Monday, November 30, 2015

The financial ramifications of Paris and keeping your loved ones in the loop

In mid-November I felt the pendulum swing of emotion. Like so many people I was saddened and angered over the horrific attacks on innocent people in Paris. A few days later I was thrilled when our unpredictable Detroit Lions finally won a game in Green Bay.

By no means am I implying that the thrill cancelled out the sadness and anger. As we’re all aware, sports results are not matters of life and death.

To put the events into proper perspective, sports are really nothing more than a sort of escape from the realities of life, a vicarious diversion.

The events in Paris were beyond horrific and caused unimaginable grief for so many families. Grief that will never go away and will forever haunt those who lost loved ones.

It just goes to show you that in this crazy world anything can happen to anyone at anytime, regardless of age and circumstances.

As an adviser, though, I was pleased to see the world’s markets open and functioning normally after the Paris attacks. Not because I’m callous or insensitive to the victims of terrorism.

From my viewpoint, the markets — on Wall Street and throughout the world — represent order and civilization. By order, I mean that, even though prices fluctuate, at the end of the day they’re determined by the free markets. Not by having someone’s or some entity’s will forced upon the people.

I’ve often written that investors need an iron stomach and that they need to keep their emotions out of their investment choices. The events in Paris are the most recent example of why both attributes are necessary.

Again, I don’t want to sound callous, but in today’s world anticipating the unexpected and unimaginable is an integral part of financial planning. I don’t pretend to have an answer to all of the world’s issues and problems. But I believe the recent events in Europe should serve as a reminder why it’s so important to not only have your own financial house in order, but also to be involved in the financial order of your extended family.

I mention this because I’m an adviser to clients of various ages. And it’s fascinating to see how different age groups handle their financial transactions differently.

For example, I have many seasoned clients that continue to receive hard copies for all of their investment and bank statements. That means loved ones can easily access their pertinent data.
On the other hand, many of my younger clients opt out of paper statements and essentially do their banking from a smart phone. Which means all their financial data is digital.

Naturally, you want all of your online activities to be secure, but you also want your loves ones to know how to access your data in the event of illness or tragedy.

Financial technology may be convenient and secure, but if that’s how you handle your finances, it’s important to make certain that trusted family members know how to access this information if you’re no longer able to do so.

Unfortunately, the unexpected can happen at any time. Recent events should serve as a reminder to keep your financial house in order. And if you’re a “high tech” household, be sure to keep your loved ones in the loop.

Monday, November 23, 2015

Technology only takes you so far in investing

When my sons were young, our family went on a number of long road trips. Back then, my wife and I were big fans of the road atlas. Now that we’re empty nesters, we fly more often than drive.

After years of frustration with the airlines, however, we decided to drive on our most recent trip. With our trusty GPS, we just had to key the address into the touchscreen and follow the instructions.

The friendly voice would always tell us what to do. If we had an upcoming turn, a pleasant woman’s voice would instruct us to turn left in one-half mile. Even with the instructions I would occasionally make a mistake; but when I did, there was no criticism. The nice woman’s voice would say, “recalculate” and get us back on track without a trace of judgment.

I’m definitely impressed with the technology of the GPS. But on the return home, if I had followed its instructions, we would have gone through downtown Chicago at the peak of rush hour. Following the instructions would have been a mistake.

While the GPS could calculate the quickest route, it didn’t take into calculation the time of day I would pass through the Windy City. Nor did it know anything about me. For example, the GPS didn’t know if I had vision issues at night.

At that point it occurred to me that, as wonderful as the GPS technology may be, we should never ignore the human element and depend totally on technology.

I bring this up in a financial column because I fear that far too many investors are doing themselves a disservice by being overly dependent on technology when they plan the course of their investments. They’re overlooking the human element.

For example, there are a number of software programs that, if you input your birthdate and risk tolerance, answer a few questions and provide a financial goal, the program will lay out an entire financial strategy.

In other words, financial planning and investing is becoming eerily similar to my car’s GPS. Plug in what you want and technology will instruct you how to get to your destination.

Yes, much of the technology is extremely helpful, but as with a car’s GPS, computers lack the very important human element that advisers can bring to the table. By that, I mean the professional relationship between you and your financial adviser.

