Monday, May 18, 2015

May your launch be successful, college graduates

This is the time of year when many of life’s transitions are launched. There are a lot of young adults graduating from high school who will soon be leaving home for the very first time. Similarly, there are a lot of young men and women who are graduating from college, ready to step out into the world and hoping to become self sufficient.

In a perfect world, all of them would either be launching their professional careers or continuing their education in a specialized program such as medical or law school.

But the world isn’t perfect. Yes, the economy may be improving, but far too many young adults will be returning home to mom and dad, still seeking their destiny.

May is also what I refer to as the beginning of the wedding season. In fact, it was exactly one year ago that one of my sons got married. And whether or not the bride and groom have matriculated through college, they too, are making a major transition.

So, we have high school grads, college grads and newlyweds, each of them embarking on lifelong journeys and all beginning in and around the month of May.

To all those young men and women graduating from high school or college or beginning their lives together with a significant other,

I offer a tip of my hat — and some advice.

At many graduation ceremonies the speaker encourages the graduates to change the world in a positive manner. I agree that this is a wonderful and compelling message, but I offer something more specific. I want to encourage all young adults to be fiscally responsible.

What exactly do I mean by fiscally responsible? First and foremost, keep your debt under control. If you borrowed money to get through college, simply pay it back.

Unfortunately there has never been more college debt than there is today, but loans should be repaid. You can always rationalize why repaying your debt should be put on the back burner. But, at the end of the day, your debt is your responsibility, not your fellow taxpayers.

Another piece of advice is simply to live within your means. In this world you can quickly run up sizeable debt with a visit to Amazon and a few clicks. I’m not suggesting that you don’t spend, but, just as with investments, balance is the key.

Finally, develop good savings habits. Don’t just save what’s left over, but rather become a disciplined saver. For example, start saving $50 per month and stick with it no matter what. A year later, increase the amount to $100. This is just an example, but making savings a habit is important.

I include newlyweds in the ‘major transition’ equation because, in financial terms, marriage is somewhat of a financial merger. You might be marrying into a large college debt or marrying someone who can’t save a nickel.

Unfortunately, money disagreements are often cited as a reason why marriages don’t succeed. My suggestion is talk about money prior to tying the knot. Both parties should be aware of the circumstances.

I believe it’s important to develop proper money skills and habits. Over the years, I’ve observed that those who have a grasp of their finances turn out to be more responsible, generous and confident in their future.

Monday, May 11, 2015

Annual report: We need to pay attention to Generation Y

Every year in late April, I attend a conference with some of the most respected financial advisers from around the country. In many ways, the conference reminds me of my college years. That’s because I continue to learn a great deal in the conference’s classroom. And the interaction, thoughts and ideas from my peers are just as valuable as the items on the conference agenda.

One focus of the agenda was Generation Y, often referred to as the Millennials; those born between 1977 and 1995. Keep in mind, for the first time in our nation’s history, there are actually four generations in the workforce. In addition to Generation Y, there’s Generation X (1965-1976); my generation, commonly called the Baby Boomers (1946-1964); and the Traditionalists (pre-1946).

Virtually every day, you can come across someone from each of the various age groups in the workplace. The crowded demographics make it easy to see why it’s so difficult for high school age kids to find summer employment.

The financial services industry needs to pay more attention to Generation Y. After all, there are 80 million people in Generation Y, virtually the same number as the Baby Boomers. Like the Boomers, Generation Y is going to need financial advisers to guide them through the complexities of the investment world.

Every generation has a defining moment. For Baby Boomers, it was the assassination of JFK. It appears that 9/11 will be the defining moment for Generation Y. And while Generation Y will have more college graduates than any generation, they will also have more college debt. Far more.

The financial services field is a graying field. It’s in need of Generation Y advisers to help their peers with the financial decisions they need to make throughout their lifetimes. As Baby Boomer advisers, my generation needs to train, educate and eventually pass the torch on to the younger advisers. It’s beginning to happen and I’m confident that Generation Y will understand the importance of financial issues. I’m somewhat embarrassed, nonetheless, that they’ll need to tackle some financial issues that Baby Boomers are currently kicking down the road.

Finally, I have to say that our keynote speaker, Condoleezza Rice, is one of the brightest people I’ve ever encountered. From her tenure as Secretary of State she has a great understanding of the many hot spots throughout the world.

