Should You Care About a Mutual Fund’s Past Performance?

February 08, 2017

The primary reason that investors choose to subject their hard-earned savings to the ups and downs of the stock market is that history has shown that over long periods of time, it’s one of the best ways to grow your savings in order to outpace inflation and maintain purchasing power. One of the biggest investing mistakes I see though is what we call “performance chasing” or making investment choices based solely on the past performance of a particular investment. I’d argue that past performance is actually the last criteria anyone should consider when deciding which funds to buy and is almost completely irrelevant when looking at index funds. Here’s what I mean.

Past performance is often the first thing people look at when presented with a list of mutual funds, like in their 401(k) account. I get it. You want the best and you want your money to grow as much as possible!

But this is a key mistake that can actually lead to losses rather than gains over time. The problem is that the fund that did the best last year or over the past three to five years is statistically LESS likely to be the best next year, so by buying the “best” based on the past, you may actually be buying high, which is the opposite of everyone’s favorite stock market adage: “Buy low, sell high.” This chart shows that. Just follow the orange square representing “MSCI Emerging Markets” over the 7 years shown:

An investor who chases performance and buys the MCSI Emerging Markets at the end of 2007 because it was the “best” would have lost half their money over 2008. That same investor may be likely to sell at the end of 2008 because they wanted to “stop losing money” and therefore would have completely missed out on the recovery of that sector, when it “won” again in 2009! That’s an extreme example, but follow any of the colored squares over the years and understand a little better why it’s a losing game to only invest in what’s done the best in the recent past. Instead try to spread your investments out over all parts of the market and just “let it ride.”

For investors who like to put their money into actively managed mutual funds, there is a reason past performance matters – so that you can see if the fund is meeting its objective to match or exceed its benchmark. Past performance means nothing without the context of its benchmark. For example, let’s say you’re looking at a mutual fund with the objective of outpacing the S&P 500. Such a fund may include words like “Large Cap” or “US Large Company” or “Capital Appreciation” in its title.

When researching any fund’s performance, look for a chart on the fund fact sheet that shows its performance alongside its benchmark. Here’s one example, showing a fund that is matching its benchmark quite well:

If the lines moves pretty much in tandem together or the fund line is consistently higher than the benchmark line, it means the fund managers are doing their jobs consistently well. If you were to look at a chart and see the fund losing to the benchmark as a pattern, then you may want to reconsider it as an investment, even if the fund is in positive territory. In other words, even if your investment is up 10% this year, if its benchmark is hitting 15%, your fund is failing you.

Likewise, if your fund value is down, it doesn’t necessarily mean you’re in the wrong fund. Markets go up and down. As long as the fund’s benchmark is down as far or further, you’re okay to stick with it.

So what does matter when choosing a mutual fund?

The one guarantee about mutual fund investing is the most important criteria in fund selection: fees. You will pay fees, guaranteed. But you can control how much. That doesn’t mean you want to select funds based solely on the criteria of the lowest fees, but if you’ve taken your risk tolerance quiz to determine a suitable mix of stocks and bonds (see the chart at the very end of the questionnaire for suggestions) and have more than one fund option to fulfill your investing allocation, then fees should be one of the deciding criteria.

What if you’re investing in index funds? Then the only use that past performance really has for you is in helping you to set realistic expectations for how your money will do over the long haul. Look at the performance numbers over the past 10 years or more and that should give you a reasonable idea of the growth you can expect for your own money. Assuming you’re only investing money that you don’t need for 10 years or more, you really shouldn’t care what happens over the next one, three or even five years.

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Financial Wisdom From My Grumpy Old Man Side

January 13, 2017

Sometimes I like to have some fun and adopt a “grumpy old man” persona for a bit just to keep everyone around me on their toes. My kids have started to say “OK, Grandpa…” when I get into my grumpy old man role. Sentences starting with “back in my day” or “when I was your age” or containing the words “poppycock”, “shenanigans”, and “new-fangled” are standard when I’m talking as that character.

The funny thing I noticed this morning as I was playing this part is that a lot of what I say as that person is absolutely true. The principles are valid and while I may be joking around and having some fun, there is some real timeless stuff that I wish more people in today’s world would implement as a part of their lifestyle. Here are some of the top nuggets of wisdom from my grumpy old man character:

Back in my day, if you didn’t have the cash, you didn’t buy it. I have seen more people get themselves in trouble financially through excessive use of credit cards than for any other reason. As credit card debt mounts, so do minimum payments as well as stress. I can’t count the number of divorces and therapist visits that people have attributed to credit card debt.

When I was your age, I always saved some money for a rainy day. Having an emergency fund, whether it’s a “starter emergency fund” of $1,000 – $2,500 or a 6-9 month cash cushion, is a great way to ensure that your financial life won’t get blown to smithereens in the event of a job loss, injury or illness. An emergency fund is the #1 barrier to unwanted debt.

What’s with all the shenanigans of picking all these stocks? Don’t put all your eggs in one basket. This is a time honored principle that the folks who worked at Enron or MCI WorldCom wish they had reinforced by senior management. The best way to “get rich” in the stock market is to find the next Apple or Google and put all of your money in that stock, but finding THAT stock is a lot tougher than it sounds and you’re more likely to find one that ends up going nowhere. So spreading your risk out among many different asset classes is a great way to participate in the whole stock and bond markets rather than concentrating your risk (and potential reward) in one area.

Who needs all these new-fangled gadgets that you spend so much money on? Another principle that works every time it’s tried is spending less than you bring home. So many people I talk to are very excited about the next iPhone that is coming out or 4k televisions or new and cool technologies that can make people say “wow.” Those things are fun and cool, but they can improve your quality of life only very slightly and they are usually pretty pricey.

By holding off on those purchases, along with driving lower priced cars and living in reasonably priced housing (the things Americans tend to vastly over-spend on), there will be plenty of room for savings and taking on debt will be a thing of the past. Think about the last “cool” purchase you made and how quickly the cool factor evaporated. Wouldn’t it be cooler to save that money and be able to retire a year or 5 earlier?

Part of the reason that I can act like my grandfather and use some of the phrases I heard as a kid is that the wisdom in those phrases has withstood the test of time. Just like 2+2=4 was true when I was in elementary school and is still true today (although the way it’s taught is different now), these little financial nuggets were true then, they are now, and they will be when my kids are grandparents. (This BETTER be in a long long time!)

How to Make 2017 the Year of Financial Security

December 28, 2016

According to Fidelity’s annual study on New Year’s resolutions, the number of Americans considering a financial resolution for 2017 increased significantly over last year. If you are one of those who are hoping that 2017 will be the Year of Financial Security, I suggest a quick review of 2016 as a starting point. Ask yourself four questions to get started:

1. How much did you save? Before you start on a mission to save more money next year, take a look at how you did over the past year. Are you better off this year than last? Could you have saved more money? Were your expectations of how much you could save realistic?

Don’t let a small balance in your savings account discourage you from continuing your efforts. Make saving automatic by scheduling a recurring transfer on payday so you never miss the money. If you don’t yet have 6 months of your expenses tucked away in a savings account, that’s a good goal to start with.

2. How is your 401(k) or IRA doing? If you haven’t checked on your retirement account lately, this is a good time to log in and check your asset allocation. If nothing else, you should make sure you’re re-balancing your investments to account for changes in the stock market.

But you should also make changes to your allocation as you approach retirement. Someone who only has 5 years until retirement will have a lot more of their assets invested in fixed income funds versus someone with 30 years to go. It’s also a good time to run a retirement calculator to see if you’re on track to retire when you want to.

3. Did you reduce debt? Raise your hand if your financial resolution includes reducing or eliminating debt. Extenuating circumstances aside, if your total amount of debt increased or stayed the same in 2016, then it’s time to take a look at how you are going to make that number go down for the coming year. The first step in eliminating credit card debt is to stop using credit cards, so start thinking now about how you will shift your spending to cash only while you tackle your debt. Then make a plan and stick with it.

