The Best Time to Invest

Credit: Stuart Miles

One of the most common questions I get in my line of work is something to the effect of “When should I begin investing?” or “When should I invest this particular portion of money?” Many brokers and financial advisors would talk to you about their ultra short-term market expectations or about trying to time the market (investing right before the market goes up a lot), but you won’t get any of that hypothetical schmoozing from me. A dictator’s unforeseen actions, a politician’s ill-conceived comment, or a shocking corporate scandal can throw even the best short-term market forecast out the window, so more often than not, I reply to someone asking me about the ideal time to invest with a very simple answer: “Probably now.”

“Now” is not a cop out. “Now” is not due to lack of knowledge or experience on my part. “Now” is not because the sooner you invest, the sooner I can talk with you about investment allocations and options. “Now” is about statistics, probability, and history. (Please click on the link and watch the video created by Time Magazine showing how $1 invested in the U.S. market has grown from 1927-2012 as well as what was in the headlines of Time.)

From a long-term investment return point of view, I think it’s safe to say that the last 85 years have been pretty awesome, but that’s not to say things haven’t been volatile. What if I told you that the S&P 500 has either been up more than 20% (which is a lot) or down (you lost money) for 18 of the last 32 calendar years, meaning returns have been between 0% and 19% (moderate growth) in only 14 of the last 32 calendar years? Well the market has been, so in order to be in a position to possibly enjoy some future, compounded long-term investment returns (like the ones you just saw if you're a good person and watched the video), I’d argue that you need to go ahead and pursue a prudently diversified long-term investment strategy and agree to stay on the market roller coaster. I just don’t think “guaranteed” annual returns of any substance are possible.

Another statistic worth mentioning is that, according to J.P. Morgan’s September 30, 2013 Guide to the Markets, the S&P 500 has had an average intra-calendar year drop of 14.7% every year since 1980. This means that the stock market has been down an average of 14.7% at some point during the calendar year despite its strong overall returns! I know of no other statistic that more clearly emphasizes the importance of a strong and patient stomach for market volatility. I also believe that in order for investors to have a stomach for market volatility, they need to have enough cash on hand, an understanding of their long-term financial strategy, and confidence in their financial advisor.

I’ve thrown a video and a couple of statistics at you that you may have found a little surprising and encouraging, but I’m not sure I’ve yet made a solid case for why investing now is likely your best course of action. You should consider investing now because over a long enough time frame the stock market has always gone up, and if you’re a betting person, the market has gone up more than it has gone down. Please understand that I am not saying you will have a better long-term investment return if you invest today versus tomorrow. What I am saying is the odds are in your favor!

If the current risk of market volatility is holding you back from investing, please know that there will always be market uncertainty no matter how long you wait to invest. There is a lot of recent and not-so-recent history to support investing now. In the battle of current market uncertainty versus market history, I personally choose history, but if you’re still not sold on this, I’d be happy to share some more of my thoughts with you and offer some techniques that can help you finally put some of your cash to work over time.

-Tom

Open Enrollment

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Let’s be honest: open enrollment stinks. At best, your human resources department goes over your medical, dental, and vision insurance plan options with you at a staff meeting and offers to help you fill out the forms. At worst, your human resources department sends you a bunch of information and a bunch of forms and asks you to make a bunch of decisions by yesterday. Either way, it’s probably not anyone’s favorite time of the year. It’s certainly not mine!

This year is particularly vile. With all of the changes going on in the realm of health care, there are a lot of new rules and revised wording in plan options, and most of the information I’ve had the joy of reading for friends, family, and clients seems to be a grotesque concoction of insurance jargon written by a group of long-winded lawyers. Fret no more, though. I’ve got 10 tips to help you get through your next open enrollment period:

