Category Archives: Personal Finance

Your 401K Choices Are Important

By Larry Luxenberg  

Many times over the years I’ve looked at outside 401k plans for clients and others who have requested this. Often, they know these choices are important but they may not have a clue about how to make the choices or who to turn to.

In bigger companies, human resources professional offer advice about how to sign up or withdraw money but may not know much about how to pick investments either. The decision point often is when an employee is new to a company, has to deal with lots of paperwork and is nervous about adjusting to so many new things. Picking a 401k investment portfolio is way down the priority list.

That’s too bad because the choices of how much to invest and where to put the money are important, especially if you are young and stay on the job for a long time. I’ve also seen people who have held many jobs and accumulated a string of retirement plans and have no way or interest in developing a coherent investment strategy.

Many plans now are electronic only and obtaining relevant information from these websites or digital brochures can be frustrating. As a consequence, many people settle for making what they believe are common sense choices. Many plans offer target date funds and what could be simpler than determining your retirement date and signing up for that fund? Or they pick something else that sounds good: what could be wrong about a “balanced” fund. Failing that, how about picking 4 or 5 choices. That way, at least some of them may be good.

People who are actually using these accounts to invest and save for retirement, have a genuine long-term outlook (many decades) and aren’t using these accounts as expensive piggy banks (borrowing the max whenever possible) could be denying themselves a powerful investment tool.

For someone who is in their 20s or 30s and may not touch their retirement accounts for 30 or 40 years, their most precious investment resource is time. And by making a choice that is not thoughtful or downright wrong, they squander this valuable resource.

The daily ups and downs of the stock market matter little if one is putting away money for the distant future. If one properly constructs a diversified portfolio and leaves it in place for decades, the returns can be powerful.

In investing, as in much of life, there are no guarantees, Instead, we have to rely on the odds and weigh the potential risks and probable returns. In some cases, making reasonable changes to the investment mix and using assumptions based on long-term historical returns, returns of double or more over the decades are possible.

Before making the choices, we have to look at someone’s complete financial life, their hopes and dreams, the stability of their career and their tolerance for risk. Doing all of these things with the help of an experienced professional can make a big difference in someone’s financial life. It’s worth spending a little time on the choices rather than rushing through the burdensome paperwork.

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It All Depends

By Larry Luxenberg  

Often when someone asks me a financial question, the answer is “it all depends.” It’s  not a cop out. The considerations frequently are more complicated than the questioner realizes and individual circumstances or unknowable future developments may determine the answer. Sometimes, the right answer is just a matter of personal preference.

Most Americans don’t save enough for retirement. But the more diligent ones read this in financial publications and overdo it. I’ve told some young people in their 20s and 30s that they’ve saved enough for retirement and need to direct their savings toward other goals such as buying a house, which involve different savings vehicles.

At the other end of the spectrum, some adults read that it’s best to defer collecting Social Security retirement benefits until age 70, when deferred credits stop (you can still improve your earnings record after that date if you keep working and have higher inflation adjusted earnings years to replace lower ones earlier in your career.). The advice to wait till age 70 is fine for many people although comparatively few follow it. However, this advice may overlook individual circumstances.

One glaring example is that many potential Social Security recipients are married or were married and this may affect retirement decisions. Married people have signed a contract that has economic implications and when it comes to Social Security, these considerations (such as spousal benefits and taxes) have to be analyzed as a unit even though this is to complicated to explain in a short magazine article. It’s easier to say, “wait till 70.”

Thinking about Social Security as an individual rather than a couple may cost people tens of thousands of dollars. That’s why this answer “depends” on individual circumstances.

Often people ask me how much money they need to retire as if there is a single magic number. Yet no one would think of asking me how much money they need to live their life before retirement. It’s a far different answer if the person is married with four children in a high cost urban area like San Francisco or New York or is single and living in rural North Dakota. Everyone’s retirement is different, too.

A final example concerns investment vehicles. People sometimes ask where are you investing now? The implication is that there is some all purpose investment vehicle that is “hot” and will work for everyone because it is going to appreciate substantially in a short time. However, there is no perfect investment.