4. Has your financial outlook changed? Perhaps 2016 was a year of change for you. Perhaps you got married, got a raise, switched careers, etc. As you prepare your plans for 2017, cover these questions to set you up for financial success in the coming year:

What are your greatest concerns? What keeps you up at night about your life and money? It might be something totally different from last year. This will affect your financial goals.
Is there specific financial guidance you need? Perhaps you received a promotion and have a lot more money to throw around so you finally need investing help or maybe now you’re caring for a relative. Does that affect your taxes? Consider seeking out a professional to help you with any big changes you’ve encountered. Your workplace financial wellness program is a great place to start.
Have your goals changed? Did you get married, have a baby, move to a new city, or decide to go back to grad school? All of these will affect your long-term goals. Hopefully, you’ve already examined how these changes affect your finances, but if not, now is the time to take a look and make any changes needed.
Do you need to revise your budget? If you did have any major life events in 2016 or if you’re setting a “stretch goal” for yourself for 2017, you probably need to revise your budget. Take a look at those expenditures that have become routine such as stops at Starbucks or taking Uber home from work and decide whether you need to reconsider those activities. For me, I have a renewed focus on my health after a rough 2016. I’m planning to spend more money on fitness activities like specialty classes and less money dining out.

Goal-setting for the New Year can be overwhelming. Make sure you give yourself some time and head space so that you are able to mindfully set goals that are realistic, achievable and motivational! Happy New Year!

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Should You Pay Off Your Mortgage Early?

December 23, 2016

One of the questions that I have fielded fairly often in my career as a financial planner is about paying off a mortgage vs. keeping it for those who have the ability to write a check and pay it off all at once. I have had a lot of discussions with my friends who are in financially -oriented careers as well as with friends who have no financial background but who always show an ability to use common sense. After years of having this same debate, we have found that there is no true consensus around this topic. But we have come up with the most important points to consider on each side.

In favor of keeping the mortgage: If the mortgage rate is 4% and it’s tax-deductible, the tax-adjusted cost of the loan is around 3%. If you can do better than 3% on your investments, keep paying the mortgage and invest your cash.

In favor of paying it off: For every dollar you pay in interest, you get a tax break of maybe $.25 to $.40. To me, that sounds like losing 60-75% of each dollar. The total interest cost can be 2-3x the amount borrowed over the life of the loan. You still lose over half of each dollar paid in interest with the tax impact factored in.

And in down markets (not that we’ve seen one since 2008), you not only lose money in your investment accounts (think about the -37% S&P 500 returns in 2008), but the interest on your mortgage is lost opportunity cost. Paying off the mortgage in Jan ’08 would have yielded a 4% return with the assumptions above. Keeping it would have cost 41%, the 4% paid in interest along with the 37% lost if your returns were similar to the overall US stock market. A mortgage can be viewed as a means of leverage, and as we’ve seen with the financial markets, leverage isn’t always a great thing.

I have seen dozens of “keep vs. pay off” mortgage calculators. The inputs on the calculators usually include the interest rate of the mortgage, the investment account’s assumed rate of return, and income and/or tax rate of the homeowner, along with other more specific data items. The one thing that is NEVER seen in these calculators is “How are you wired? How would you sleep best at night? Do you like having a mortgage or do you really despise owing money to anyone?”

The most sophisticated calculators miss the single most important factor in this decision. Which option feels best to you? Financial planning isn’t always about the numbers. Sometimes human behavior and psychology are even more important.

In my experience, the option that feels best is the option that individual will choose. This is the same in your financial life as well as with exercise and nutrition. The things that work best are the things that you feel are consistent with your internal wiring.

There is a lot of analysis, discussion, calculations, changing of assumptions, and an enormous amount of time devoted to this decision. In the end, I’ve seen that what matters is the emotional viewpoint of each individual. Almost always, emotions outrank number crunching in this kind of analysis.

Why I’m Investing 100% of My 401(k) into One Stock Fund

December 15, 2016

Like many companies, Financial Finesse recently changed the fund line-up in our 401(k). As part of the new offering, we now have target retirement date funds that are fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date. But rather than this more diversified approach, I’m choosing to put 100% of my 401(k) into an S&P 500 index fund. While this strategy is certainly not for everyone, here’s why I decided it makes sense for me:

It complements my investments outside the 401(k). If you have retirement investments outside your employer’s retirement plan, you might want to look at all of your retirement accounts as one big portfolio. In my case, the bulk of my outside retirement investments will be in real estate and microcap and international value stocks. Since I’m a very aggressive investor with my retirement portfolio, I have no interest in bonds or stable value. Therefore, domestic large cap stocks can best diversify my overall portfolio without sacrificing much in expected returns.

Index funds tend to outperform actively managed funds. It’s also the only index fund offered in the new plan. This is an important point because studies have shown that index funds tend to do better than the vast majority of actively managed funds in the long run, primarily because of their low fees and trading costs. While value stocks tend to outperform in the long run and growth stocks would better complement my already value-heavy portfolio, both advantages can be wiped out by the higher costs of active management.

Warren Buffett recommends it. Arguably the greatest investor alive today has recommended index funds to both Lebron James and average Americans. He’s also put his money where his mouth is, instructing his trust to invest 90% of his estate in an S&P 500 index fund for his wife when he passes away and betting a $1 million to charity that a simple S&P 500 index fund would outperform a selected group of top hedge fund over 10 years. (It’s year 9 and he’s way ahead so far.) If it’s good enough for Buffett, it should be good enough for me.

Of course, this certainly doesn’t mean everyone should put 100% of their employer’s retirement plan in an S&P 500 index fund. If you don’t have much outside your plan, your portfolio may not be diversified enough without international and small cap stocks. Unless you’re also a very aggressive investor, you’ll probably want some bonds and cash as well to reduce the portfolio’s risk. This is why most people are probably better off investing in a more diversified portfolio like the target date retirement funds we have now. As always, you’ll want to make sure you’re making an informed decision that’s best for you.

Is Too Much of a Good Thing a Bad Thing?

December 02, 2016

During some recent conversations with employees of a publicly traded company, the topic of company stock was very popular. This company’s stock price has tripled (300% gain, point to point) in the last 5 years, while the Dow Jones Industrial Average has increased over 50% (from ~12,000 to ~19,000). What that has done to employee 401(k)s, for those who contribute to company stock inside the plan, is ratchet up the percentage of company stock beyond the 20% limitation that the firm’s policies allow. For those who have participated in the employee stock purchase plan (ESPP) or who receive some form of equity compensation (restricted stock, stock options), their company stock holdings could even be higher. The question around their building during these conversations was “do I have too much company stock?”

My answer to that question was almost always “it depends!” Most financial planners will recommend that no more than 10-15% of one’s portfolio should be in employer stock. Employees at Apple or Google would disagree with that, while employees of MCI WorldCom and Enron think that is probably 10-15% too much. While that rule of thumb is out there, it is often misconstrued.

I spoke with one employee recently who had 40% of her 401(k) in employer stock and she was concerned because her financial advisor told her that was far too much to have. When we broadened the scope, from just her 401(k) to her total portfolio, we found that only 5% of her total wealth was in employer stock. She had most of her money in CDs at her local bank and in a portfolio of bonds with her financial advisor. Her employer stock was almost her only growth asset. We did talk about more broadly diversifying her portfolio and about allowing her financial advisor to know that she had the CDs at the bank too so that his recommendations could be with the full knowledge of her situation.

The lesson: When looking at employer stock, look at the whole picture not just one account.

I spoke with another employee who had 15.1% of employer stock in his 401(k) and his plan provider had a big red warning sign on his 401(k) one day. If the stock price fell and the stock became 14.9% of his plan, the red warning sign would go away the next day. He was right on the edge, as he viewed it – and as his 401(k) plan provider viewed it.

