Boring Investing is Better

Aug 26 2015

One of the most dangerous investment attitudes (along with “this time it’s different”) is the complaint that “my investment isn’t doing anything.” The observation says more about the speaker than it does the alleged short-comings of the investment.

Of course this isn’t about lack of activity at all. Last week the market was really active – actively tanking. I’m pretty sure this isn’t the activity those people had in mind. If the alternative is being trapped in a nose-diving market, “doing nothing” can seem pretty attractive.

When people say the investment isn’t doing anything what they mean is “it isn’t making enough money.” There’s an old Wall Street sales pitch: “Your money isn’t working hard enough for you so hire me and I’ll fix that.” When I was a stockbroker, hearing that phrase always made me imagine the speaker physically whipping the client’s portfolio to make it pick up the pace like some poor galley slave in a Cecil B. DeMille movie.

I remember a revealing cartoon of a broker telling his client “Yes, your money was working for you but it quit and now it’s working for me.”

Investing isn’t supposed to be exciting. Any stock that can rocket to the moon today can crash and burn tomorrow. Slow and steady is what you should want. Boring is better.

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Military ID Cards at Age 65

Aug 14 2015

Should you get a new military ID card at age 65? Yes you should. Technically, it’s not required but it will save you from some grief down the line.

ID cards for retired military members have an “indefinite” expiration date on the front of the card. On the back of the card is an expiration date for medical benefits that expires the month prior to you turning age 65. While your entitlement to medical benefits does not end after the expiration date, your entitlement changes to Tricare for Life (TFL) at age 65. If you haven’t made the change to enroll in TFL, you lose your Tricare coverage until you enroll in TFL. The back of the card indicates your status in TFL at age 65.

The reason is that Tricare Standard and Prime end at age 65 by law. You must be enrolled in TFL for continued Tricare coverage at age 65 and beyond. TFL enrollment simply means that you are enrolled in Medicare Parts A & B. Once you enroll in Medicare A & B and get your Medicare ID card, go get a new ID Card. The ID card office will remove the medical expiration date on the back after they verify your Medicare A & B status and know you’re eligible for TFL.  Now medical providers know you are officially in TFL.

We recently received an email from a member who told us of his trip to the base pharmacy. He still used his original retired ID card with an expired medical date on the back. His card was confiscated by the pharmacy. Turns out, the base hospital implemented a local policy to confiscate cards in an effort to get cards updated for those over 65 years old.

In this fast paced, ever changing world, military ID cards have undergone several updates over the years, photos get old, and some service providers won’t understand the date on the back doesn’t render the card expired. Many bases are now installing electronic scanning devices at the front gates and new ID cards have bar codes for that purpose.

People aren’t ID card experts. An expired date means one thing to most; game over. Save yourself the potential grief and get a new card.

What if you are working at age 65? What are your options. Read this article to find out more.

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The Challenges of Managing Retirement Savings

Aug 04 2015

You have retirement savings. It’s enough to last a while but you’re not sure about it lasting your life time. How do you manage it to provide current income and not run out too soon? This is a big challenge for money managers. If you are working with a financial adviser, thinking about working with an adviser or you’re a do-it-yourselfer, this article is for you as you prepare to navigate the rough waters ahead. If I were speaking as your adviser, here are some of the issues we would discuss.

Your Strategy. Your portfolio requires a balance between the proper mix of savings and investments to create income and growth. Your money will require fairly regular oversight and management. It will probably require the use of multiple savings and investment vehicles. The ‘savings’ aspect will generally include products that protect principal and provide some return usually in the form of interest payments. The ‘investment’ aspect will involve fluctuations in the principal amount as we try to capture some growth to increase the portfolio’s longevity. There may even be an insurance aspect to the portfolio mix.

Just knowing what I describe above, you have to ask yourself if you are up to the task or will need help. You need to know what savings, investments and insurance choices are available, why they are used, how they are used, and when to use them.