Today, besides teaching, she also serves on the NCAA college football playoff selection committee where she was in charge of evaluating our own Big Ten Conference. Whatever your politics may be, there’s no questioning her considerable knowledge. Her comments and opinions were always respectful; a rare trait in today’s political environment.

Summarizing, the classroom information was great and I think perhaps this should be the “discussion of or with my peers.” Our featured speaker spent years trying to make the world a safer place, and we spent a fair amount of time trying to get our arms around Generation Y and their finances.

Our world will always need quality people like Condoleezza Rice. People who try to make the world a better place for the generations to come, each of which will need some sort of financial advice. I believe that Generation Y is no exception and I have every confidence that they are up to the challenges that lie ahead.

Tuesday, May 5, 2015

Don’t abandon ship yet — one day does not make a trend

Time and time again I have emphasized that diversification is a key ingredient in the recipe for long-term investment success. I have also made readers aware that the current uptrend in the financial markets is now more than six years old. In other words, it’s one of the longer bull markets in our nation’s financial history.

To go six years without a 10 percent correction is quite remarkable. To a certain degree, the investment world is like a living being in that it periodically inhales and exhales. So, after six years of exhaling, seeing the markets stop and take a breath shouldn’t be a surprise — or cause for alarm — for anyone.

There’s no question that the world is facing some serious issues. Some of them so serious, in fact, that they could potentially light the fuse and ignite global warfare.

Here at home, even though most investors have seen their account values appreciate over the past six years, I sense that many feel the economy still hasn’t totally recovered from the recession.

In a recent column I made readers aware that a dollar dominated world currency is currently being challenged. Although the effort is being led by China, even some of our close allies have lent support, including France, Germany and the United Kingdom.

I won’t go into the ramifications of the U.S. dollar losing its status as the world’s reserve currency. Suffice it to say that it’s quite worrisome. That being said, however, there has always been something to worry about.

There’s an old saying that successful investors must be able to climb the wall of worry. I have often referred to it as needing an iron stomach. Considering the many serious issues around the world, I think we can add “nerves of steel” to that list of requirements.

Remember, bad news sells. When you turn on the TV or radio, the lead story is seldom about some great philanthropic event. More often than not, it’s about a tragedy, crime or some controversial political issue.

I noticed that immediately after the markets plunged on April 17, the Internet and my email were flooded with disturbing solicitations that preyed upon fear. I personally was warned of “the coming economic collapse,” to “cash out now and buy gold,” and to “buy this report to avoid doomsday.”

Stating the obvious, nobody has a crystal ball. As a financial adviser, when I work with a client to develop a diversified well-balanced portfolio, I design it with them for the long term.

Of course there are periodic reviews that may result in the plan being modified or tweaked. It’s essential to follow that course of action rather than eventually hitting the panic button and changing everything.

Unfortunately, I’ve seen that happen. People abandoning their strategy and letting emotions take over. Emotions are a dangerous thing for investors. They often lead to impulsive decisions that seldom work out. Long-term investors understand that setbacks occur and don’t let emotions take over.

A lot of money is made off of a person’s fear. I’m sure that many people responded to the Internet and email warnings after the market drop on April 17. The fear mongers may have cashed in, but abandoning ship rarely works out well for long-term investors.

Monday, April 27, 2015

Take stock of your investments, if you have them

A recent survey by bankrate.com concluded that more than 50 percent of Americans are not invested in stocks in any way, shape or form. To say that this surprised me is an understatement.

It’s actually shocking to me that people aren’t buying individual stocks. Especially since it means they don’t own any mutual funds that contain equities, either within or outside of their retirement plans.

Returning to Basic Investing 101, stocks represent ownership in a company. As such, they can fluctuate up or down in value every business day. All business owners carry an element of risks, and since stocks represent ownership, they also carry risk.

But with risk there are potential benefits. Returns are never guaranteed, of course, but historically most stock market indexes perform fairly well over time. That’s one reason I believe every long-term investor should have a place for stocks in his or her portfolio. Of course, there are no assurances, but historically stocks have kept pace with rising costs.

For many households, their employer’s retirement savings program is the only real savings. If retirement is far into the future, it could be a mistake to totally ignore the equity markets. I understand that many households have a distrust of Wall Street and are still shell-shocked from the market meltdown.

Apparently this distrust of Wall Street carries over to financial advisers because the same bankrate.com survey determined that 21 percent of those surveyed didn’t trust stockbrokers or financial advisers. Naturally, this saddens me because in my world, the financial advisers that I interact with are of high quality, competent and caring.