He wasn’t too concerned because he is highly optimistic about the company’s future. During our conversation, he convinced me that he totally understood the risks associated with having one stock be too big a portion of a portfolio. When I asked a follow up question about equity compensation and the ESPP, he told me that an amount equal to his 401(k) balance was sitting in company stock through the ESPP and restricted stock grants.

So 65% of his investable asset base was in company stock, and this company is going through a merger that may be wonderful or dreadful for the company stock price. Upon realizing that, I asked “Are you more concerned about your stock price doubling right after you scale back your holdings or the stock price falling by half if you don’t scale back your level of holdings?” He was far more concerned about the stock price falling if the merger didn’t get approved or if the overall stock market tanks after 8 years of increases so he opted to scale back some of his holdings by selling ESPP stock and paying off his mortgage.

The lesson: Be aware of where the overall markets are, what your risks are and the full scope of your holdings.

To answer the question of “How much employer stock is too much” requires a fairly thorough understanding of your financial life and goals, the economy, current events/news regarding the company and your willingness to accept large losses in an attempt to make large gains. I’m certain there are people at Google who wish they could buy nothing but Google stock, and I know for sure that there are people who once worked at Enron who wish they had never owned a single share of Enron stock. Each person is different, but understanding your specific situation and the risks and rewards of your employer stock can help you come to the right answer.

Do You Really Know What You’re Investing In?

November 04, 2016

My kids, some coworkers, and it seems like the whole world around me are big fans of Twitter. In fact, some of the podcasts I listen to mention Twitter as the hosts’ #1 source for breaking news. I guess I haven’t ever seen that platform as one that works for me and when Twitter became a publicly traded company, I chose not to buy the stock because I couldn’t figure out their revenue model.

I also thought “speaking” in 140 characters or less was a way to degrade the way people communicate. I already despise “text speak.” Character limitations have given us degradations of the English language like UR, BRB, LOL and the worst of all possible things…emojis! (And while I’m at it, get off of my lawn!)

I am a big fan of words and grammar and punctuation. There’s a huge difference between “Let’s eat, Grandma” and “Let’s eat Grandma.” Punctuation can save lives!

With this mindset, I have been watching the world of technology companies and see that Yahoo was for sale recently and the price paid was far less than it would have been when Yahoo was one of the kings of the technology hill. Now Twitter is for sale and potential bidders keep opting out of the deal. There are fewer suitors as time moves forward and the potential sale price keeps dropping. The moral of the story for me is that just because something is cool and trendy and “everyone loves it”, it doesn’t always translate into a wonderful business model.

I’m a huge fan of Sirius satellite radio and have it on constantly. Just because I’m a loyal customer, doesn’t mean I want to be an investor. Again, cool stuff is awesome as a consumer, not always wonderful as an investor.

As you think about investing your hard-earned dollars, be very aware of the “cool effect” (not a real term, I’m making it up for this blog). Sometimes in situations like Apple and Google, a “cool effect” translates well into a cool investment that produces great returns for an extended window of time. But those are far more the exception than the rule.

One of the rules I use when evaluating if I want to invest in a particular company (which I rarely do anymore) is that I absolutely MUST understand what the company does and how they earn their money. I’m still mystified by Facebook! Do people really buy that many ads or pay for that many games? No one I know has ever spent a dime on that platform, so either I know the wrong people or I just can’t grasp what they’re doing to generate revenue and profits.

Do you know what you’re investing in? Most people I meet don’t really know where to begin to answer that question. Even at the top level of stocks vs. bonds vs. cash, most people I meet are unaware of their asset allocation. Many have no idea what it “should be” for their stage of life and goals.

If you’re like me and don’t understand how Twitter makes money and why anyone would want to buy it, let that thought make you dig into what you really do own and invest in. I’ve heard the phrase “no one will care about your money more than you” used a lot recently. Take a few minutes over the next several days and figure out what your current asset allocation is and what you’d like it to be and then take a look at your current holdings to see if there are investments that might not fit with your goals.

This investment risk profile can help you determine where you might want to be from a top level asset allocation standpoint. To dig a layer deeper, here is a fairly technical article and a practical one as well to help you evaluate your investment holdings. Remember, you aren’t investing to own the “cool stuff.” You invest for one reason and one reason only: to make your money grow over time.

Why Homes Actually Tend Not To Be Disappointing Investments

July 28, 2016

One thing I often hear people say (except right after the crash in the real estate market), is that their home was the best investment they ever made. However, a New York Times article titled Why Land and Homes Actually Tend to Be Disappointing Investments points out that real estate has increased by only .6% a year in real terms from 1929 to 2015 compared to a 3.2% average annualized increase in GDP over that same time period. The problem is that comparing just increases in price ignores a lot of the financial benefits of home ownership:

You don’t have to pay rent. If you don’t buy a home, you’ll probably have to pay rent and unlike a mortgage payment, rent tends to go up at least as much as inflation and never goes away. In fact, one of the biggest factors I’ve noticed in whether people are on track for retirement is whether they will have a paid off home by the time they retire. This “imputed rent” (or income from your home in the form of not having to pay rent) is one of the main sources of return. If you’d like to see whether buying or renting makes more financial sense for you, you can see how all the factors come out with this NY Times Rent v Buy calculator.

Real estate allows you to use leverage. Let’s suppose you purchase a $100k home and put down 20% or $20k. If the home appreciates with inflation by 2%, it’s now worth $102k. That doesn’t sound so great until you realize that the $2k increase in your net worth is actually 10% of the $20k you put down.

Being able to borrow from your home can help you in other ways too. Once you have equity, you can generally get a revolving line of credit or a home equity loan against it with relatively low interest rates and deduct the interest from your taxes. This can be useful in an emergency or to pay off higher interest credit card debt. (In that case, be sure you can make the payments because your home will be on the line if you can’t.) When you reach age 62, you can also take a reverse mortgage that allows you to supplement your retirement income by borrowing from your equity without having to make payments as long as you live in the home.

You’re less likely to over-react to market downturns. One of the biggest mistakes people make with stocks is to stop buying or to even sell when an investment goes south, only to miss the recovery. It’s not as easy to stop making your mortgage payments and if anything, people are less likely to sell when their home value is down.

Don’t forget the tax advantages. Not only can you deduct the interest and property taxes, you can also sell it and pay no taxes on up to $250k of gain (or $500k if you own it jointly) as long as it was your primary residence for 2 out of the last 5 years. You can also defer the taxes if you immediately reinvest the sale proceeds in a new real estate property, and if you pass it on to your heirs, they can sell it without paying capital gains taxes on all the gains during your lifetime.

You can rent it out. While you live in it, you can rent out an extra bedroom to a long term tenant or possibly for shorter stays on sites like AirBnB. If you move out, you can also rent out the entire home as an investment property (which also allows you to deduct depreciation and other expenses from your taxes).

There’s an emotional return. Not every benefit can be measured precisely in dollar terms. Homeowners also benefit from knowing that their home is truly their own. They can make renovations as they want and don’t have to be concerned with being kicked out by a landlord.

When looking at real estate as investment, don’t just focus on historical appreciation. Be sure to understand all the pros and cons. Then maybe one day you’ll be saying it was your best investment too.

Should You Buy Whole Life Insurance?

July 27, 2016

One of my favorite parts of being an unbiased financial planner is that I have the opportunity to answer questions for family and friends as well, with no concern as to whether there is a conflict of interest or a loss of earning opportunity. I love it when people ask me for help making their decisions. It’s what I do every day, and it’s why I’m in this business in the first place.

