Michael's Blog: Money Matters

There is almost never a good time to take care of basic estate planning, but for many people the specter of the process is worse than just doing it.  Here are some very rudimentary steps you can take, and while I would be loathe to suggest you not engage the services of a qualified attorney (because you should), if that reticence is the primary reason for your delay, then it’s best to do some basic things yourself online.

Step 1:  Make a will.  Duh.  If you have kids, do it this weekend.  We all have a crazy relative (some of us more than others), and we’ve all seen our share of crazy judges.  What an insane thing to play Russian Roulette with, huh?  Just make it clear who you would like to be the guardians of your children.  If you do nothing else, do this.  Assets can be squabbled over, and attorneys may be enriched by said squabbles, but nobody’s best interests are served when courts are involved in determining your children’s future.

Step 2:  Create a Durable Power of Attorney for Health Care.  Different states have different forms, but the forms are out there and available for low, or no, cost.  Think Terry Schiavo and that lovely term “persistent vegetative state.”  You may want to hang on by your fingernails or you may want that plug pulled lickety split.  Whatever—just make sure someone out there knows what you want and put them in charge!  [Now, I’m not sure I’d put the same person in charge of my financial affairs as the one making life or death decisions, but that’s just me.  Just sayin’.].  If you don’t remember the Terry Schiavo case, please Google it.  And even those who do might forget that case went on for 15 years.  That is One-Five years. 

Step 3:  Complete an Advance Medical Directive.  This is a companion document to the Durable Power of Attorney for Healthcare, and a very straightforward form (and different by state) that simply tells doctors what life extending measures you want.  For the elderly or infirm, those are often placed either on a nightstand or on the refrigerator in the event an ambulance is called to your home.  Here’s an easy one from the state of Maryland:  http://www.oag.state.md.us/Healthpol/AdvanceDirectives.htm

A few codicils (yes, that’s an estate planning pun—and there just aren’t many of those to be had):  if you really love your family dog (or cat…I guess), you absolutely can ensure they are provided for with a Pet Trust.  Some states don’t have such a provision, but DC, Maryland and Virginia all do. 

Second, there are possessions in your life that have value to you and maybe to others, but they have nominal real value.  Append a letter to your executor specifying your wishes for those items.  It simplifies the will and can always be changed when someone pisses you off.

Finally, put everything in one place!  Call it your “Death Book” if you want to be maudlin.  Put an image of the Grim Reaper on the front so nobody mistakes it for anything else.  You want your loved ones to be mourning you, not riffling through your desk to find account numbers and passwords!

Hey, nobody said this was fun, just necessary.  And valuable.  And time and money saving.  And potentially of real emotional value to your loved ones, and maybe even to yourself, as you work through these steps.  If you’re still not sure of its value, think of the 5,475 days they spent fighting over Terry Schiavo…and get to work!

Though I’ve yet to see my first Rockin’ Santa, I know the holiday season is upon us…if only because Walmart tells me so.  Here’s a different gift strategy for that child or grandchild in your life—the gift of starting a nest egg.   

There are tons of ways to get a youngster started on that savings front, but three are especially worth noting:  the Roth IRA, a 529 college savings plan, and gifting appreciated stock.  This blog is about the Roth IRA.

First, this is the biggest no-brainer out there when you have kids—and you, they or anyone else has the financial ability to give them an early boost by placing funds in a Roth IRA equal to the amount of money that the kid has earned. So, you have an eight-year-old who walks dogs or mows lawns (do kids still sell seeds?)—or designs websites, what do I know?—and makes a few bucks here and there.  Junior doesn’t need a W-2, just a record of the income being earned.

Kids get a little taste of savings, responsibility, investing, inverted yield curves…well, that may be a stretch but you get the point.  

To review, a Roth IRA is the obverse of the traditional IRA—the traditional IRA generally allows contributions to be made before state and federal taxes are paid; taxes are collected when the contributions and earnings are withdrawn later in life.