History is no indication of the future, but investors who were scared away and sold their stock holdings during the recession of 2008-09 have missed out on sizeable market gains. To rub salt into the wound, if those dollars went into the bank, they produced very minimal interest gains over the past few years.

I’m not suggesting that every penny of your savings go into stocks. But not putting any dollars into something that has great growth potential makes you vulnerable to rising costs. Balance and diversification are the key words for most investors. I’m confident that most households can accomplish them.

If you’re in need of assistance, there are a number of excellent financial advisers who can help you through the maze of the investment world. There’s also the Internet, where you can find and research all kinds of financial data. The challenge with online research is sorting through the plethora of information.

Finally, don’t overlook personal observations from your daily activities. For example, if you notice everybody is eating at a certain restaurant chain, wearing the same clothing label, shopping at a certain store or driving the same brand car, do some research.

One of the most famous mutual fund managers of all time got some of the best ideas for his stock portfolio from his own personal observation.

I find it more than a little disappointing that half the investment world is choosing not to invest in equities. Owning anything is certain to have bumps in the road. But a bumpy road doesn’t mean it’s not drivable. Remember, with interest rates so low and life expectancies so long, totally ignoring stocks is a recipe for problems down any road.

Monday, April 20, 2015

Global warning: Economic dominance of the U.S. nearing end

Earlier this month, the local news was dominated by sports. The MSU Spartans were advancing to the Final Four and our Detroit Tigers were preparing for another season.

The national news, meanwhile, was focused on the debate over the Indiana Religious Freedom Law and the international news was all about the potential nuclear agreement between Iran and the USA.

Without question, all of these events were newsworthy. But perhaps the most overlooked story is China related; a story Larry Summers recently thrust into the forefront. Summers, you may recall, served as our Secretary of the Treasury in both the Clinton and Obama administrations.

The morning of the Tiger opener he wrote that this past month “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”

I don’t want to go into depth to explain the machinations of the International Monetary Fund or other aspects of global finance, but it’s a fact that China has been instrumental in spearheading a new “World Bank.”

The new China-backed bank, called the Asian Infrastructure Investment Bank, will directly compete against the US-backed World Bank. The founding members of the new AIIB include Russia, Brazil, India, France and Germany. Even strong US allies like Israel and the United Kingdom agreed to join.

The stated goal of the AIIB is strictly to help fund infrastructure projects throughout Asian nations. Stated being the key word. But, intent or not, the AIIB is clearly a threat to the dominance of the IMF and World Bank.

The reason I bring this complex international issue up in a personal finance column is because it could ultimately impact all of our pocketbooks. Since World War II, the American currency has, in essence, been the world’s currency. For all of our lives we have known the world as dollar dominated.

Many experts suggest that living in a US dollar dominated world has added as much as 20 percent to our lifestyle. Said another way, how many would be adversely impacted by taking a 20 percent cut in their monthly finances? I’m guessing the vast majority of my readers would feel the impact of such a pay cut.

China’s economy is virtually the same size as ours, and by some measures, may now be even larger. There’s no question they are an economic powerhouse, and former Treasury Secretary Summers, now a Harvard professor, believes the economic dominance of the U.S. has come to an end.

Dr. Summers points to the dysfunctional leaders in Washington and criticizes them for failure to pass the reforms that have been on the table since 2009. Consequently, our national debt just keeps on growing.

International banking issues are not as exciting as the NCAA Final Four, and I doubt that any Tiger fans discussed the AIIB between innings. However, it’s important to keep in mind that we are indeed in a global world where we can feel the ripple effect of decisions made halfway around the world.

Only time will tell what adverse consequences may befall us if the world shifts away from a US dominated financial system. For the past several decades, the US has been the undisputed economic and political global superpower. But be aware: China is on deck.

Tuesday, April 14, 2015

A special plan for those with special needs

As a grandparent of a special needs child I have firsthand knowledge of how much extra time, love and patience is required of the parents on a daily basis. I’m so very proud of my son and daughter-in-law at how well they manage their household day in and day out.

As a financial adviser, I am also keenly aware that having a child with special needs can be a significant strain on a household budget.

At the end of 2014, President Obama signed into law the Achieving a Better Life Experience Act (ABLE). One of the major goals of the ABLE Act was to provide people with special needs an incentive to save.

You would think that families would be thrilled when their special needs adult child got a job. Unfortunately, landing a job could create a drawback. If the special needs person earned too much money they could forfeit their eligibility for government programs.

