Don't Pick All The Flowers
My neighbors had their granddaughter over this past weekend. She is a cute three or four-year-old who loves running around in the yard and looks to be a bit of a handful.
This past Saturday, I saw her run to the front porch of their home and reach out to the roses that grow just about porch high each year. As she began picking the pretty flowers I heard her grandmother caution her “Don’t pick all the flowers!”
So there it is, the gap between youth who want to take all of life in right now and the older, more experienced, generation who know you can’t take everything now or you won’t have anything to enjoy later.
How we find that balance in our financial lives determines a lot of our financial future.
Yes, you can spend everything now and have a whale of a time for a little while. Or you can spend some now and save the rest for another day.
The Brexit Chaos
I turned on CNBC this morning to the news that the Brits had voted to leave the EU. The S&P futures showed a loss of nearly 4%. The British Pound dropping by nearly 8%. The announcers are interviewing anyone that will talk about the doom to come. In other words the sky is falling...again.
Except that it is not.
This is another example of the crisis du jour that causes too many investors to think like day traders. The long term effects may be substantial, but they will not be deadly. The markets will fall today, but they will not go to zero. If anything, this will be a chance to buy some stocks for long term gain.
Remember, the price of the permanent ups of the stock market are these short term downs.
Profit Not Politics
We are in the midst of another US Presidential election cycle and again clients are worried about the effect the election will have on the stock market. While nothing can be predicted with certainty, we can look at history to get a feel for what might happen.
Since 1944 all presidential elections coincided with a gain in the stock market, except two years that appear to be outliers. In 2000 as the tech bubble burst and in 2008 as the housing bubble burst and the credit markets froze stocks ended the election year lower. But barring any black swan event later in this year, I would expect a return to historical norms and a positive end to 2016 for equities.
In the end it is profits not politics that rule the stock market.
Getting Over The Hump
For those of us who enjoy watching competitive golf and also enjoy a great story of perseverance, this weekend’s US Open had both on display. Dustin Johnson had been struggling to close out a major championship after being close several times and just coming up short. Well yesterday he finally got over the hump of winning his first major, and I’m betting this will lead to more confidence and victories in his future.
While watching this play out on Father’s Day, I found a particular parallel between Dustin’s story and finances. You see, just as Dustin was trying repeatedly to get over this major championship hump, I speak with many people who are trying to get over their own personal finance hump.
Many people know what they should be doing- as in talking with a professional, maxing out their employer retirement plans, saving more, setting up personal retirement accounts or general brokerage accounts, etc. However, often times it takes a big leap to actually put these plans into action.
So if you’re trying to get over that hump, to get into a personal savings/investment/retirement strategy that will help you reach your financial goals, reach out to an advisor or financial planner who can help give you that extra motivation to take that leap. The sooner you do it the better, and just like DJ this weekend, you’ll move forward with more confidence than ever before.
The Lake Wobegon Effect
You know Lake Wobegon from NPR and Garrison Kielor. It is the mythical place where “all the women are strong, the men are good looking, and the children are all above average.”
Unfortunately, we cannot all be above average. However, if asked we will generally claim that distinction no matter what the subject, and this can lead to behavioral mistakes that cost our bank accounts real dollars.
In finance like other areas of your life, try to play to your strengths and recognize your weaknesses. If you lack patience, the stock market is no place to learn. If you like taking risks, the markets will let you take plenty, and then send you home with nothing. If you are timid, you could easily talk yourself into staying on the sidelines- the ultimate financial mistake.
Work with an advisor who helps you use your strengths and fills in for your weaknesses. It is not always about the opportunity, sometimes it’s about our attitude.
We all have a tendency to hear what we want to hear. It seems to be especially true of financial products and services.