In contrast, the Roth IRA has no immediate tax benefits because contributions are not tax deductible.  However, the Roth IRA allows for all funds, both contributions and future earnings, to be withdrawn completely free of federal taxes.

Basic rules—there is no minimum age, you gotta earn money and have records, and junior is not required to file income taxes to make a contribution (other than a simple Form 8606).  You generally need to be 59 ½ to withdraw funds without penalty—as long as the account has been maintained for five years.

Parents and grandparents can do this on behalf of the kid as long as the kid earned some money.  In other words, the exact dollar earned doesn’t have to be the dollar contributed to the Roth IRA.  If your child makes a few thousand dollars, let them spend it on candy or clothes if that’s what you want to do, and make the contribution to their Roth on their behalf.

We all know the old maxim that the two most powerful words in the English language are “compound interest.”  A $5,000 contribution put in for a ten-year old, growing at an average rate of 7% a year, would be worth a cool $232,000 at age 65.  Put in $5,000 a year for five years and then leave it alone?  How about a balance of $942,000?  And yes, that’s 100% tax free.

The usual caveat here, folks:  I’m a CFP®, not a doctor, dammit.  And I’m not a CPA either, so consult a tax advisor.

A while back I wrote a piece on the three facets of risk, focusing on the need, the ability and the willingness to take risks.  

It is the willingness part of the puzzle that can prove vexing for financial advisors—and can be the undoing of individual investors who fail to appreciate it.  Because one’s willingness to take risks can be unduly influenced by factors that should have no relevance to the question of how willing one is to taking risks!

Anyone who has ever filled out a “risk tolerance” questionnaire knows how difficult they can be to answer with precision.  “On a scale from 1 to 10, how much risk are you willing to take to achieve a higher return?”  (oh yeah, and 10 equals “a lot,” does that help?!).  Absent any context, it’s a brutal question to answer.

Even with context it’s hard.  In fact, sometimes context itself can make the question even more elusive.  Enter the “recency bias.”  The recency bias is the tendency to think that trends and patterns that we observe in the recent past are likely to continue into the future.  Such biases block the ability to buy when stock prices decline and sell as they rise—because the recency bias leads us into thinking that down markets will continue to go  down and upward trending markets will continue to rise.

Ask yourself how much risk you are willing to take after many consecutive months of a rapidly rising stock market, and you will come up with a far different answer to the identical question if the market had tanked the previous year.  Neither answer is right.  Or, perhaps, they both are right.  

Folks sell at the bottom because they are convinced the market will continue to decline, and they fail to sell near the top because of the inaccurate belief that the market will just keep on rising.  The “buy low-sell high” maxim is a wonderful theory, but real-world biases such as this one make it exceptionally difficult to implement in the absence of a plan!

Defining all facets of risk is such a critical aspect of building an investment portfolio, yet the very definition of risk changes constantly, and it's often easier for an objective outsider to help us see the truth without bias.

Interested in learning more?  Anything written by Paul Thaler (The Winner’s Curse) or Daniel Kahneman (Thinking, Fast and Slow) are fascinating looks into this and other biases that can make managing one’s own money so very difficult.  

You are always welcome to contact me to discuss these and other issues that impact your financial health.  I'm always available to help.

I read an interesting article in one of the financial planning trade rags the other day entitled, “Advisors Need to Talk About If, Not When, to Retire.”  So that’s what I’m going to do!

In one of the greatest movies of all time, The Shawshank Redemption, Morgan Freeman exhorted Tim Robbins to, “Get busy livin’ or get busy dyin’.”   For many, the whole concept of planning for retirement seems like an exercise in the latter.  And that just ain’t so.

After 13 years of talking with middle-aged folks about planning for retirement, the one thing I found to be almost universally true is that virtually no one has the stereotypical retirement in mind.  I’ve yet to have one person who wants to move to Florida, buy white polyester pants, yell at kids walking on their lawn and b**ch about the government.  It’s a graphic image, to be sure, but it just doesn’t fit most folks.