Some investments are appropriate for certain circumstances and other investments are better suited for others. For example, a private investment vehicle might require you to lock up the investment for ten years or longer. The expectation is that this investment is risky but holds the possibility of extremely high returns if it works out well and if it doesn’t, the chance that it becomes totally worthless. This may be enticing to a well off investor as part of a diversified portfolio who can handle the risk but may not work for someone who has a small sum to invest and needs part of it for next month’s rent.

When I ask people if they are “average,” no one says, “yes, I’m average.” Everyone feels unique and wants treated that way. So why would they be satisfied with an answer that relies on a “rule of thumb” and treats them as average when each one is special and wonderful. That’s why “it all depends” is a real answer and not a cop out. You wouldn’t want it any other way, would you?

 

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Bobby Bonilla Day, Anna Scheiber and the Miracle of Compound Interest

By Larry Luxenberg  

Every July 1, the New York Mets mail out a check for $1.2 million to former outfielder Bobby Bonilla This will continue until 2035 even though he last played baseball in 2001.

Anna Scheiber died in 1995 at age 101 and left a fortune in excess of $22 million even though she never earned a salary of more than $4,000 and had a pension of $3,100 a year.

Both stories dramatize the miracle of compound interest.With both we are talking about piles of money beyond the reckoning or aspirations of most people. But they do provide lessons that are applicable to all of us. Spend wisely, save for the future, invest globally and be patient.

One example I’ve often given is that for the price of a car, a parent can provide for a child’s retirement.

Here’s how that works. For the last 95 years, for as far back as we have good statistics, the broad U.S. stock market has returned about 10 percent a year. There’s no guarantee with stocks. No guarantee whatsoever that that will continue. But for almost the last century, that is what has happened to a broad investment in U.S. stocks.

At that level — 10 percent a year — stocks double every seven years and quadruple every 14 years. Play that out for fifty years. If you fund a child’s Roth IRA account at age 20 with $5,000, assuming they have that much earned income, and they don’t touch the money till retirement, the money won’t be taxed again under current tax law. If you invest that money in stocks for fifty years and you achieve those same returns — admittedly a big if — you will have accumulated $587,000.

If you do that four times, the total would be in excess of $2.3 million. There would be inflation to reduce the value of that sum and the child would have to sit by and do nothing — not touch this massive nest egg and not panic at all during the intervening market crashes. Patience is key because most of the accumulation is in the final years. But if they can surmount all these challenges and past is prologue, that child would be a happy person in retirement.

None of this is easy but some semblance of it is attainable. Whether you accumulate vast riches or merely add a bit to a more modest bundle, let compound interest work for you.

Bobby Bonilla was a great baseball player. Early in his career, for three years in the early 1990s, he was the highest paid player in the league. He was a star on one World Series championship, for the Florida Marlins.

But other, higher paid players, didn’t manage to postpone the payoff and guarantee their financial security for most of their adult life.It’s hard to be patient but a great slugger has to wait for the right pitch and that’s what Bobby Bonilla did.

The annual checks to Bonilla were not a massive stroke of idiocy by the Mets. Instead, it was a careful calculation by both sides of the value of compound interest and the benefits to each.

Financial writers have calculated that the string of payments assumed an eight percent return on the money that the Mets owed Bonilla. They were supposed to pay him $5.9 million in 2001. If that sum were invested at 8 percent interest and the string of payments were deferred for ten years, this series of checks is what you’d get.

A return of eight percent was good for both sides. Bonilla didn’t have to worry about bad investments or being tempted to spend his money too soon. The Mets didn’t have to pay out the money right away and had the potential to get higher returns on the money or use it in the meantime for other purposes.

Anna Scheiber is a different story entirely. She never made much money but she never spent foolishly either. She lived simply, saved her money and invested it. The heroic part was how much of her income she saved and invested and resisted temptation for so long. The investments were good but not out of the normal. Financial writers have calculated that she earned a rate of return a little better that the broad U.S. stock market but not much better. If she earned exactly the same as the market, the story would be basically the same.