A friend recently asked for my thoughts on a whole life insurance policy that she was being pressured to buy after meeting with an agent to discuss disability and term life insurance. She was pretty sure that whole life was bad since that was the thing the agent was pushing the most, which is a definite red flag. If someone is trying to sell you something that you don’t understand, and they’re unwilling to take the time to educate you on why it’s the right thing for you, JUST SAY NO. However, in this case, the answer isn’t cut and dry. This is basically how I answered the question:

The big downside to whole life policies is that they tend to have high fees, especially in the first couple years, when the agent makes their big bucks off commissions. (This post explains a little more about the intricacies and the different types of life insurance.) Whole life insurance is most appropriate for higher income people who are wealthy enough that all their other tax-advantaged ways to save money are being fully utilized.This means that:

1. You and your spouse are both maxing out your workplace retirement savings plans. ($18,000 if you’re under age 50, $24,000 if you’re over. The limits can be higher for self-employed people who have a SEP-IRA).

2. If you have an HSA due to high-deductible health insurance, you’re putting the full $3,400 (for individuals) or $6,750 (for families) into those accounts.

3. You are maxing a Roth IRA (using the “back door” method, if necessary and applicable).

4. You have no debt besides a mortgage, car loan, and possibly student loans as long as the rate is 3% or less.

5. You have at least 6 months of expenses set aside in a savings account.

6. You feel like you have enough extra money every month to do the stuff you want to do within your lifestyle values like travel, caring for pets, entertainment, etc. and you can adequately fund things that might pop up like medical procedures, etc.

If all of those financial needs are either met or you’re on track to meet them, and a whole life policy premium wouldn’t derail them, then they can be a decent investment that can fulfill the “fixed income” part of your long-term investments. That’s how the agent I purchased my small policy from described it. I also decided to purchase my whole life policy because there was a strong chance I may not qualify for long-term care down the road due to blood clot issues (and ironically enough, I got a blood clot exactly one week after my policy was accepted for underwriting – timing was impeccable, and my policy had a cheap rider for that coverage). Here’s how we looked at it:

The annual premium for at least the first 5 years is equal to an amount that we would typically be saving in a bond fund or other less-risky investment anyway. The policy builds a guaranteed cash value and based on the projection of the cash value’s growth, we would break even (aka the cash value would equal and then exceed the total amount of premiums we’d paid in to date) after 13 years. The real question then was whether we would otherwise take that money and save it some other way.

Since the answer was yes, we went with making this a small part of our overall investment savings strategy. Once I’m 65, we no longer have to pay premiums and at that point, we could borrow against the policy and use the cash value as we needed. It’s actually a great way to invest tax-deferred, as long as it’s truly looked at as a long-term investment.

Could we take that money and invest it in a bond index fund for lower fees and expenses? Sure, but there’s no guarantee on the growth of that money, and should I meet an early death (heaven forbid!), my policy would pay its full face value starting from the day we made the first premium payment. It’s worth it to us.

Post was updated 3/9/17 for current savings limits.

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

Meet Our Newest Planner: Cyrus Purnell

July 25, 2016

Cyrus Purnell, CFP® is driven to take the mystery out of why some people thrive financially and others don’t. Recently, I had the privilege of sitting down with our newest planner. We discussed his money story and how this Gen X father aligns his personal mission to help others get the information they need to make better financial decisions with his work at Financial Finesse and his role as a husband and father.

Why did you want to earn your CERTIFIED FINANCIAL PLANNER™ designation? What does it mean to you?

I earned my CFP® designation because my primary reason for joining this industry was to help families plan for their futures. When my mom would pick me up from school, she would have the radio on Larry Burkett’s radio show “How to Manage Your Money.” After listening to him help people work their way through financial situations day after day, I thought to myself, “I would like to do that.” Looking back on it today, I was struck by how effectively a short conversation can help relieve someone of stress and set them on a positive road.

What’s your money story – what your parents taught you about money, etc.? Did you hold any negative beliefs about money that you had to overcome?

In hindsight, my parents had a very well balanced view on money. They had very consistent positive money habits when it came to paying bills on time and maintaining low debt levels. They definitely lived within their means, but they would occasionally splurge on things like vacations for the family.

Growing up, I felt like they said “no” to everything, but as an adult, I realize they were very balanced in their yes’s and no’s, and that balance allowed me to walk away from undergrad with zero student loan debt. My perception of being deprived of certain luxuries growing up has always given me a slant toward spending on one event or item and then doing a 180 and spending nothing for a while to make up the difference. It took time for me to learn to plan for those special items and live in balance.

What is the biggest mistake you ever made with your money, and what did you learn from it?

When I started out on my own after college, I picked up what I call “pet debt.” I seemed to carry around some credit card debt and never really took the initiative to completely pay it off. My wife had a similar level of debt when we married, and while were very aggressive on paying off student loans and car loans, we still kept our “pet debt.”

After the birth of our first child, we took a hard look at what the debt was costing us in interest. We got on the same page and attacked the debt and paid it off aggressively. This allowed me to get my MBA without picking up new debt, and my wife was able to start her own business.

What have you learned about money and marriage that you can teach the rest of us?

You can accomplish a lot more working together than you ever could individually. Anytime my wife and I had individual agendas, it always produced tepid results. When we work together on something, we would have better-than-anticipated results.

I know how to run an amortization schedule and how quickly something can be paid down. When we work together, it was faster than any pay-down plan. We would have the wind at our backs.

How do you teach your kids about money?

While my kids are still young, we have felt it was important to begin conversations with them on the value of money and saving. We’ve wanted them to be very involved in the savings process, going to the bank and opening their own savings accounts. Now with any Christmas or birthday monetary gifts they receive, we have the conversation on what we will give, spend and save. My 8-year old is now earning money with doing extra chores around the house. I have been impressed that while he has enough in savings to get the toy he wants, he’s yet to ask for it but has a plan to continue saving $5/week.

If you could wave a magic wand and reform the financial services industry, what would you do?

I would shift cost from the products to the advice. I think there are many very intelligent and ethical people in the financial industry, but they are trapped by the fact that so much of the industry is product-focused and not solution-focused.

Tell me about your personal investment philosophy?

My study and experience with investments has shown that almost all investment return is based on asset allocation. The biggest obstacle to realizing the return from that allocation is fees. In my personal portfolios, I endeavor to build allocations well suited to my time horizon with an eye to keeping fees low.

Is there anything that really surprised you about coming to work at Financial Finesse? Why?

I did a fair amount of research before joining the company so there haven’t been many surprises. I will say the company is exactly what it says it is. Most companies tend to over-hype the strength of their culture and their dedication to mission. It is not hype here. All of that is real.

Have a question you’d like answered on the blog? Please email me at cynthia.meyer@financialfinesse. You can also follow me on Twitter at @cynthiameyer_FF

Anatomy of an Investment Mistake

July 22, 2016

I saw an email from a soon-to-be-retired employee recently, saying that he thought that he made an investing mistake and was looking for some help in correcting it. Here’s the mistake he made. When the stock market tumbled for a couple days because of the British exit from the E.U. (Brexit), he jumped out of the stock market. He moved his portfolio from 60% stocks/40% bonds and cash to 100% stable value because he was afraid the market would continue to drop like it did in 2008.

Well, after two days of going down, the market went back up and within two weeks, it was higher than it was the day before Brexit. The question he asked was “When should we get back in: when it drops to the level when we got out or lower?” There are a few flaws in his thought process.

Issue #1: Selling (or buying for that matter) based on emotions and news events usually ends poorly. In not too distant memory, we have seen the dot-com bubble burst, 9/11, Enron, the housing market collapse, the stock market collapse of ’08 and an economy that is 7+ years into one of the most lackluster recoveries ever, and the stock market is near all time highs! Markets go up. Markets go down. But over time, there has historically been an uptrend given enough time.

One of the things I tell people when they are worried about how the market will respond to a news event is “emotions are the enemy of good decision making.” Yeah, it’s not inspirational. It doesn’t rhyme, and it’s not all that compelling as a standalone statement. But it’s true, and I’ve seen it have horrible consequences for people time and time again.