You will need to monitor the results in your portfolio and the economic environment (public and private sectors) to know when to make necessary changes. Since no one has a crystal ball to glimpse into the future, historical and current knowledge of markets will have to do.

We’ve covered the easy part. Now let’s get into the meat of the matter. What is the proper portfolio balance? How do you determine your balance? How do you achieve the balance?

Portfolio Balance. The perfect portfolio balance would allow you comfortable current income while simultaneously growing the portfolio so you never run out of money. It’s so much easier said than done. For many it comes down to living on less than you wish or running out of money. If you invested well over your working life, your job is easier. As your adviser, I would rather be safe (manage to last a lifetime) than sorry (you go broke).

I can almost guarantee that my definition of ‘safe’ and yours are different. That means we have to come to an agreement on a definition or we’ll be at each other’s throats at some point in our working relationship and you’ll fire me. ‘Safe’ for you probably involves some form of principal protection. ‘Safe’ for me is maximizing the longevity of the portfolio since going broke isn’t an option in my mind. Principal protection as the primary strategy is a dog that won’t hunt in my plans.

Determining Your Balance. Let me start by providing a measuring stick. The following spectrum will help define our portfolio balance situation.

100%  —————————————————100%
Principal Protection                                                 Principal Loss

For illustration, 100% principal protection is a guaranteed savings vehicle like a FDIC insured savings account or CD. 100% principal loss is gambling or over spending.

The potential rub between us is that ‘safe’ for most people usually implies a form of principal protection and as a result people seeking safety prefer the far left side of the line above. When people aren’t sure whether they have enough money to last a retirement, they want to protect the money thinking that will help it last–our minds fear the potential loss more than we crave the potential gains. But the truth about the line above is that both the far left and the far right of the line result in the same outcome; you go broke during your lifetime.

On the left side of the line, you’ll use your principal to live on and burn through it much faster than it can grow to offset your usage rate. This is the classic scenario of outliving your savings. On the right side, you’ll throw your principal away before you die. So essentially an FDIC insured account is the same as gambling when you consider the ultimate long-term outcomes.

For me, safety is somewhere between the dots and that’s where the challenge is between us. I have to coax you to go out onto the line between the dots and that can be a scary place for some retirees. Then I have to determine how far out on the line I need to go with you. I can’t be too safe and I can’t be too aggressive (risky). Three huge factors in this consideration are: how much money do you have, how long I have to make it last, and how much income you need now—not to say there aren’t plenty of other factors.

Achieving the Balance. This is where the recipe gets complicated and can’t be comprehensively explained in this article. However, I want to get you pointed in the right directions in case you want do more research. The balance is a mix of the right savings, investments and insurance products that allow you to withdraw a reasonable amount of income each year and at the same time grow the portfolio to last a lifetime. Here’s where you have to know what the products are, why you use them, how you use them, and when to use them. Having knowledge of the economy and markets is a big plus.

What. The choice of savings or investment products span the cosmos—savings accounts, CDs, bonds, stocks, mutual funds, options, convertible stocks or bonds, closed-end funds, Exchange Traded Funds (ETF), Unit Investment Trusts (UIT), private money managers, annuities, life insurance products, long-term care insurance… This only skims the tops of the trees since each of the items listed have many (hundreds or thousands) branches below the tree top.
Why. Some of the choices above provide for a stable principal, some are for income, some are for growth, and some provide a combination of outcomes. Whatever the expected results are for each of these choices, you can be certain that how each choice delivers its result will involve a pro and a con in relationship with the rest of your portfolio. You should know the pro and con for each choice to offset and balance the results with the other holdings in your portfolio.

When you shop for an adviser, it should be a part of your shopping list to ensure the adviser understands not just what the choices are but also why and how to use them. Know how many choices your adviser offers. Some advisers only offer a few choices. If an adviser offers only a few choices, they will make their choices work for you even if there are other choices in the cosmos that may work better for you.