We don’t know most of Anna’s story directly and we can’t calculate the returns exactly. We don’t know when she began saving and investing and she may have had some minor sources of income such as gifts or inheritance that we aren’t aware of. But contemporaneous interviews with her longtime lawyer and stock broker give the broad outlines of her story.

Anna worked as an IRS auditor and never got promoted to a high level despite good reviews of her work. She began saving and investing before she retired and a tax return while she was working showed enough dividends to suggest that her savings in 1936 could have been $21,000.

She retired in 1944, apparently never working again and lived till 1995. Her investment strategy was to buy Blue Chip stocks and hold for the long term. She studied the stock market and was patient and apparently avoided the key mistakes that most investors make, letting their fears psyche them out of large returns.

Both stories converged in 2008. Anna donated her large legacy to Yeshiva University for scholarships for women.Yeshiva University and the New York Mets both turned for investment expertise to Bernie Madoff, the convicted swindler. Eventually both recovered much but not all of the money.

Today is Bobby Bonilla Day. It is a great time to remember not only his baseball talent but his patience and financial acumen and to celebrate the discipline and sagacity that secured the fortunes of both Bobby Bonilla and Anna Scheiber and apply those lessons to our every day lives — spend wisely, invest globally and be patient.

 

 

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The Era of Magical Thinking

By Larry Luxenberg  

In recent years we have been conditioned to believe that anything is possible. Indeed, miracles have happened. The Internet, cell phones, social media, networked computers, online shopping have changed the world beyond recognition. These advances have changed so much and become so ubiquitous that we take them for granted. But perhaps because of these big changes, we expect miracles everywhere.

Cheaper, faster, easier is the rallying cry of technology and much of the time it delivers. But not always. Usually we have to compromise on some of these things. Easier for example. These days, it seems, everything beyond a pencil comes with a thick user manual and the use is not self-evident.

I’ve been particularly struck by television advertising. Many service businesses advertise better, cheaper, easier and more personalized. Usually, some of these claims, but not all, may be true.

One real estate company advertises that if you answer a few simple questions, it can give you a personalized quote on your house and arrange a transaction. Now, they may be able to do something if you answer a few simple questions, but they certainly can’t give you a personalized recommendation based on a handful of answers.

A brokerage firm boasts that they can make investing easy. And, indeed, they have. But they have hoodwinked a generation of naïve investors, convincing them that ease of use equates to success. If your goal is to easily do transactions, that’s fine. But if your goal is to save and invest and build wealth, ease of transactions is irrelevant at best and likely counter-productive. Flushing money down the toilet is easy too but unlikely to be a recipe for amassing wealth.

Google is one of these miracles. A majority of people around the world can no longer get through a single day without Google. It has unlocked more information for more people than perhaps any development in history. And, yet, even Google is no guarantee that our questions will lead to good answers. If the question is simple, we will get the information we need in seconds. But for more complex questions, we often do not get satisfactory answers. More importantly, often times, we do not know the right questions to ask and Google cannot supply answers if we don’t know the questions.

For the right questions, I turn to experts. When I go to a good doctor or lawyer, often I find that the question I arrived with was not the important one, the one that I should have been asking. An expert can frame the important questions, and with that help, often, we can supply the right answer. I have become sophisticated about medicine the hard way and yet I’ve been struck by how many times I haven’t had a clue about the most important ways of treating my conditions. Perhaps the years of study and work in the field — expertise-– do matter.

In my field of personal finance and investing, I find that rarely do people address the important or critical questions or bring perspective to their situation. Oftentimes they’ll ask how to do something when the more important questions are why or what, when and where, which need to precede how.

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Watching Paint Dry

By Larry Luxenberg  

Good investing should be even less interesting than watching paint dry. Paint dries in a matter of minutes or hours, perhaps a day or two at the most. While it’s happening, there is no perceptible change. After it’s done, if you touch the surface, you realize the paint is dry. None of that process is the least bit interesting and while it’s happening there is no sense of change. But at least it’s quick and in the end, it’s satisfying if whatever you’ve painted looks better or is more protected than when you started.