If you are thinking about changing your investment mix based on a news event, don’t! Go take a nice walk, turn off the TV, play your favorite tunes and let some time pass. Markets overreact…in both directions. If there is a huge sell-off on Monday, chances are that logic and reason will come back into the market, and there will be a few up days after a massive sell off.

Cool your jets and maintain your long term asset allocation. Talk with a financial professional if you have one in your life. Don’t let your emotions be the enemy of your decision making process.

Issue #2: In his question, he assumes that the market will, one of these days, be lower than when they sold off the stock portion of their accounts. It may never be that low again. People who sold in ’08 and wanted to buy back in when the market got that low again are still sitting around waiting for that to happen. Their wait may be eternal (or not).

The logical flaw in this argument is a lot like the “sunk cost fallacy.” You’ve already made the sell decision and are now tied to the results of that decision emotionally. Looking into the rear view mirror isn’t helpful in this case. Look forward. It’s a difficult skill to apply, but don’t allow yourself to fall into the sunk cost fallacy.

Issue #3: The reason he sold off a big chunk of his 401(k) and went to stable value is that he is considering retirement in the not too distant future. It makes sense to want to be more conservative in that case but it’s too drastic of a change. If he had been considering retirement for some time now, maybe a few years ago would have been an appropriate time to start making small changes to his long term asset allocation.

For instance, I meet annually with someone who has a retirement goal of 12-15 years. She was 100% stocks and 0% bonds and cash when we first met 5-6 years ago. Rather than selling her existing holdings, she changed her future 401(k) contributions to 75% bonds/cash and 25% stocks. She recently moved future contributions to 100% bonds/cash, and when she hears that the stock market hits a new high, she moves 1% of her account to stable value. Her goal is to be at 50% stocks, 50% bonds/cash at and during retirement.

Do you know your long term asset allocation preferences? Do you have a plan in place to shift from where you are now to where you want to be when you’re 98 years old? Review your asset allocation today, see if it’s consistent with your investment risk tolerance and then develop a plan to get from point A to point B over the course of time. Remain patient and don’t let emotions get in the way.

Over the course of time, we all make mistakes. I have, you have, and the odds are high that we’ll make even more in the future. But some mistakes are preventable, and we can hopefully learn from the mistakes of others so that we don’t make them as well. If you can remain emotionally detached from your investments when bad news is happening, avoid the sunk cost fallacy and have a clear vision about your long term investment strategy (and stick to it), you will put yourself in a great position for long term financial success.

Investing Made Easy

July 18, 2016

Can investing be easy? How can you become a more informed, savvy investor without learning a lot of extra financial jargon? Investing really doesn’t have to be that hard. Consider following these three simple principles:

Know Yourself

Successful investing starts with knowing yourself: how you like to make decisions, whether you like advice or you like to do it yourself, and what you do when the going gets rough. The first step is to figure out your investing risk tolerance, which is how much of your invested money you’d be willing to risk losing in order to make a profit. Try and quantify that in real dollar amounts, e.g., you have $1,000 to invest, and you’d be willing to risk it going down to $900 (a ten percent loss) in order to have a good shot at ending up with $1,150 (a fifteen percent gain).

Would that change if your investment was $10,000 or $100,000? Are you a conservative, moderate or aggressive investor? Make sure to take a risk tolerance questionnaire like this one to double check your assumptions.

The next step is to ask yourself how involved you want to be in the day to day management of your investment portfolio. Are you more of a “hands-on” or a “hands off” type? A hands-on investor is actively involved in designing a portfolio, setting target weights for different types of investments and monitoring/re-balancing the portfolio regularly. A hands-on investor may favor individual stocks or actively managed mutual funds or setting up their own asset allocation (mix of investment types) of index mutual funds. The hands-off investor is looking for a one-stop shopping solution and is more likely to favor pre-mixed portfolios like target date mutual funds or use a robo-advisor to set the strategy and automatically re-balance.

Finally, ask yourself if you like to do it yourself or if you’re the sort of person that likes advice. There are many options for do-it-yourself folks, including low-fee financial services firms where you can invest on your own without an advisor. If you are the type who likes having a coach, consider working with a fee-only CERTIFIED FINANCIAL PLANNER™, professional who is paid only by clients and not by commissions or brokerage fees. Make sure to check your advisor’s background with FINRA or with the SEC if they’re a registered investment advisor.

Set a Clearly Defined Goal

When will you need to use the money? Certain types of investments are better suited to certain time periods due to their levels of risk. If you need access to the funds in less than three years, stick with very low risk investments like savings accounts, money market funds and CDs. A stock fund is no place for your savings for a home down payment!

If you will use the money in three to seven years, consider adding some high quality bonds or bond funds. Adding in stocks makes more sense for goals of seven to ten years or longer, like your retirement account. The longer your time horizon until you need the money, the more you can consider adding stocks and stock mutual funds to your portfolio.

How much do you need your investment to be worth in order to make your goal? That’s called your “investment return.” Take the home down payment scenario: The most important thing is that you don’t lose any money, and your investment return is secondary. However, with a large, far-off target like retirement, you may need to achieve a 6-7% average annual return in order to meet your goals.

Match Investments to Your Goals and Preferences

Your investments should match when you need the money (time horizon), your required growth (required return), your investment risk tolerance and whether you are hands-on or a hands off investor. According to fellow CFP® Kelley Long, choosing investments is a lot like choosing a pizza. You can customize it to fit your tastes.

For a longer term, aggressive investor, you could consider adding 5 to 10 percent in stocks to a typical portfolio mix (for example, moving to a 70% stocks/30% bonds instead of a 60/40 mix). A more conservative investor would add 5-10% to their bond allocation (a 50/50 mix using the previous example). The bottom line is that with some easy tweaks, you can customize your investment portfolio to suit your tastes.

How do you make your investment decisions? Email me at [email protected]. You can also tweet them to me @cynthiameyer_FF

Yes, the Investing Game is Rigged

July 14, 2016

Do you ever feel like the investment game is rigged against the “little guy?” In some ways, that’s true. The “little guys” (and gals) generally don’t have enough money to access institutional funds (except maybe in their employer’s retirement account), can’t afford to hire the top investment managers, aren’t allowed to invest in hedge funds, and don’t qualify for some of the best bank rates. The value of many of those investment managers and hedge funds is dubious though. On the other hand, here are some investments for each asset class that the “little guy” actually has an advantage in:

Cash: Reward Checking Accounts. These accounts are insured and if you meet their requirements, they can pay up to 5% in interest and often reimburse ATM fees. The catch is that the high interest rate is only on the first $5-20k, depending on the institution. That may not be worth the hassle for wealthier individuals with hundreds of thousands or even millions in cash, but may be the entire cash savings for the rest of us.

Bonds: US Government Savings EE Savings Bonds. These bonds are fully backed by the federal government, do not fluctuate in value, and are tax-deferred (and tax-free for education expenses if you meet the criteria). Their interest rate is pretty low right now, but they’re guaranteed to at least double in 20 years, providing a minimum 3.6% rate of return. In comparison, the rate for 20-year treasury bonds is only 1.82%, and they can lose value if interest rates rise. However, each person can only purchase up to $10k a year of Series EE bonds, which is one reason why wealthier individuals and institutions stick to regular treasury bonds despite the lower rate and higher risk.

Stocks: Micro Cap Stocks. Studies have found that these stocks with a capitalization of less than half a billion dollars have produced higher returns than larger stocks even when adjusting for risk, and they tend to move differently from other stocks so they can help diversify a portfolio. Because these stocks are generally too small to be purchased by mutual funds and are seldom followed by Wall St analysts, they also offer more opportunity to find bargains. (In fact, this inability to invest in the smallest of stocks has made investing harder for Warren Buffett compared to when he first started.)