Also consider all of your various accounts and how what you do in one account balances with what you do in other accounts. If you are working with an adviser, and the adviser is only working with one of your accounts, the adviser may duplicate another account or counteract another account since all accounts might not be visible to the adviser.

How. Once you understand why you use one choice over another (“I need income.”), how you use the choices are dependent on your specific needs and goals. In this case, our desired outcome is generating income, so we may purchase an immediate annuity to generate a steady flow of guaranteed income for life. Or we could purchase dividend paying stocks, or a closed-end fund, or a bond, or an income generating mutual fund or sell covered options…on and on.

If we purchase an immediate annuity, this allows us to consider alternate portfolio choices with your other accounts in the light of having established a guaranteed lifetime income stream with the annuity. Meaning, you may be able to move a little further out on the line with your other accounts to assume some potential for greater growth. Or you may be able to reach for greater income with more aggressive income investment vehicles like junk bonds or closed-end funds.

If you purchase a long-term bond mutual fund for income instead of an immediate annuity, things change for other portfolio choices. Realizing that interest rates are at all-time lows right now, the outlook for bond prices is down in the future. Here’s where the econ and market insights help. Expecting the value of your long-term bond fund to go down in the future (and your account value), how will we offset this issue with other portfolio choices? On the flip side, while your bond fund goes down in value, we can expect the income payments to increase. How does this change other choices in the portfolio? Maybe we don’t have to rely on the other choices to provide as much income so we can focus on making up the loss in value of the bond fund with other growth choices. Usually when bond prices decrease it leads to growth vehicles increasing in value. Maybe we don’t need to bulk up on growth options as much and can bulk up your income producers so you have more spendable income. Choices choices.

When. When to use one choice over another is tough because we can’t predict the future—not even the pros know the future. We can only read articles from respected people in the field, keep tabs on current economic events (not fads), and understand some history about economies and markets. However, don’t focus on current trends as the base line for your decisions. Trends are just that; fleeting events. Tomorrow they will be something else.

That’s why you have to follow the media with a healthy dose of suspicion. The media don’t mention anything until the investment has done something to create a newsflash worthy story, and by that time, it’s too late for investors. Besides all the sales people come out during the periods of euphoria in an investment to take advantage of your need for greed. Have you noticed how firms hustle gold to satisfy greed? Sales people also like periods of crisis because they can play on your fear. Have you noticed how firms hustle gold to alleviate your fear? One investment idea like gold can be spun to push either your greed or fear button. There is always an answer to greed or fear and sales people will find it when something is in the news.

View a bigger picture of society and the world. What are the big economic conditions? Housing in a slump or peeking? Interest rates up or down? Unemployment up or down? Construction on the rise? Consumers in a buying mood or a savings mood? Then remember that these events are temporary. Will the housing slump last forever? Is a down market something to fear or a temporary condition that will come back at some point and represents an opportunity to get on the ground floor of something good? How much time do you have to wait in your portfolio? How can you situate other portfolio choices to offset or balance the choices that will take time to rebound?

Can you prevent the need to deal with all these issues? Sure. If you are a ways from retirement, save and invest to have assets beyond your future needs. If you are close to retirement or retired, you could establish a retired living standard well below your means. You can plan to have no debts and very few other payments going into retirement. You could also choose to live in a lower-cost area. Or if you are retired, consider working at some level to subsidize your income thereby minimizing the need to pull from your assets.

Working in retirement accomplishes several good things. One is that it provides more options for how you manage your retirement assets. You can reduce the withdrawal amount from your assets which allows you to re-allocate your portfolio to capture more growth. Besides the money issue, working keeps you busy, works your mind and provides you a purpose in life. Finally, chances are the spouse could use a break from having you around all the time; no matter how charming you are.

