go down when the market goes up so that theoretically, gold will go way up when the market goes way down? Take a look at the chart below!

  

  Source: Yahoo! Finance

  Gold’s performance was somewhat the opposite of the market’s performance in 2008, 2011, and so far in 2013, but in 2009, 2010, and 2012, gold’s performance was very much in-step with the market. I expect my home insurance to be valuable to me should my home come crashing down, not to go down with my home’s value on the way! Maybe gold acts like insurance against the market some of the time, but you have to admit, it’s not a reliable or consistent hedge!
• Is gold currency?
• No, not anymore. It’s been a medium of exchange in the past, and it can still be a valuable asset, but unless you’re planning to barter, it’s not really a currency. Say you actually bought a gold brick. Where would you keep it? Who would you tell that you had a gold brick? If a catastrophic economic scenario actually played out and you needed to use your gold brick to buy bread or safe transportation, what are you going to do – scrape off a piece? Look, I know I’m poking fun at hoarding away gold, but I really feel that outside of collecting a few Canadian Maple Leaves in a top dresser drawer, if we ever get to a point where we need to use gold as currency, we will probably have bigger fish to fry! Just mute the guy on television for a second and think - if all that you owned became worthless, would the amount of gold you have, or sometimes think about acquiring, actually be enough to get the job done?

 

Look, if owning several thousand dollars worth of gold helps you sleep better (and you can afford it), go for it. Just know that’s the same advice I’d give a financially independent client who “needs” a fancy golf cart, a rare painting, or an exotic cat to feel better as well.

 

If you want to sell me some gold, I’m not buying. If you want to give me some gold, I’ll gladly take it, but I’m going to sell it. I have my wedding band, and that’s all the gold I think I’ll ever need. Many people may try to convince you otherwise, but when you get down to it, I personally view gold as a pretty metal and an unpredictable hedging investment instrument. If gold really is as grand as some talking heads try to make it, wouldn’t things have worked out a little better for King Midas, Auric Goldfinger, and Machu Picchu?

 

-Tom