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.

Monday, October 5, 2015

The health of your nest egg is at risk

The Affordable Health Care Act notwithstanding, a considerable amount of money is being siphoned out of many retirees’ nest eggs. According to government projection, health care spending will account for nearly one out of every five dollars spent by the year 2024.

Not long ago, I wrote that retirees should earmark at least $250,000 for health care related costs and expenses. To my amazement, I recently opened up one of my financial journals and a headline read, ”Michigan is the most expensive state for retirement health care.”

That was the conclusion reached by HealthView Services, the nation’s leading producer of health care cost-projection software. Their research indicated that a 65-year-old Michigan retiree would spend $3,707 in premiums for Medicare parts B and D supplemental insurance this year.

HVS also said that over a 20-year period, a Michigan retiree would spend $40,000 more than his or her Hawaiian counterpart. It should be noted, however, that Hawaii is among the states with the lowest health care costs.

The bottom line is that, even after all of the health care debates and the passage of the Affordable Health Care Act, the costs associated with health care continue to increase at an alarming rate.

Meanwhile, because the government’s data indicates there’s no inflation, it appears that retirees collecting Social Security benefits will not see an increase in their payment in 2016.

Nonetheless, those same retirees are likely to be hit with jaw-dropping increases on their Medicare premiums. Clearly there’s a disconnect between Uncle Sam’s perception of inflation and the reality of increasing health care related costs and expenses.

Roughly 10,000 people per day turn 65 in America. As this group moves through their retirement years, it’s going to put a great strain on our health care system. The question that I believe will continue to be debated is, “Who should pay for these increasing costs?”

There are already new taxes in effect dedicated to paying some of the increased costs. For example, the .09% increase in Medicare taxes for married couples filing jointly who make more than $250,000 a year. And in 2018, a new excise tax for those whose employers offer so-called Cadillac health care plans will be phased in.

It’s important that people understand before they retire that all of their retirement dollars aren’t going to be spent on vacations. It’s very likely that a significant amount will go instead toward mundane expenses related to their health.

Anyone who is currently working and has a large deductible should see if you’re eligible for a Health Savings Account. If not, before the next enrollment period you should check to see if you can switch your coverage to a plan that is HSA eligible.

Simply stated, an HSA is similar to an IRA in that both are tax deductible and they accumulate tax deferred. Ultimately, the funds can be used for a wide array of health care services.

If you’re not HSA eligible, you just have to be more aware that a significant portion of your retirement nest egg will likely be used for health care related expenses.

After the Affordable Health Care Act was passed, many thought that, as a nation, we would stop debating health care costs. I have a feeling the discussion is just getting started.

Ken will be speaking at a workshop regarding healthcare spending on Oct. 21. For information and reservations please contact Lifetime at 248-952-1744.