1. Read it - all of it. It’s probably a daunting amount of confusing material, but we’re talking about your medical insurance benefits, and possibly your spouse’s and children’s medical benefits. You are about to make irrevocable decisions (at least until your next open enrollment or qualifying life-changing event) that could have real consequences (both medical and financial) to your overall well-being. Make sure you’re giving your elections the time and due diligence they deserve.
2. When in doubt, ask. If you don’t have any questions after reading through your materials, you should probably read them again! No question is too small, and you don’t want to find yourself wishing you had asked your “little” question back during open enrollment while you’re at the check-in counter in the ER!
3. What’s changing? This is probably the easiest and best question you can ask your human resources department (or your insurance provider if your company is keeping the same provider it had last year). If you are a really organized person and can get your hands on last year’s plan, lay this year’s plan next to it, side by side, and go at it. Highlight the differences so you can know the new rules of the game and be ready to go with a different plan option if needed.
4. What costs are increasing? Unless the benefits you are being offered are being reduced, there’s a pretty good chance your health insurance expenses are going up. We can argue about whether the government, the insurance companies, the hospitals, or the doctors are behind this, but at the end of the day, what matters is that your costs are still probably going up. It’s important to know what specific areas of your plan are becoming more expensive. Are your premiums (the amounts you pay for insurance coverages) going up? Are your deductibles (limits you have to hit before the insurance company starts substantially paying for health care costs) going up? Are your co-pays (fixed charges for visiting a doctor) going up? These increases should be considered when determining which plan option is best for you and your family.
5. In-network or out-of-network? An in-network doctor is one who your health insurance provider is contracted to work with, and an out-of–network doctor is one who your health insurance provider is not contracted to work with. Typically in-network doctor visits will cost you less because your health insurance provider has already negotiated set prices with the doctor for his or her services. If you love your doctor and are not cost sensitive, this may not mean much to you, but if you’re neutral towards your doctor, I’d suggest you make sure he or she is in-network, and if not, find a doctor who is. This is particularly worth looking into if your company is changing providers or you are looking into an obstetrician.
6. Consider dental insurance. If your company offers dental coverage, give it a look. I know it’s more coming out of your check, but you may find that for a relatively minimal cost you can have a lot more coverage and flexibility should that dreaded toothache strike. If you go to your dentist regularly, and you should, it’s possible your savings on basic preventative care could be almost equal to the cost of your insurance.
7. Consider vision insurance. I’ll just be frank and tell you that, in general, I rank basic health insurance needs in order of importance: medical, dental, and then vision. In a lot of cases, if something serious happens to your eyes, it’s possible your medical insurance will be there for you. That being said, vision insurance can also add a lot more coverage and flexibility to your insurance arsenal should something happen to your baby blues. Particularly in years where you know your prescription has changed, you need new glasses, or you need new contacts, your savings on those appointments, products, and services could almost equal the cost of your insurance. I’d give it a look (pun intended).
8. Make sure everyone is covered. This may seem obvious to some people, but trust me when I tell you this tip is embarrassing to some people. Please, please don’t leave off a spouse or a child who is eligible and needs insurance benefits. Even if your company and the insurance provider can fix your paperwork mistake, by the time you get through the process, you’ll wish you hadn’t forgotten anyone.
9. Ask about wellness programs. This suggestion may be a tad early, but I am beginning to see, read, and hear about more and more programs companies and insurance providers are putting in place that offer rewards, incentives, and in some cases, reduced costs to employees who participate in wellness programs. These programs can be yoga classes, gym memberships, online classes about eating right, and lots of other things, but if you’re interested in getting healthier and potentially getting some perks for doing so, see if you can participate in a wellness program.
10. What do you want your health insurance to do? I saved what I think is my most important tip for last. Many people I know go with whatever plan option has the lowest premium, and I’m not sure that’s the smartest move. In my book, health insurance is a last line of defense to protect you and your family’s assets should something really serious come about medically. Personally, I always look for the plan options that offer the highest coinsurance. Coinsurance is how medical expenses are shared between you and your insurance provider once the deductible is met. If there is an option that offers 100% coinsurance (or close to it), it will probably have a relatively high deductible and be one of the options that takes a bigger bite out of your paycheck, but it will likely offer more financial protection should a very expensive medical issue come up. If you don’t have the healthiest family history, you or your spouse are thinking about having a child, or your abdomen felt really bad the last time you had spicy food, I would certainly encourage you to consider this type of plan. Playing with your insurance election is not how you get a raise. Remember, if you have an adequate rainy day fund, you should be able to handle a higher deductible. If you follow this tip, you may curse me every two weeks, but I would wager there will eventually be a year where you will be glad you went with an option that offered more protection to your overall wealth. 

 

Today’s tips are pretty general, so please let me know if there’s something specific I can try to help you with. Just like you, I do hate reading the insurance lingo, but I love helping others.

 

-Tom

Two Nickels

Credit: Gualberto107

Anyone who knows me at all knows I love quotes, one-line “zingers,” good stories, and witty jokes. The chances are pretty high if I’ve heard a “good one” in the last few days, and you and I come into contact, you’re going to hear it, too. I’m sorry, but it’s just the way I’m wired. Unfortunately, in the last 48 hours I heard a saying that I really didn’t care for. I heard this same idiom twice, and both times, it made me cringe: “He doesn’t have two nickels to rub together.”

That phrase obviously means someone isn’t doing so well financially, but what stood out to me is how different the two scenarios were that people were describing to me using that same phrase. In the first scenario, someone was busting his tail to make ends meet, but he couldn’t seem to catch a break. In the second scenario, someone was making a lot of money, but he was choosing to spend all of his nickels before he ever thought about rubbing a couple of them together. Both instances of this phrase made me pause, and they led me to think about the advice I might give in these two very different scenarios.