A good adviser will be aware of the human side of the planning process. For example, is there a child or grandchild with special needs? Are you worried about one of your children blowing through their inheritance? Are you or your spouse facing a large medical bill or is senior housing on the horizon?
Whenever the situation dictates, I believe a human can relate to your loved ones much better than a computer program. And from a purely investment standpoint, study after study shows that investors who work with an adviser tend to have better investment performance. Probably because advisers help investors keep their emotions out of their investments and keep them calm in difficult times.
Technology is great, but it shouldn’t replace the human element. Otherwise you might find your investments stuck in the Chicago rush hour traffic with your GPS muttering an apology.

Monday, November 16, 2015

Why long-term financial planning is out of control

We’re in a day and age where long-term financial planning is more important than ever in order to achieve your financial goals. My experience tells me that financial independence is rarely just a matter of luck.

I’ve observed that, in most instances, it’s a result of a lifetime of disciplined investing and simply living within your means. Among the major hurdles that make long-term planning so difficult are the circumstances over which we have no control. We can only react to them.

A few years ago, I had a retired client who decided to re-enter the workforce. He wanted to discuss all of his new retirement plan options and how they could fit into his existing investments.

He mentioned that he wouldn’t be eligible for any of his new company’s benefits until he was employed for six months. Rather than discussing his options immediately, I suggested we wait until it was closer to his six-month anniversary.

When we ultimately sat down, the entire investment platform offered by his new employer had changed completely from when he was hired six months prior. This is not an uncommon occurrence.
It’s also quite difficult to make long-term plans regarding income taxes. Last year was a good example. There was a new income tax rate for higher wage earners and numerous new taxes instituted in order to help fund the Affordable Care Act.

Another hot topic for many of my clients is Social Security planning. It seems to me that I get a solicitation in the mail almost weekly to attend a lunch or dinner seminar that explains the various strategies available for collecting benefits.

More than likely, such seminars are educational and informative, but as is so often the case in our nation, Uncle Sam just changed the rules. In the recent budget agreement, it was decided that the very popular Social Security strategy of file and suspend would soon be eliminated. So if you were a few years away from retirement, you’d be wasting time to learn about something that’s not going to be available.

You also have no control over the benefit package your employer provides. Other than by voting, you can’t control the tax codes and we certainly have no control or input over government-sponsored programs such as Social Security.

The point is that the items over which you have no input or control make long-term financial planning very difficult. During the planning process, I generally like to look deep into the future with a very cautious and conservative eye. Using Social Security as an example, I never like to project the maximum income a couple might possibly receive. I think it’s far more prudent to project less than anticipated, especially since the new Social Security statements say that Congress can make changes at any time and that there will eventually only be enough to pay 77 percent of projected benefits.

You can only control so much in life. I applaud those that take the time to learn in detail what they should do in the future. Unfortunately, the details that you can’t control keep changing.

That’s why long-term planning in today’s world requires frequent review. As you plan for the long term, make sure you keep an eye out for short-term glitches along the way.

Monday, November 9, 2015

New healthcare plan? Make sure your family plans with care

It’s that time of year again. Families across Michigan and throughout the entire country have to re-evaluate and select their healthcare insurance program for 2016. Like so much else in our society these days, healthcare plan options are far more complex than in years past.
Most employer-sponsored plans offer a number of choices, running the gamut from low deductibles with high premiums to high deductibles with low premiums. Additionally, many employers also offer payroll deductible Flexible Savings Accounts.
With an FSA, the dollars deposited can be used for various healthcare-related items such as insurance deductibles and other medically related expenses not covered by health insurance.
In other words, selecting the proper healthcare package for your family requires a fair amount of research. And that includes a projection of how your family’s health will fare in the year ahead.
For those not covered by insurance, it’s back to selecting their favorite color. Bronze, silver, gold and platinum will again be the available choices. And, of course, the higher the deductible, the lower the premium.
People who have Individual plans can also open a Health Savings Account (HSA), similar to the FSA, to cover deductibles and other non-covered medical expenses. If you’re on Medicare, the big decision is selecting the Medicare supplement that best fits your needs and budget.
Regardless of age, whether you have an individual plan, group plan or a Medicare supplement plan, it looks like a lot of households are staring at significant increases in their healthcare premiums.
I’ve already received several snide comments stating the Affordable Care Act is not very affordable. And I have to admit, I’m not aware of anybody’s premium decreasing as healthcare advocates projected while the law was being debated.
But, politics aside, healthcare premiums are taking a significantly larger bite out of the family budget, so households need to adjust their annual budgets accordingly.
On numerous occasions, I’ve had clients comment that their adult children are facing a more difficult journey than they did. When I ask why they feel that way, the inevitable response is the lack of pensions and the high cost of health insurance.