Alternatives: Direct Real Estate. The main reason that it’s so hard to beat the stock market is because knowledge about stocks is publicly available. It’s like trying to find money on the street when everyone else is looking too. That’s not true of the real estate market though. Big investment firms can’t afford to hire people to inspect every piece of real estate and even if they could, most properties are too small to be worth it for them.

When you’re buying your home or an investment property, you have the ability to add value by researching the location, having the property inspected, negotiating the price, fixing it up, and then managing it. All of that work can translate into higher returns. (Don’t forget that it is work though.)

Wall St has a lot of advantages over the rest of us, but that’s not always true when it comes to investing. You have the opportunity to earn returns that the Buffetts of the world can only dream of. So yes, the investing game is rigged…in your favor.

How Much is Your Rental Property Earning or Losing?

July 07, 2016

One of the benefits of investing in stocks, bonds, and mutual funds versus in direct real estate is that it’s a lot simpler. A good example is when it comes time to answer a key question: how much money am I actually making or losing in this investment? With stocks, bonds, and funds, this is relatively easy because it’s all spelled out for you on your statement. You can see how much you’ve collected in interest and dividends and how much the investment has gained or lost in value since you purchased it. With real estate, it’s not quite so simple.

After a couple of years of owning rental properties, including having a few big repairs, an eviction, and vacancies that lasted for months, I decided to sit down and calculate what I was really earning (or losing). The good news is that 4 out of my 5 properties have a positive cash flow of about $200/month over the last 6 months, which is about what I expected when I purchased them. The bad news is that the last property had a negative cash flow of about $500/month since it was vacant during most of that time. (Fortunately, I have a tenant there now.) This netted out to a positive cash flow of about $300 per month.

I was glad to see I wasn’t in the red even with a vacant property, but that still didn’t look very encouraging. However, when I annualized it as a percentage of what I spent on the properties, it came out to be a 5% positive cash flow. If you’ve seen interest and dividend rates lately, that’s not too bad. With the tenant in the 5^th property, it would come to about a 17% return on cash. If you have rental properties or are thinking of investing in one, here are some of the factors to consider in determining the return on your investment:

Cost Basis: This is the upfront cost of purchasing the property (the down payment and closing costs) as well as the cost of any improvements you make. (Only some of the closing costs are included in the basis for tax purposes.)

Rental Income: This is the easiest part to measure. If you’re thinking about buying a property, assume a vacancy of at least one month per year.

Rental Expenses: This is the toughest part to measure and estimate. If you have a property, be sure to keep records so you can tally them up. Don’t forget to include the costs of advertising the property to prospective tenants and any property management fees in addition to the mortgage, property taxes, and insurance. You also need to separate maintenance/repairs from capital improvements since they affect your profitability (and taxes) differently. For prospective properties, maintenance costs tend to run 1-4% of the property value, depending on it’s condition.

Tax Breaks: In addition to non-improvement expenses, you can deduct mortgage interest, property taxes, and depreciation.

Cash Flow: Take your total rental income, subtract your expenses (including taxes on the rental income), and then add in your tax breaks. This is how much income you actually pocket.

Return on Cash: Take your annual cash flow and divide it by your cost basis. This is the cash return on your investment.

Total Return on Investment: Take your cash flow and add in any appreciation in the value of your property and reductions in the mortgage balance to get your total return. Then divide it by your costs basis to get your total return. This is the most fair comparison to your total return on other investments.

When you look at all the ways you can make money (rental income, tax breaks, and building equity), real estate can have some of the highest investment returns. (You can use this calculator to make the calculations above.) But with high returns, comes high risk. Sometimes those risks are obvious, but other times they come in the form of small costs that can add up to big losses over time. Make sure you do the math on any property to see if it makes financial sense to buy, hold, or sell.

How to Protect Your 401(k) After Brexit

June 27, 2016

Will the “Brexit” affect your 401(k)? Global stock markets fell on the news that voters in Great Britain voted narrowly to leave the European Union. Investors don’t like uncertainty, and there will be plenty of that during the next few years as Great Britain and the E.U. sort out the terms of their divorce. Employees are worried, calling our Financial Helpline to ask whether they should react now to protect their retirement savings. Here are some questions to ask to determine what action, if any, is needed:

Does my overall portfolio match my risk tolerance?

Does all the news about the Brexit have you compulsively checking your portfolio during the day? Are you tempted to throw in the towel and put everything in the lowest risk investment possible? If that’s the case, then maybe it would be a good time to double check your investment risk tolerance.

Try downloading our risk tolerance and asset allocation worksheet, a questionnaire which help you determine your risk tolerance and time horizon to get an idea of what investment mix is best for you. Compare the results to your current portfolio mix. If they line up, you don’t need to re-balance. If there is a big discrepancy, you may want to make some changes. This blog post from my colleague Scott Spann, PhD, CFP® offers some guidance on choosing the right investments in your 401(k).

Keep in mind that investing in stocks and bonds always involves some financial risk. Bad days or even years in the stock market are completely normal. However the risk of not investing in stocks and bonds means that the money you save will lose purchasing power over long periods due to inflation (the rising cost of living).

Is my stock portfolio well-diversified by sector?

My fellow planner Cyrus Purnell, CFP® noted that, “Even if you have the right mix of stocks, bonds and cash, it is worth checking to see if your holdings are sector heavy. The Brexit shock is beating up some sectors more than others. If you have stock funds that are focused on financials (banks, brokerage firms and investment managers), you may see more than the average downturn.” International funds focused on Europe are also likely to have some hiccups as Brexit gets sorted out. “If you are running into high concentrations of sectors, consider indexing,” he added.

When is the last time I ran a retirement calculator?

The reason you’re investing in your 401(k) is to build a nest egg for retirement. Measure your success against whether or not you are on track to achieve your retirement goals, not from the highest balance on your 401(k) statement. Now is a great time to run an updated retirement calculator to see if you are on track, given your savings and reasonable projections for your rate of return and inflation. You can use our Retirement Estimator for a basic check in to see if you are on track. You can also use the calculator to model different scenarios using different rates of return to see what happens.

Be realistic in your estimates: recent research from the McKinsey Global Institute suggests investors lower their expectations for average annual US stock returns to 4 to 6.5%. It’s better to use a conservative expected rate of return. If you’re wrong about it, you’ll be happily surprised, but if you’re right, you’ll be adequately prepared.

Do you have a personal finance question you’d like answered on the Monday blog? Please email me at [email protected]. You can also follow me on Twitter at @cynthiameyer_FF

The Father’s Day Gift That Keeps On Giving

June 16, 2016

Are you looking for a last minute gift for Father’s Day? Instead of another necktie that he probably doesn’t need, why not a gift that keeps on giving: financial wellness? Of course, none of us can actually give someone financial wellness, but the next best thing would be our CEO’s new book What Your Financial Advisor Isn’t Telling You.

Don’t worry. If your dad is like mine and acts as his own financial advisor, this book could still apply because much of it covers essential personal finance information that financial advisors typically don’t tell their clients like how to build wealth in the first place. (Advisors generally won’t work with you unless you already have some wealth for them to manage.) If your dad does have an advisor, the book discusses how to best work with an advisor, how to know if he has the right advisor, and how to find a new one if necessary. Specifically, here are some topics that would be particularly useful for dads:

Life Insurance and Estate Planning. These are important topics for dads because they’re still typically the primary breadwinners in their families, and men generally don’t live as long as women. To really see the value of estate planning for dads and what specific steps they can take, see this blog post by my colleague Greg Ward.

Basic Money Management:Money is often cited as a top source of stress and an issue that couples fight about. It can be particularly difficult for new parents. Among all the other challenges are the additional expenses and possibly a loss of income if one parent takes some time off work. Having a better understanding of money management can lead to lower stress and more marital bliss for both mom and dad alike.