We’ve just scratched the surface of money management and portfolio considerations. In some ways it would be great if the task of money management was a simple recipe that could be easily followed by all with success. That would solve a ton of problems. But in another way, the fact every person’s needs and goals are different and we have an assortment of choices to build a custom plan suited for each person is a good thing. Cookie cutter approaches only work for the people whose financial situations fall within the design of the cookie cutter.

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Kiplinger Magazine’s Social Security Strategies

Jul 29 2015

For those of you closing in on your eligibility for Social Security benefits, I found this article very helpful for determining your application strategy.

Best Strategies to Boost Your Social Security Benefits

I hope you find it helpful also.

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11 Lessons That Distinguish Successful Investors

Jul 27 2015

I don’t think the media do us any favors in the investment arena. More often than not, what I read, watch or hear does us more harm than good.

It’s not just what’s said. It’s the subliminal misguided perceptions about investing planted in our minds when faced with the following situations.

  • The constant reporting of how the investment markets did at the end of every workday. The DOW is up; the DOW is down and how it implies a winner or a loser.
  • Viewing the business news channels that follow the markets throughout the day and report on specific companies’ stock values.
  • Viewing the shows with stock pickers telling you to buy or dump various stocks based on their predictions.
  • The ratings of top mutual funds, stocks, bonds, etc, etc., in magazines and newspapers.
  • All the articles touting “…you must own these investments…” to be wealthy or retire comfortably.
  • The reports connecting negative national and world events to the markets and our investments.
  • Do this one month and do this the next month. And all the conflicting advice.

Too many of us are left with the impression that being a successful investor requires:

  • Daily or regular involvement.
  • Constant change.
  • Playing the stock market by timing the markets and your investment selections.
  • Moving your investments around among the funds in your 401k/TSP/IRAs.
  • Picking funds based on those with the best reported returns.
  • Specialized education or training.
  • A get-rich-quick scheme.
  • Listening to Uncle Joe for investment advice.
  • Too much effort.

Some believe the deck is stacked against us so why try.

We know average investors aren’t successful because data collected from investment accounts indicate individuals tend to have average annual returns well below the free-flowing markets.

According to the data collection and analysis firm DALBAR from a 2014 report, look how the average investor did against the free-flowing S&P 500 stock index.

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What does this mean in dollars? Starting with $10,000, over the 30 year period, the S&P 500 index would have grown to $235,190 while the average investor compiled $29,740.

At this rate, people won’t have enough wealth to retire and more people will rely on the government for retirement security at a time when the government is broke. Congress is already talking about whether the government should take over our retirement investments since we can’t be trusted to do the right thing for ourselves.

How did the average investor fall so far behind? Partly because we are never taught how to be successful investors and, if we try to learn, look at the information we get from the media—“Buy These Funds NOW!” And in the financial service arena, you can’t tell the sales people from the honest advisers who work for your benefit.

So where do we go from here? First realize that successful investing is boring and that’s why we don’t get realistic, quality information from media. If the media explained the real story, it wouldn’t catch our attention, it wouldn’t sell media and there wouldn’t be anything else to write about.

We shouldn’t look for excitement or expect to read about success in 140 characters. Being a successful investor requires a little time to understand a few key concepts but none of the concepts are cosmic. Anyone can be successful with a little knowledge and a lot of discipline. If you are doing it right, your days should be calm and your nights restful. Remember, it’s boring.

So here are the lessons successful investors live by.

1) Learn to appreciate saving and investing more than spending. Spending is a short-term high. Assets from savings and investments are a deep and lasting satisfaction.

2) Realize wealth is about what you’re worth not what you earn. Wealth provides freedom. Otherwise you’ll be a slave to a paycheck your whole life.

“Man! If I made $150,000 a year, I’d be rich!” Wrong. There are plenty of people who make lots of money but have low-net-worth. Ask any low-net-worth professional athlete what happened when the paychecks stopped. There are high-net-worth people who earn average incomes. 80% of millionaires in the U.S. are average citizens who budgeted and invested well over their careers (“The Millionaire Next Door” by Thomas J. Stanley).