Unless your last name is Rockefeller, you will probably go through (or have already gone through) at least one period in your life where it’s hard to rub two nickels together. I was fortunate enough to grow up in a family that could give me all that I needed, but even so, there have been times where things were tight. I remember in high school how quickly a weekend trip could eat away at my hard-earned minimum wage, maximum hour check from the local dry cleaners where I worked. I remember in college how serious things got when gas crossed three dollars a gallon for the first time, and suddenly going home was a little bit more of a financial commitment. I remember when my wife and I were just married, and our dining room had no light fixture, no table, and no chairs. I consider myself very blessed, and frankly, a little lucky, to have had as few lean times as I have, but I don’t take anything for granted and know that what I’ve been given can also be taken away. If you’ve been dealt a tough hand, even if you’ve been repeatedly dealt tough hands, I urge you to press on. Hard work will eventually pay off. You will eventually get that break. Your dining room will eventually have light, a table, and chairs. You will eventually get through the financial wilderness you have been walking through. In the words of my iconic role model Winston Churchill, “If you’re going through hell, keep going.”

As for non-savers, a recent talk at the Terry College of Business Leadership Speaker Series by Dan Cathy, the President and COO of Chick-fil-A, comes to my mind. Mr. Cathy was explaining the differences between wages and profits and the importance of future business leaders and future employees recognizing those differences. These are my words, not his, but what he was getting at is the fact that a company is only profitable if it makes more than it spends to sell or produce what it offers. Essentially, a company is no better off than it was if it doesn’t make a profit. How true this also rings on an individual or family level! I know there are hard times and bad things happen to good people, but if the waters are relatively calm and you are fortunate enough to have a good job, I might make the argument that you and your family are no better off financially if you don’t make a profit. How do you make a profit as a person? By spending less than you make and saving the surplus, investing it, or paying down your already-incurred debt and obligations with it. I can hear it now: “That’s great Tom, but I don’t have a surplus or that much of a surplus.” To continue my company/individual comparison, I’d tell you that a company can only increase its profitability by increasing revenues or cutting expenses. I believe an individual’s situation is very similar, and an individual or family can only increase their profitability (which increases their surplus, which improves their financial situation) by increasing their revenue or cutting their expenses. Now feel free to ask your boss for an increase in revenue, but personally I’d advise cutting those living expenses however much you need to until you have two nickels to rub together.

If you’re going through a tough time, keep your head up and keep on trying. If you’re going through a good time and not taking advantage of it, I’d encourage you to think about those people who would love to be in your position. As the country duo Montgomery Gentry says in their hit song “Something To Be Proud Of:” “You don’t need to make a million – just be thankful to be working. If you’re doing what you’re able and putting food there on the table, and providing for the family that you love, that’s something to be proud of.” And if you keep working hard and make sure you are earning profits and not just wages, I bet you’ll have two nickels to rub together. And if you keep on a little longer, I bet those nickels will become dimes, dimes will become quarters, and quarters will become real dollars.

-Tom

Rational Investors

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Last week, I read an interesting article in an old Forbes magazine that described an experiment conducted by Dr. Dan Ariely, a bestselling author and Duke University professor of psychology and behavioral economics. In the experiment, participants were given balances on multiple credit cards with varying interest rates and varying amounts of income over a period of 25 rounds. Then they were asked to decide how they would allocate their income towards paying down their debts. The participants’ stated goal was to maximize the money left over at the end of 25 rounds. Now maybe I’m a finance nerd, but the cash maximization strategy seems fairly straightforward to me. One should probably pay down the credit cards in order of their interest rates from highest to lowest, with no regard whatsoever for the principal balance amount. To my surprise, Ariely discovered that almost none of the participants could stick to the optimal strategy. Participants were evidently too tempted to pay back the smaller loans and feel like they were making “progress.” Ariely concluded that the satisfaction participants got from having fewer loans open overwhelmed their ability to do the financially optimal thing. I can see how people might convince themselves to do this. Actually, I can see how I might even pay off some of the smaller debts first. This got me thinking, are investors really rational?

I think Merriam-Webster’s definition of the word rational almost answered my question for me right off the bat:

rational: having the reason to think about things clearly, based on facts or reasons and not on emotions or feelings

I have some friends, family members, and clients who can certainly think about their finances and investments pretty clearly, but I have others who don’t really get it, and some who don’t even want to get it. I also know that some of the times I have added the most value (financial and emotional) to people I advise financially are when I have helped talk them into staying the course with their savings strategy or investment philosophy and out of buying that breakout penny stock, piece of speculative real estate, or going to all cash, bonds, or gold. Wow! All those painful economic lectures in college on the efficient market hypothesisis just got crushed in a couple of minutes by a Forbes article and a brief look in the dictionary!