Good investing is similar except it’s much, much slower. While it’s happening, you also don’t get much sense of satisfaction that you are making progress. It also can be upsetting in the meantime with wild fluctuations in the stock market or other markets.

Many investors are seduced by the idea of a quick hit, a get rich overnight scheme or the excitement of rapid trading and immediate results. Occasionally that works just like someone always wins the lottery. But similar to the lottery, the odds of quick success as an investor are low and most participants go away disappointed.

While good, long-term investing is unexciting and unsatisfying along the way, the odds are good and the results can bring you ultimate pleasure.

On average for the last 100 years, large U.S. stocks like those in the Dow Jones Industrial Average, have returned 10 percent a year. There’s no guarantee that will continue but the principle of what follows is the same, even if the returns are lower.

Some years there are big losses in stocks and some years the gains are small. But over time that 10 percent has held for nearly a century. While 10 percent a year or .83 percent a month may not sound like much, over time it yields very exciting numbers. At 10 percent a year, stocks double every seven years and quadruple in 14 years. That means one dollar turns into four over 14 years.

Over fifty years, that same dollar turns to $117.39. This doesn’t take into account inflation, taxes and fees for investors, but any way you slice it, that is a powerful and big return. And it doesn’t require heroic trading, skill or luck. To achieve big returns, it does require history repeating, a little bit of knowledge and, most of all, monumental patience.

Most of what we do in life does not come with a guarantee. Intuitively, we act on probabilities. There’s no guarantee we’ll wake up in the morning, but the odds are good. With investing, if we have a diversified portfolio, keep our costs low, resist the temptation to do much trading or think that we are smart, the odds of success are good. If we crave more excitement or believe that we know more than other investors, the odds plummet.

Investors have to choose. They can have an interesting and exciting experience and likely failure or they can have a dull financial existence with a high probability of success. It’s unlikely you can have both.

For me, the more boring, the better. I’m looking for results, not excitement. I’ll pull my chair over and take a snooze while the paint is drying.

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On Gold

By Larry Luxenberg  

When I began my investment career forty years ago, the price of gold was $800 an ounce and the Dow Jones Industrial Average was at $800. Today gold is a little under $2,000 an ounce and the Dow is at 28,000. Stocks, by any measure, are the clear winner.

Every decade or so, gold and other commodities have a flurry of activity and a brief price run. Traders periodically jump in and we hear people spouting theories about how paper money has no backing and only physical things have value.

Admittedly, stocks are an abstract concept and every once in a while we need a reminder of what they are. Stocks are a fractional ownership in a company. If you buy a mutual fund you have a fractional ownership of a fund that has a fractional ownership in these companies. If you own an S&P 500 index fund you have a stake in 500 of the biggest and best companies in the history of man.

What do you have with gold? You have a shiny object that has tantalized man for thousands of years and held value since prehistoric times. Should investors avoid gold? Not necessarily. If one loves shiny objects, by all means indulge. But as a repository for your life savings? Not for me and I would suggest not for most others.

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Easy Peasy

By Larry Luxenberg  

Many people think there is nothing difficult about personal finance. Listen to a few gurus on TV and maybe scan a magazine or two.

That may have once been the case (I would argue not) but it’s certainly not the case after the passage of the Secure Act last December, which was followed quickly by the CARES Act and the possible Heroes Act.

Couple that with other changes to RMDs, add in QCDs, QLACs, IRMAA (Income Related Monthly Adjustment Amounts), partial Roth Conversions, pension options, tax loss harvesting, asset allocation, tax aware investing, market timing and the Social Security formula (the simple part — 35 years of monthly inflation adjusted earnings).

If you’ve got all that, knock yourself out and do your own planning and hope you don’t run out of money in retirement (See Monte Carlo simulations).