For many current retirees, their employer paid virtually all their monthly premiums during their working careers. Today, the employee’s portion of the monthly premium takes a big bite out of the paycheck.
I don’t pretend to have a quick fix for the high cost of healthcare, but I do know that, at every stage of the financial planning process, I project that the cost of healthcare will increase at a rate steeper than other areas of the economy.
I suggest you do the same. During your working career, expect that healthcare premiums will increase every year. When you retire, plan on allocating $250,000 of your nest egg for healthcare related costs, keeping in mind that Medicare supplement plans are part of the equation.
Selecting the appropriate health care program every year is a complex but necessary endeavor. A young family needs not only to select the best healthcare option, but also to save for their kids’ education and set money aside for retirement. Not to mention the mortgage and other monthly bills.
Life not only is complex, it can also be stressful. Good financial planning can mitigate that stress.

Monday, November 2, 2015

The riskiest gamble you can take is to not plan

As a financial adviser I continually like to remind investors that there’s no such thing as a sure thing. You can look to the past to see how an investment has performed, but as the cautionary disclaimer often warns, past performance is no guarantee of future results.
Over the years, we’ve heard many fallacies about sure things. In the investment world, some recent examples of certainty claims that didn’t quite pan out are: real estate can only go up in value; day trading tech stocks will make you so much money you’ll be able to buy your own private island; gold can only skyrocket in value; and most recently, oil can only increase in value.
At one time or another, most of us have seen commercials implying the above statements are fact. They are not. Just as it is with life in general, there are definitely no sure things in the world of investments.
Locally, we recently witnessed the near impossible. A couple of weeks ago Michigan State made an unbelievable comeback against Michigan in the last 10 seconds of the game. According to the statistical firm Massey-Peabody Analytics, the probability of Michigan State winning the game was .02 percent.

Said another way, the likelihood of Michigan winning with only 10 seconds remaining was 99.98 percent. But whether you’re a Wolverine or Spartan fan, you are now certainly aware that more than a 99 percent probability does not mean 100 percent certainty.
That being said, regular readers of this column know that I’m a strong proponent of using math and statistics to enhance your investment results.
Statistically, would you rather have a high probability for achieving your financial goals, or hope to reach those same goals by hoping for a statistically improbable event to occur?
The practice of making consistent contributions into your retirement plan is a good example of improving your probability for a successful retirement. For example, by saving $500 every pay period and taking advantage of compound interest, you can amass a sizeable retirement nest egg over a 30-year work career.
Statistically speaking, I’m pretty confident that the person in the example above will have a much, much larger retirement nest egg than someone that gambles $500 at the local casino every pay period for 30 years.
One of the things that concerns me is that far too many people are counting on a miracle win for a successful retirement. Don’t be swayed by the Spartans near impossible victory. The actual statistics for anyone getting a financial windfall are nearly impossible to determine. And yet too many still reach for the highly improbable by purchasing lottery tickets or squandering paychecks at the casino.
In other words, gaming is well beyond entertainment for some. They’re grasping for a nearly impossible result in order to achieve their retirement dreams.
What we all saw on the football field in Ann Arbor was about as improbable as you’ll ever see in sports. True, there are no real guarantees in the world of investing either. But rather than hoping or gambling on the near impossible, it’s wiser to put statistics in your favor.
It may not always work out as planned, but the alternative of counting on a near miracle is no way to achieve your financial dreams.

Monday, October 19, 2015

Investing is full of risks, just like life

Many people frequently go online to check the status of their investments. Still others review their portfolios on a monthly basis with their traditional paper statements. But no matter how you keep track of your numbers, it was indeed a rough third quarter for most investors.
Several pundits believe this is the beginning of a long overdue bear market. Other experts feel we’re still in the late stages of a bull market and this past quarter was simply a breather before the climb continues.

The reality, of course, is that nobody can be certain what tomorrow will bring. This is true not just with investments, but with life in general. No matter who you are, your life can change in a heartbeat.
While risk can’t be eliminated, it can be managed. That’s why we strap in our kids and buckle ourselves up when we get into a car. That’s why virtually every piece of machinery, all our medicine bottles and everything else we own that has an instruction manual, clearly explains that improper usage may cause harm, injury or even death.