I am often asked about the guarantees that variable annuities and equity index annuities offer. For example, this week I spoke with an individual who owned an annuity that offered an annual 7% step up in calculating the lifetime income benefit rider. The client thought that meant they earned at least 7% per year on the money they had invested in the variable annuity. Here is how the guarantee actually works:
Every year the insurance company looks at the value of the annuity contract and if the value of the underlying investments (after the insurance company had extracted about 3.4% in fees) was less than 7% higher than the previous anniversary date, the account was credited with a 7% increase for the purpose of calculating the 4% annual guaranteed lifetime income benefit. That is not 7% that the client can withdraw, but an increase in the calculated annual income benefit.
Still not clear?
Investment in a Variable Annuity: $100,000
Initial Guaranteed Lifetime Benefit: 4%
Annual Income for Life: $4,000
Here the insurance company is only guaranteeing that should you earn net zero on the account and withdraw and spend your principal for 25 years, they will step in and send you $4,000 for however long you live. If you live 30 years, then the insurance company is on the hook for $4,000 for the 5 years after your account was depleted. The cost of this rider is 1.1% per year.
If the underlying investments in this account earn 3% by the first anniversary date, the client can withdraw $103,000 less any contingent deferred sales charges, but the account is credited as if it had earned 7% for purposes of calculating the guaranteed lifetime income benefit.
Income Benefit Base: $107,000
Annual Income for Life: $4,280
Now the insurance company is promising to return your principal for 23.36 years and step into the breach if you live longer to the tune of $4,280 per year. So the longer you wait to receive income the bigger your guaranteed check, but also the less life expectancy you have to draw the check and the longer the insurance company gets to pick 3.4% per year from your pocket.
Still not clear? You are not alone. Seek help from an advisor who doesn’t get paid to sell you a product!
Photo:By Ion Chibzii from Chisinau. , Moldova. - "Problems, problems..." (70-ies)., CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=32730682
Mid Year Resolutions
Being that it’s June, it’s time to check up on your financial New Year’s resolutions. Have you stuck to your financial plan? Have you achieved more saving or paid down debt? Have you given up completely on your personal goals only to fall back into old habits?
Did you even remember that you set any goals?
No matter how you answered those previous questions, it’s never too late to reengage and refocus on the end game. Whether that’s saving for a down payment on a home, increasing your retirement assets or finally meeting with a professional to talk about these things- it’s as good a time as any to accomplish these goals.
Just as many of us have fallen off the workout schedule or reverted back to the habits we were trying to end or alter at the beginning of 2016, it is easy to forget and abandon our financial goals as we go about our everyday lives.
Now’s the time to refocus and rededicate ourselves to the financial habits that we know we should be practicing, but sometimes forget or find any excuse not to do.
Here are the people who do not think advisors should be held to a fiduciary standard:
SIFMA – Securities Industry and Financial Markets Association. View their members here.
FSI – Financial Service Institute. FSI is comprised of financial advisor members and broker-dealers. You can learn more about this group here.
IRI – Insured Retirement Institute. IRI is the only association that represents the entire supply chain of insured retirement strategies (read annuities). On the web at http://www.irionline.org/home
Financial Services Roundtable - FSR members include the leading banking, insurance, asset management, finance and credit card companies in America. You can view their membership here.
Like the meatpacking industry depicted in Upton Sinclair’s novel The Jungle, these trade associations would have your retirement left open to Wall Street greed rather than cleaned up with the financial services version of the Meat Inspection Act.
They believe putting you, the client’s interest first would not be a good idea. Hmm...
The No Spend Weekend
Whether you live paycheck to paycheck, or are fortunate enough to enjoy some financial breathing room. Once a month, I challenge you to enjoy the "No Spend Weekend". It might not sound feasible, but believe me, it can be done and is financially rewarding.
Whether you go it alone or are married with or without kids, it's a great way to save some money and take control of your finances.
I recommend going to the beach or park, enjoying a free local museum or social event, or simply getting some projects done around the house. The process is simple, just don't spend any money from Friday to Monday. You and your loved ones can enjoy some personal time, experience some things you don't typically do, and, oh yea...save some money!