Look, I like to think of myself as a rational person, but in some areas of my life, I know I’m not. I'm always a proud believer that there is not a football team in America that could take my Georgia Bulldogs in a game in Athens on a fall day after a delicious tailgate. I’ve said at the end of every season since 1991 that the Atlanta Braves were going to win the World Series next season before the champagne was even popped by whatever team was the current champion (Hey, I was right in 1995!). I frequently waste time and gas on the weekends with no hesitation when I drive to the other side of town for a club sandwich that there is just something about, while knowing good and well that any one of the delis or sandwich shops I pass on the way could probably produce something almost identical. When it comes to the Dawgs, Braves, and club sandwiches, I don’t have the reason to think about things clearly, and my actions, statements, and decisions are often based on emotions and feelings. I’m okay with that, and I don’t think it’s that big of a deal because I’m not being irrational about anything that is actually crucial - like my finances.

I believe being rational when it comes to your finances and investments is very important. I believe you have to stick to your goals and the strategies needed to achieve those goals as much as you possibly can in order to have a realistic shot at achieving financial success. I also believe you have to stick with a prudent investment strategy with a long-term time horizon no matter how badly you may want to sell out at the bottom of a market downturn or get more aggressive at the top after a long market boom. Because some investors do get caught up in emotions and feelings, I think there are two clear takeaways: 1) it’s important you recognize the risk of getting caught up in emotions and feelings and try to stay a rational investor yourself, and 2) you may actually have an opportunity to benefit financially in the market because of others who are not rational.

You may still disagree and think investors are always financially rational, the market is perfectly efficient, and that you, personally, are always rational, but I bet I could counter those thoughts if I introduced you to a few investors I’ve met and took you to get one of those special club sandwiches on the other side of town. As Dr. Ariely put it: “For some reason people are willing to put their lives at risk because their phone vibrates for a second (while they’re driving), but when it comes to money…they think people are perfectly rational.”

-Tom

Shutdown!

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As of midnight on October 1, 2013, the U.S. federal government has temporarily been shut down. There is a whole host of reasons for the shutdown and many politicians are already playing the blame game, but the actual reason for the shutdown is that Congress and the President could not agree on a bill allowing the government to spend money going forward. Said another way, the Constitution requires Congress to pass spending bills to fund the government, and when they do not (or the President vetoes the bill), most functions of government come to an abrupt halt until they do.

It’s been a while since the last U.S. government shutdown in 1995-1996 when President Clinton and the Republican-controlled Congress got in a fight over the 1996 budget, but don’t get too excited. It’s not like this is really a rare event. According to the Congressional Research Service, there have been 17 shutdowns since 1977! Most shutdowns last less than a week, but the longest lasted 21 days in 1995-1996. Sure, there could be some stock market volatility, there could be a little damage to the economy, and some national landmarks and small agencies could very well be closed for a while, but most essential government services like air traffic control, the military, Social Security, and Congress members’ pay (that’s essential?!) will continue rolling along until this Congressional lover’s spat comes to an end.

I hope you know me well enough to know that I’m not going to try to convince you how you should assign blame among the House of Representatives, the Senate, and the President (that would be too easy as all of them have egg on their face in my book), but I couldn’t pass up this opportunity entirely. You see, the government shutdown offers some lessons for all of us.

• If you see that you have an approaching cash flow problem or major expense, pretending it’s not really there until it’s almost upon you is probably not a good idea. We citizens cannot simply increase our debt ceiling, sell some more bonds, or set a new interest rate to get around our problems!
• If you are facing a difficult or controversial financial decision that is not solely yours, waiting until late the night before the decision is due will probably lead to a verbal altercation. If you get into a disagreement with someone when trying to work out a financial compromise, stay away from name-calling, stay away from blaming, and try to stay focused on the issue at hand as opposed to bringing up all sorts of other issues from the past.
• If you are trying to successfully plan for something big, say, running a country, providing for your child’s college education, or retiring with the lifestyle you’ve always wanted, you need a long-term plan! Little-bitty, month-to-month, stopgap budget bills finally didn’t work for our country, and little-bitty periods of living within your means, saving, and investing won’t work for you, either! This may sound a little crazy, but a financial shutdown for an individual person or family is relatively more catastrophic than a government shutdown. A normal person can’t just retroactively go back and make things better.

Oftentimes when I try to consider the problems we face in today’s world, I find myself looking to history for answers. When it comes to this current government shutdown, I look to two of my favorite leaders, Abraham Lincoln and Winston Churchill. When addressing the division facing the union in his first inaugural address, Lincoln stated, “If the minority will not acquiesce, the majority must, or the Government must cease. There is no alternative, for continuing the Government [other than] acquiescence on one side or the other.” Lincoln was speaking about a different issue in a different time, but his words ring true today regarding this current government stalemate. Hopefully you’ll be able to sleep easier, like me, if you take the actions of our dysfunctional government in stride and reflect on the words of Winston Churchill: “You can always count on Americans to do the right thing – after they’ve tried everything else.”

 

-Tom