Investing. In my experience working with couples, the husband usually manages the family’s investments. However, it turns out that most would probably be better off letting their wives handle this since research has found that on average, women are better investors than men. This is because hormones like testosterone and cortisol can contribute to more overconfidence and less patience in men, which leads them to invest more in things they don’t fully understand, take bigger risks, and trade more frequently (which costs more money). Learning more about investing from an unbiased source can help them overcome their biology and become better investors.

What Your Financial Advisor Isn’t Telling You or a similar personal finance book can be a great Father’s Day gift that benefits the whole family. At the very least, it will be sure to cost you much less than the $116 average that people spend on a Father’s Day gift. You can always use those savings to buy him a nicer tie next year.

Don’t Be a Financial Horror Victim

June 14, 2016

I love old B-rated horror movies. In fact, I was watching the Halloween countdown of horror movies at a Halloween party, and every male under 20 was impressed by the fact that I knew almost every horror movie by watching one scene. I am sure some of this comes from my male relatives taking me to an R-rated horror movie (sorry mom) when they were forced to babysit me. I felt so grown up watching the movies, and I was surprisingly so fascinated as to how they created the scenes that I never got frightened.

What struck me about every movie is that moment when you almost root for the bad guy. You know the scenes when the next character to die goes into the scary building and then runs upstairs as if he or she will grow wings and fly? They always had a bad feeling and always ignore the outward signs. As I recently watched a horror movie with my husband, I was struck by the similarity between people in horror movies ignoring all of the bad signs and how people ignore the “writing on the wall” about a bogus advisor.

During 2008-2011, the main demographic of the group where my office was located was snowbirds – retirees who spent their winters in Florida and their summers in Georgia. One client at the time asked me to talk to her sister. She said something did not sound right about her sister’s investments. After taking a quick look at her statement, I recognized the name of the investment company, and I unfortunately had to tell her that she was a victim of a Ponzi Scheme. News traveled quickly, and I soon found myself flooded with retirees.

I could feel the panic of most of the retirees I spoke to. Most sensed something was wrong. After I got to know many of them, I asked them what they would have told themselves ten years ago, knowing what they know now. Overwhelming what I heard was:

1. If it is too good to be true, then it is. Many of them knew markets goes up and down and anyone that promises nothing but an upside automatically should raise a red flag. No investment is 100% perfect. As you can see from this chart that markets have highs and lows. If you are promised returns that do not match this chart’s returns question your financial planner as to why their results differ from historic average. Remember, a good planner will go over the benefits as well as the risks with their recommendations and work with you to make the most informed decision.

2. If you do not understand the investment and/or investment philosophy, ask until you do. Over and over again, I heard that the reason why they thought they did not understand their investments was because they weren’t knowledgeable enough. You should always understand the investments and/or investment strategy and how those choices will get you closer to your goal. If you struggle to understand this, keep asking until you do, even if it means finding an advisor that can help you understand. If you struggle to understand financial lingo, consider using websites like Investopedia University or Morningstar’s Investing Classroom to help you translate financial jargon into something understandable.

3. No matter how much you trust your advisor, do a background check. Not one person I spoke to did a background check. All believed everything they were told. In some cases, the background check would have revealed past problems with clients. No matter how trustworthy you think your advisor is, check their records at FINRA BrokerCheck.

You can also use this article as a checklist to finding the right financial advisor for you. Whatever you do, don’t be like a horror movie victim. Noticing bad signs and doing a little homework can go a long way to preventing you from being the victim of a bad financial planner.

10 Steps to Jump Start Your Earning Power

June 13, 2016

Are you consistently earning less money than you are capable of, given your education and experience, in a way that negatively impacts your financial health? If you took the Quiz: Are You Underearning? from my recent blog post and it raised questions for you, don’t despair. Underearning is a behavior, not a character trait. You can change it. In this post, I offer ten steps people can take to begin to challenge limiting financial beliefs and earn an income that corresponds to their capabilities:

Step 1: Measure the problem. Set aside some time when you won’t be interrupted and do this exercise by hand. Fold a sheet of paper in two lengthwise. On one half, make a list of all your income that you earn during a typical month: salary (use the net take home, not the gross salary), consulting fees, investment income, etc. Add it up.

Next, on the flip side, list all your mandatory monthly expenses: mortgage/rent, utilities, transportation, insurance, taxes (if self employed), student loans/credit card payments, groceries, etc. Don’t forget to add 15% for retirement savings, even if you’re not currently doing that. Download this Easy Spending Plan as a guideline. Now add another 10% for wiggle room, things like vacations, gifts and donations. Add that all up too.

Open the paper and compare both sides. Is there a gap? How wide is it?

Step 2: Unmask hidden beliefs. Review your income and expenses from Step 1. What’s your money story? Fee-Only CERTIFIED FINANCIAL PLANNER™ Michael Kay writes in his new book, The Feel Rich Project, that in order to overcome money misery and “feel rich,” you have to examine “your beliefs around money and values, that in most cases stem from your childhood and how you see yourself in the world.” Spend some time writing your money story in a journal.

Kay offers several writing exercises with powerful questions to help you uncover your beliefs, fears and attitudes about money. If money is a source of struggle for you, it’s particularly important to uncover your hidden belief system, which is guiding your actions now. This is likely to bring up uncomfortable feelings, so treat yourself gently.

Step 3: Write your new money story. Now that you have uncovered your money mindset, it’s time to write a new money story. For thought-provoking exercises, I like Kay’s chapter on “Stoking Your Money Mojo.” Take your money story from Step 2 and craft a new message for each of the beliefs which are limiting you and contributing to your underearning. For example, the old message might be, “people who earn money are greedy,” and the new message could be, “I am well compensated for my talents and abilities.”

Kay also suggests developing a Money Code. This is “a statement of who you are and what you believe when it comes to your financial life.” Summarize the key points and post them somewhere where you can read them several times per day.

Step 4: List 100 ways you can earn money. This simple exercise comes from Jerold Mundis’ Earn What You Deserve: How to Stop Underearning and Start Thriving, which brought the phrase, “underearning,” into the modern financial vocabulary. Make a list of 100 ways you could earn money: full-time jobs that fit your education, experience or skills, part-time work or side-gigs (e.g., coffee barista, drive for Uber), asking for a raise, freelancing, selling investments, holding a garage sale, etc. Don’t stop until you get to 100. This will be a more powerful exercise if you do it by hand.

When you’ve finished, review your list. Are there any surprises or “ah ha” moments? Pick something on the list that you can take action on this week.

Step 5: Sell something you no longer need. People who underearn often have a poverty consciousness and doubt that money they spend to take care of themselves can ever be replaced with future earnings. (It’s the opposite of the overspender, who doesn’t see any connection between what they spend today and their future earnings.)

Pick an item/items from your home or garage that you no longer need and that’s worth at least $20 and sell it. Perhaps you have books you can bring to a secondhand book shop, designer clothes you’ve never worn that you can consign, or unused exercise equipment. Here’s the kicker. After you’ve sold your items, take $20 and spend it on yourself doing something fun you wouldn’t normally do.

Step 6: Identify a financial role model. When I was working through my own financial issues, one of the things that helped me navigate the rough terrain was identifying a financial role model. As inspiration, I chose a friend who worked in the same field, always earned a good salary, managed her money wisely, and bought her first home at a young age as a single woman. Although I didn’t tell her she was my role model, every time I faced a tricky financial issue, I would ask myself what my friend would do in the same situation. If I wasn’t sure, I’d ask her directly.

Later on, after I had made financial progress and had more surplus income to invest, I studied clients in my financial planning practice. What financial habits and behaviors did they show that would teach me something I could use in my own life? In part because of inspiration from clients, I became a successful real estate investor. Now I look to our CEO, entrepreneur Liz Davidson, so I can learn to think even bigger!