In other words, to a certain degree it almost forced special needs people to keep their income so low that they were practically living in poverty. The ABLE Act is intended to alleviate this concern.

One of the provisions of the ABLE Act created 529A plans, modeled after 529 College Savings Plans, which I have written about before. A 529A plan is intended to help families with special needs children save for their future without giving up eligibility for public benefits.

As with traditional 529 plans, the 529A must be used for “qualified” expenses. Since special needs last a lifetime, the qualified expenses last over a person’s lifetime on purchases and expenses related to the special needs, including education, employment training, housing and health care.

A big difference between the traditional 529 and the 529A plan is that with the traditional program the account owner, typically a parent or grandparent, can withdraw the money at any time. Of course, they must pay taxes on any gains plus a ten percent penalty. With the 529A plan, the money is truly the special needs person’s money.

With most traditional 529 programs there’s a cumulative cap. It varies from state to state, but it’s generally around $200,000. The new 529A plans simply limit the annual contribution to $15,000 per year and only the first $100,000 is exempt from Supplemental Security Income. Once the account value exceeds $100,000, SSI benefits are no longer received.

With traditional 529 plans, families can purchase the program of virtually any state. For example, if you like the fund manager of say, Ohio, you can purchase it for your loved one. With the 529A plan, it must be your state.

I recently called the two 529 programs available to Michigan residents and I am sorry to say that neither offers a 529A program. Nor does one appear to be in the works. I find this extremely disappointing.

This is a program that Michigan should offer. I’m certain there are a number of grandparents who would like to financially contribute to the long-term care needs. It might be helpful to write your elected officials in Lansing and urge them to do something.

In the meantime, I tip my hat to all the moms, dads and grandparents who, on a daily basis, do the very best they can with a smile under difficult circumstances.

Monday, April 6, 2015

They don’t make pensions like they used to

The nonpartisan, nonprofit Employee Benefit Research Institute recently revealed that 40 percent of employees have less than $10,000 in their 401(k) retirement accounts. Shortly thereafter, the criticism of these programs began to pour in. Many of the critics called for the return of traditional pensions, which would shift the responsibility of retirement income from the employee to corporate America.

The EBRI data isn’t the only source of statistics that support the notion that too many American workers are not saving enough on their own. I’ve read articles in several business and financial publications that have issued the same warning.

Nonetheless, I don’t believe a return to the traditional pension is in the cards. Nor do I believe such a move would ultimately be a viable alternative.

It’s not that I’m anti-pension; it’s just that times have changed. For example, years ago people often spent their entire career working for just one employer. Not anymore.

Today’s workers are far more mobile than their parents. The way so many people hop from job to job, I believe very few would actually remain anywhere long enough to become vested in an employee-sponsored pension. One of the original ideas behind pensions, after all, was to reward long-term employees.

Those 401(k) critics who called for the return to traditional pensions often failed to mention that many pension plans couldn’t meet their obligations. Did it help when their liabilities were turned over to the Pension Benefit Guaranty Corporation? No, because the PBGC has its own financial issues.

Why did so many pension plans fail? There a number of reasons. Poor investment decisions by the pension fund managers were very likely among them. Another factor was that too many plans over promised. In many negotiated settlements that entailed bargaining, unrealistic results were agreed upon. Extended life expectancies also contributed to the failure of so many pensions.

In other words, although pensions sound nice, you have to keep in mind that they have problems as well. Detroit workers and retirees alike recently saw their pensions reduced. But they could be thankful they don’t live in Chicago, which has a pension liability that’s absolutely staggering. Not to mention several other government pension plans that are approaching the crisis level.

So if both pensions and 401(k) programs have issues, what’s the solution? Well, I don’t think it’s anything that can be legislated. What we need, in my opinion, is education on how to plan for retirement.

I do understand that it’s difficult to think about saving when you’re living paycheck to paycheck. But too many who are beyond that still fail to save. Unfortunately, saving for retirement is something many do only if there’s ever any extra money. Even then, much of that extra money is spent on a “deserved” or an adult toy that costs “just” a couple hundred dollars per month.

In other words, bad choices and impulsive decisions are reasons why some will never have enough money set aside. Saving and investing cannot compete with short-term gratification. That’s why financial education is so critical.

In this world, which I often refer to as YOYO (you’re on your own), parents and educators need to lead by example. They must teach the importance of financial discipline, investing and long-term saving.