If you can’t sort your way through that alphabet soup and want help with ETFs, ETNs, open end mutual funds, closed end mutual funds, ADRs and plenty more, how about turning to a CFP (Certified Financial Planner), CFA (Chartered Financial Analyst) or CSA (Certified Senior Advisor) or better yet someone with all three.

We don’t know all the answers, but we do know a lot of the right questions and a lot of the places to start looking for answers.

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It’s Ok to Panic… But Don’t Do Anything

By Larry Luxenberg  

On Monday, the markets panicked, resulting in the Dow Jones having its biggest point drop in history and one of its biggest losses in percentage terms. Bond yields just about vanished while oil prices dropped by one-third. More than one commentator said that if you think you know what’s going on, you’re not paying attention.

The elephant in the room is the rapidly spreading Coronaivurs, COVD 19. How widespread and how deadly it becomes are still huge unknowns. What we know for sure is it is hugely disruptive to the global economy and it is inducing fear way out of proportion to what has happened already. It may become a huge and deadly global pandemic and if it does the hype is justified.

So what is an investor to do? If you have the wherewithal to wait it out, you stand a high probability of winning. Long term investors usually (but not always) win. Ebola, Swine Flu and MERS vanished while the markets left them in their wake. Certainly COVD 19 could be orders of magnitude worse. Even so, it’s likely that vaccines and treatments will emerge over the next year or two and eventually the disease will get under control.

We don’t know the human or economic toll and it could be substantial. But if an investor has a well thought out financial plan, he should stick to it. The odds are in his favor.

Emotions destroy more investors than diseases. I know many investors who panicked in 2009 and that momentary lapse has adversely affected the rest of their life. People who think the stock market is dangerous tend to make it a self-fulfilling prophecy to their detriment.

In the meantime, do what I did on an otherwise beautiful day. Take a walk and wait until the wave of panic goes away and leave your portfolio untouched to recover on its own. Nature has great restorative powers, especially for portfolios.

 

 

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Your Dog and Your Investments

By Larry Luxenberg  

Nearly everything about your investments and your dog is different, except for this: both are precious to you.

Your dog needs attention and affection. Your investments do not. They work best in a quiet corner, getting little attention and given sufficient time to work their magic.

A dog absolutely needs exercise. Your investments do not. The investments do best when they are not moved or stirred up. The longer they are not disturbed the better they are likely to do.

Your dog is your one and only. Your investments are not. They work best when they are widely distributed around the world, not when your affection is concentrated on a favored few.

Finally, your dog is loyal. He is your best friend and rewards you for your efforts.

Your investments are totally indifferent. They are more like an ungrateful teenager. They could care less whether you live or die, prosper or suffer in penury.

You may be grateful to your investments if they have stood you well over the years but be assured that your investments do not return your affection. You can fall in love with a stock but the stock does not love you. Hanging on too long out of affection has destroyed many investment relationships.

Like a dog, an investment can bark or bite but it will never greet you warmly or share a cozy evening.

Both a dog and your investments have a place in your life but confuse the two at your peril.

 

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There’s Never a Good Time to Get Gas

By Larry Luxenberg  

I never feel pumped to get a gas fill up for my car. I’m always in a hurry or tired or it’s unpleasantly cold or rainy outside.

But I also don’t like it when the light goes on with the dire warning that I’m running on fumes.

It’s also like this about personal financial planning. There’s never a good time to straighten up the mess of your financial affairs. It takes energy and gumption to deal with the reality and the complicated forms and ideas that determine your financial fate.

But if you don’t do it, just as if you don’t get gas, dire consequences await.

Your financial affairs may be complex and daunting but you don’t have to do everything at once. It’s better to start small than not at all.

And it’s better to start now that waiting for whatever your current excuse is to pass.

The key thing in investing and personal finance is time. The younger you start, the easier things are. Investment returns compound over time and the longer you invest, the more money you will have.

It may not be pleasant to tackle financial planning but it can be very rewarding.

There’s never a good time to start, so just do it soon.

 

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