In other words, we all face a multitude of risks every day. At some point in our lives, most of us have fallen off a bicycle. I have never met anyone who stopped riding a bike because of it. Nor do I know anyone who quit driving because of a fender bender.

But, with money it’s different. Investment risk is a horse of a different color. And the biggest reason, in my opinion, is emotion. Money makes it easy for our emotions to take control of our brains. And when that happens, my experience has been that long-term results are rarely positive.

For example, during the 2008-09 recession, some may have moved their entire investment portfolio into cash. The initial move may have looked good and relieved some stress for a while.

But, long term, what if those monies remained in cash all these years, with interest rates barely above zero? My guess is that people who left their money safely in the bank would lag well behind those who rode out the recession and remained invested.

The bottom line is that most long-term investors should neither get too excited about a good quarter, nor overly distraught over a poor quarter. Most long-term investors are best served with a diversified portfolio that incorporates various asset classes.

Depending on the size of your portfolio, diversity might mean traditional domestic and foreign stocks and bonds as well as real estate and commodities.

Naturally, everyone should periodically review their investments and tweak them as necessary. It’s just common sense. But rarely do circumstances dictate abandoning your long-term strategy altogether.

Whenever investments trend downward, the Internet is flooded by the gloom and doom crowd selling their advice. They can’t predict the future. They’re playing on your emotions. Could the economic world as we know it could totally collapse? Sure. Anything is possible.

That being said, I believe that somehow, someway, our nation will get its financial house in order and the traditional investment methods that have historically rewarded investors will continue to do so.

Of course, the world will continue to change and I believe these changes will open the door and reward investors who stay with their long-term plans.

Monday, October 12, 2015

A good financial adviser does more than advise

When the investment world is on a downward spiral, fear begins to take a firm grip on many investors. And when people are fearful, they’re vulnerable to investment scams. This is especially true of elderly investors.

It’s been my experience that, in the spectrum of human emotions, there are two extremes that get people into financial difficulty. Fear and greed.

Fear overrides the brain of people who strive to preserve what they already have. Greed is the emotion exemplified by people who either ignore risk or turn a blind eye to common sense in an attempt to garner unrealistic, off-the-charts investment returns.

The victims of the Ponzi scheme that put Bernie Madoff behind bars were good examples of greed. Some scam artists like Madoff were properly registered, but his antics were not immediately discovered by financial regulators. Many scam artists are nothing more than hustlers, simply out to get their hands on other people’s money.

I firmly believe the vast majority of financial advisers go to great lengths to educate, explain, and communicate with their clients. Consequently, most advisers really get to know them over time.

They know which ones need their hands held during market downturns and, conversely, those who don’t even want to be bothered when the market stumbles. Most advisers meet with their clients year in and year out, regardless of what’s going on in the financial world.

Their discussions aren’t just about the numbers, either. They also include dreams, family issues, health concerns, estate planning and much more. So financial advisers not only help clients meet their financial goals, they also get to know them beyond the numbers.

One of the most difficult aspects of being a financial adviser is seeing clients begin to lose some of their mental capabilities or become seriously ill. These are times when clients are most vulnerable to quick talking scam artists. And when responsible financial advisers intervene to protect their clients from those fast-talkers trying to get into their pocketbooks.

Several years ago I was meeting with a widower client. I sensed his mental sharpness had diminished so I tracked down one of his adult children. She thanked me and said that she had also noticed a change. By getting involved, a problem was averted with minimal financial damage.

In another instance, a client’s spending suddenly increased and a “friend” took inquiring telephone calls instead of the client. Protective Services for the Elderly was contacted and, once again, intervention prevented someone from taking financial advantage of a vulnerable senior.

Of course, not all investors work with a financial adviser. So they lack an extra set of eyes watching out for them; something especially important as they enter the point in life where they have two things that scam artists find most desirable: Money and old age.

That’s why I recommend that people establish a life-long relationship with an adviser during their working years. Advisors can not only help protect you from people trying to pry your money away, they can also help when your health begins to fade or you otherwise struggle with the aging process.

In other words, financial advisers who know their clients are the first line of defense to help protect you and your nest egg from anyone trying to steal your assets.