The danger in this scenario comes when the inability to envision retirement leads to a lack of planning for getting old—a condition which seems to affect us all.  Here is an idea that might help you get over that hump (not mortality, but retirement planning):  think about retirement not as a place to hang out before you meet your maker, but as a place when income security gives you full flexibility to do whatever it is that you want to do!

If you’re in your 40s and 50s you are likely in your prime earning period of life.  It may well be that you no longer even enjoy what you’re doing, or at least you’re liking it less than in years past, but you’ve gotten to a point where changing jobs would be financially ruinous for you and your family.

I have a very successful client who works in public relations.  This client has been spectacularly successful by any reasonable financial metric and cannot conceive of leaving his current status—at least not until he reaches his definition of income security.

How do I define the phrase income security?  At its base level, it means the ability to do whatever you want without being concerned about the financial cost or benefit.  Teach school, volunteer, dig ditches—whatever your version of a fulfilling, enriching life, is, income security allows you to do just that.

Here’s the other version of “retirement” that most 40- and 50-year olds can envision:  let’s say you like what you do, you just want to do less of it.  Perfect!  Income security may mean that rather than working 50 or 60 hours a week, you work 10 or 20 hours a week continuing to do what you love.  The American Psychological Association shows that those who work past traditional retirement age suffer 17% fewer major diseases and less physical decline than those who retire “on time.”

So get your kids through college, pay off major debt, create the nest egg that you and your advisor have deemed appropriate to maintain the lifestyle you want in retirement…and then don’t retire!  Or do.  Getting to the point where you can confidently say, “I can do whatever the hell I want” may be the ultimate financial goal.

What steps are you taking to get to that place?  A different way of thinking about retirement may help you get over that hump…and help you to get busy livin’!

If you ever wonder whether there are lots of folks who have a better handle on the markets than you or I do, we need only look back to 2013, when the Nobel Prize in Economics was awarded to three folks.  One was Eugene Fama, most closely associated with the theory that markets are very efficient and quite unpredictable.  Another was Robert Shiller, who argued that markets aren’t very efficient and can be predicted.  No, seriously.

But here’s the thing:  in my opinion, they are both right!  [And if folks want to send this to the judges in Stockholm you have my permission.]

In the overwhelming majority of times, markets are mostly efficient.  While the business media often ascribe reasons for stocks rising or falling in any given day, here’s the reality:  they are giving us the excuse, not the reason.  Markets go up and down every day for hundreds of reasons and there is little value in trying to figure out “why” the market declined over a few hours or a day.  You often find correlation, but rarely find causation in short time frames.

But there are times that markets are exceptionally inefficient.  We witnessed that during the so-called “flash crash” in 2010 and to a slightly lesser extent on Monday (August 24), when the Dow Jones Industrials fell nearly 1,100 points at the open, only to close at 15,871, five hundred points above the lowest drop.  The market was rational, right up until the point when it wasn’t.  And when it wasn’t was your and my best chance to profit.

On Monday, GE was at $19.37 at 9:31AM.  Thirteen minutes later, it was at $24.04, a gain of 24%.  In 13 minutes.  Was there something that happened to General Electric or its balance sheet or its earnings or its product sales over those 13 minutes?  Not a thing.  It was sheer panic, causing boatloads of shares to be dumped on a market that had very few buyers.

We were net buyers in the first few minutes of that memorable morning.  And it stunk!  It was miserable; we placed an order and wanted to upchuck our breakfasts.  But when the mania of the moment clears we, as investors, were rewarded by traders who see the price of many things but the value of few.

You and I don’t get many chances like we did Monday morning.  And if we find “the bottom,” it means we’re both lucky and good.  At the core, it means we paid less for a company Monday—a lot less—than that identical company was trading just a few days earlier.  Doesn’t mean it guarantees success, just that it gives us a better chance at it.

I’ll take every chance at long term success I can find.  How about you?