3) Know the difference between an asset and a liability. Assets increase in value over time and you own them. Liabilities decrease in value and don’t last. To build wealth, increase your assets and decrease your liabilities.

4) Learn the difference between good credit and bad credit. Good credit, like a mortgage or an education loan, can help you build assets. Bad credit, like consumer credit, makes buying disposable or short-lived products more expensive. You end up with nothing to show for your money. However, all debt can be bad if not maintained at reasonable levels for your income. The ideal is to have minimal debt to no debt.

5) You don’t have to take high risks or have a get-rich-quick scheme. In fact, stay away from these. Don’t listen to any marketing or sales pitches. These only make the sellers rich. Most times, if a person approaches me about playing with penny stocks or stock options or the lottery or gambling or sweepstakes or multi-level-marketing programs, the person is usually the last person on the earth who should be messing with these programs. It seems there is a correlation between not having any assets and the need to find a get-rich-quick scheme. Sales people know this and take advantage of this investor psychology. So…

6) Slow and steady wins the race. It’s a marathon; not a sprint. It’s like building a home. Start with a solid foundation; emergency savings, a good budget, spending less than you make. Build solidly planned investments in real asset building funds within your 401k/TSP/IRAs. When you’ve built your home (so to speak) and can afford to throw money away, then you can play with the stuff in point 5 above. I have no idea why you would want to though.

7) Get rid of emotional investing. If emotion drives your investment strategy, you lose every time. Emotional investments are based on pushing your greed or fear button. Gold is an investment that is routinely sold by appealing to your greed or fear. Listen carefully to ads and sales pitches to determine which button they are pushing on you.

8) Carve out a portion of your paycheck off the top to invest in your 401k/TSP/IRA every pay period. Live off the remainder of your pay. Credit isn’t a source of living income. If you wait to invest after you’ve paid bills and lived, you’ll never have investments/assets. “A part of all you earn is yours to keep.” (from The Richest Man in Babylon)

9) Wealth is about ownership. Why are wealthy people wealthy? They have lots of ownership in companies, properties, or their own businesses–assets not liabilities. The stock funds in your 401k/TSP/IRAs and other investment accounts represent ownership in companies world-wide. It’s the number of shares (ownership) in your account that determines your wealth. The account value will rise over time as a by-product of your ownership level. Focus on the collection of shares. The person who retires with the most shares wins. Search “averaging down” on this site to learn more about building ownership in your accounts.

10) As your income rises, so should your contributions to your investments. Not just the raw number increases but the percentage of your income going into assets should increase over time. Besides your money investments, invest in your career-self to increase your career value and marketability. Your lifetime income is part of your worth. Make more income to increase your net-worth; not to have more worthless toys. The new car smell wears off however increased wealth provides you options like earlier retirement or the ability to work because you want to and not because you have to.

11) Learn how to build a portfolio allocation to meet long-range objectives and to get out of self-defeating activities like market-timing and churning your individual investments. This Financial Frontlines site is full of lessons on building appropriate portfolio allocations (search “portfolio allocation”). The investment pros can’t regularly beat the free-flowing markets with all their staff, research and trading strategies. What makes us think we can? NOTE: we don’t need to beat the markets. We don’t have to beat the markets to do well. See the table above. Just understand portfolio allocations.

I know people who followed these lessons early in their careers and are now 50-year-old millionaires. Ordinary, average wage earning people. Be patient. The key to success is learning to not listen to news, media, sales people and friends/family. Building wealth doesn’t “trend.” It’s not a fad, new technique or a hot tip. Wealth is the result of proven timeless concepts and strategies implemented over your career.

If you want to read something that can help, read “The Richest Man in Babylon” by George S. Clason. This old book has timeless lessons that will serve you well.

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