Step 7: Read a book about investing. Remember the famous line from the film Field of Dreams, “If you build it they will come.” Act as if you will earn a comfortable income that offers you the opportunity to save and invest a generous percentage. What would you need to do to prepare to manage that money wisely? Start building your financial infrastructure by learning more about investing fundamentals. Beginners can start with The Wall Street Journal Complete Money and Investing Guidebook. Those who already know basic concepts can move on to the Forbes/CFA Institute Investment Course.

Step 8: Track your income and expenses daily. Creativity coach Julia Cameron, author of The Prosperous Heart, calls this practice of tracking your daily income and expenses, “counting.” Whatever you want to call it, it’s a way to be mindful of the constant flow of money in and out of your life.

If you’re kinesthetic, you may prefer to keep a notebook or ledger on your kitchen counter to track your money. Smartphone and computer users may prefer an application like Mint or Yodlee. I saw from decades of personal experience that tracking income and expenses is a powerful way to gain awareness of financial imbalance and align your spending with your values and goals.

Step 9: Say thank you. Are you thankful for the financial resources you already have in your life? If you focus on lack, you are likely to get less than you need. If you focus on gratitude, you are likely to get more experiences for which to be grateful.

Watch the short video, If the World Were 100 People, whenever you are feeling like you don’t have enough. Whenever you earn money or receive it as a gift, take a moment to feel grateful. This will help you keep your eye on the goal of increasing your earnings.

Step 10: Start a Financial Independence Day Group. Can your friends help you become financially independent? As I wrote in a previous blog post about my own experiences with peer-to-peer learning, having the support of a group of like-minded seekers of financial balance is like having a personal cheer-leading squad. The structure of the group learning experience creates confidence, and many of us are more successful when we are accountable to others. Visit our Financial Independence Day website to download an FID community guide on how to use our book What Your Financial Advisor Isn’t Telling You to create a powerful group learning experience.

Is there a topic or a question you’d like to see addressed on the blog? Send me your thoughts or questions at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

How to Build Your Own “Hedge Fund”

June 02, 2016

Hedge funds have long been considered the sexiest investments. Part of it is that they’re exclusive, legally limited to “accredited investors” and financially limited to those who can afford their high fees (typically a management fee of 1-2% plus about 20% of the fund’s performance). They’re also the largely unregulated bad boy of the financially world, which allows them to use complex investments and strategies to try to outperform or hedge against the market for higher returns and/or lower risk.

I’ve always been skeptical of hedge funds though, so I was interested to read an article titled “Hedging on the Case Against Hedge Funds.” It defends hedge funds from a lot of criticism they’ve been getting lately for charging those high fees while producing disappointing performance numbers. (For example, Warren Buffett is on track to win a $1 million bet that a simple S&P 500 index fund would beat a group of top hedge funds over 10 years.)

The article makes the case that hedge funds can’t be expected to always outperform the stock market when stocks are doing particularly well. After all, many hedge funds are designed to “hedge” against the market so while they may not do as well when stocks are up, they should do better when stocks are down. But the article still ends up arguing that hedge fund fees are too high and that they perform too similarly to the stock market rather than acting as a true hedge. Fortunately, there are ways to get that type of hedging without paying such high fees.

For example, one strategy is the “permanent portfolio,” described by the late investment author Harry Browne in his book Fail Safe Investing. The concept is to divide your money with 25% each to stocks, long term government bonds, gold, and cash. The idea is that since stocks tend to do best during prosperity, long term government bonds during deflationary recessions, gold during periods of rising inflation (which can be bad for both stocks and bonds), and cash during “tight money” recessions when all the others may lose value, part of the portfolio should always be doing okay no matter what the economy is doing. By periodically re-balancing, you would sell some of the best performing investments while they’re priced relatively high and buy more of the worst performing ones while they’re priced relatively low. This can reduce your risk and increase your returns.

The numbers speak for themselves. From the year the book was published in 1999 to 2015, the permanent portfolio earned a 6.13% compound annualized return compared to 5.76% for a traditional 60/40 stock/bond allocation and 4.89% for the S&P 500. More impressively, the permanent portfolio’s worst year was a loss of only -3% vs. -20% for the traditional portfolio and -37% for the S&P 500.

Unlike the high fees charged by hedge funds and other active managers, the portfolio can also be created with a mix of low cost index funds. The value of this shouldn’t be overlooked. A study comparing the model portfolio allocations of various financial institutions found that the difference in returns between the best performing portfolio (9.72%) and the worst (9.19%) from 1973-2015 was about half a percentage point. Since the average active stock fund charges .86% in expenses and the average stock index fund charges .11%, going from index to active funds could have turned the best performing portfolio allocation into the worst! (And no, active funds don’t generally make up for their higher fees with higher performance.)

So does this mean you should invest in the permanent portfolio? Not necessarily. You just need to make sure your portfolio is broadly diversified beyond the stock market (including more conservative investments like government bonds and cash and real assets like gold or real estate) and has low costs. If you do that, there’s a good chance you’ll actually outperform most hedge funds. Your portfolio may not be as sexy but you can take it home to mom and dad.

3 Lessons Millennials Can Learn From Previous Generations

May 26, 2016

With the recent release of our research report on the generations, our current Think Tank Director and former Financial Finesse blogger Greg Ward makes a second appearance to discuss what millennials can learn from previous generations…

I recently received an interesting call from a young woman asking how much the average person her age has saved for retirement. She was 35, and while I understand the nature of the question, I think it is a very bad one to ask. You can search “how much has the average 35 year old saved for retirement” and you’ll find a variety of articles (e.g., The Motley Fool and Personal Capital), but comparing yourself to others is a recipe for creating false expectations. Not only that, but the average balance is based on the average American who makes an average salary, and this is a terrible benchmark when it comes to planning for retirement. As our latest retirement research points out, less than 20% of Americans are on track to achieve 80% income replacement—a reasonable goal for most people—so why on earth would you want to measure your progress to this?

I find it interesting that millennials feel the need to compare themselves to other millennials. Wouldn’t it make more sense to compare themselves to older generations or at least listen to them? Ask any pre-retiree what they wish they had done to be better prepared for retirement and most will tell you that they wish they had started saving earlier. So while some may think that saving money in your youth is a waste of time, older generations will tell you it is the best way to achieve financial independence. Here are three things I want the next generation to know when it comes to planning for retirement:

#1 Save early, save often, and save as much as you can.

Albert Einstein is known to have called compound interest “the eighth wonder of the world,” so what could be smarter than listening to one of the smartest people who ever lived? The more you start with, and the earlier you start, the more you’ll have later in life; pretty simple, huh? The more you save when you’re younger, the more you will have when you get closer to retirement, which gives you more flexibility in what kind of work you do, how long you do it, and what kind of lifestyle you’ll have when you are done.

#2 Be aggressive.

Piggy backing off of number one, don’t let youth be wasted on the young. You may be nervous about stock market fluctuation and who can blame you? After all, you witnessed several of the most volatile stock and real estate market years in recent history. That said, you have the most opportunity to recover from these short-term events, so you must take advantage of your youth and save with the intention of keeping this money invested for a long, long time. The longer you can keep money in the stock market, the more likely you will see the types of returns that have been produced historically.

#3 Stop comparing yourself to others.

Some will make more and have to save more. Others will make less and not need as much. Some look forward to a simple lifestyle. Others plan to live the high life. Higher income earners will receive less from Social Security as a percentage of their income than lower income earners.

YOU are unique! You have to plan your life around who you are, how much you make and what you want your future to look like so the best thing you can do right now is decide for yourself what you want your retirement to look like and plan accordingly. Then use this retirement estimator to determine whether or not you are on track.

As my oldest of four children prepares for college, these are the things that I am teaching her. Now I offer them to you as well. If you, the next generation, adopts these principles, you will give my generation hope that the impending retirement crisis will likely be averted.