Tag Archives: financial affairs

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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Babe Ruth and Financial Planning

By Larry Luxenberg  

Babe Ruth was born into a poor family in Baltimore and died young as a wealthy man and the hero of the golden age of sports. Although he didn’t look like a heroic athletic and roamed well outside of fair territory, he broke ground in athletic and business achievement. He had good coaching and support in both arenas and knew which rules to break (most) and when to listen to his coaches and he had some of the best.

Ruth’s life is swathed in myths and we will never know the full story. But what facts we know and the many myths are instructive. Ruth was a great athlete and dramatically changed the game of baseball – then the national pastime – forever. And despite his great hunger and appetites, he achieved success on and off the field, making up in part for the deprivations of his youth.

At age 7 he was a wild youth and his parents shipped him to reform school at St. Mary’s Industrial School in Baltimore. He remained there till the end of his teenage years and the beginning of his life as a professional baseball player. Life at the school was regimented and austere; he only got meat once a week and had to learn a trade and work. He became a proficient shirt-maker and carpenter. At the school he also became a great baseball player under the tutelage of Brother Matthias.

At 19 he signed a contract with the Baltimore Orioles, then a minor league team. Soon they sent him off to the Boston Red Sox in 1914. It was not love at first sight and he spent part of that truncated season in the minor leagues, helping the Providence Grays win a minor league pennant.

Back in the majors the next season he began to establish himself as the best left-handed pitcher in the American League and a strong hitter. Short of cash, the Red Sox sold Ruth to the New York Yankees in 1920 after three World Series Championships. At that time, the Red Sox had won five of the 16 World Series and the Yankees had yet to win their first American League pennant. He went on to lead the Yankees to four World Series Championships and create an aura of success there.

Ruth was already the best home run hitter in baseball and 1920 ended the “dead ball” era. The livelier ball and some other changes opened up the game and with Ruth in the daily lineup, he led the charge,

In 1923 the Yankees opened up Yankee Stadium, “the House that Ruth built.” He was the biggest draw in the major leagues at home and on the road. He soon broke records for player salary as well as for batting and pitching. Prior to Ruth, Ty Cobb’s salary of $25,000 was the highest in baseball history. This at a time when $10 or $20 a week was respectable if not great pay. At his peak, in 1930, Ruth earned $80,000 a year, more than President Hoover. Asked about that, Ruth said, he’d had a better year than Hoover and that was demonstrably true. For 14 straight years, Ruth was the highest paid player in baseball with no one close, another record that has never been equaled or approached.

While Ruth made a lot of money, in the early years of his career, he kept little or none of it. He was generous and lived high and partied wherever he went. He bought cars as fast as he wrecked them and the beer in his hotel rooms was always cold and plentiful. His appetite for food and many vices was brobdingnagian. In addition to major league baseball, he made money barnstorming with Lou Gehrig around the country, appearing on the Vaudeville circuit, in the movies and making endorsements.

In 1927 his fortunes changed dramatically for the better. That year the Yankees fielded one of the great all-time teams with Ruth in the middle of a lineup termed “Murderer’s Row.” He also became the first baseball player to earn as much or more off the field as on it in the regular season. That year he also turned most of his financial affairs over to Cristy Walsh, the first real baseball agent. Walsh was a promoter, public relations man, business manager, investment manager and all-around trusted adviser. It isn’t clear, how Walsh first established the relationship. But the story I like best happened when Ruth was living in the Ansonia, a famous apartment building on Broadway in the Upper West side of Manhattan. Walsh described hearing that a local deli was going to be delivering a shipment of beer to Ruth’s apartment and Walsh bribed the deliveryman to let him bring up the beer. Once there, Walsh got Ruth to agree to let him represent him.

No one now knows the true story of the beginnings of the relationship but we do know that Walsh had a talent for ingratiating himself with successful people and in turn did well by them. Over the next few years Walsh expanded his relationship with Ruth until he took over most of his business affairs and kept that up until 1938, three years after Ruth had retired from baseball.

In 1927 Ruth had run out of money as a result of high living, record fines and suspensions and an inability to keep money in his pocket. Walsh loaned Ruth money and in turn had Ruth turn over much of his incoming funds to Walsh. That year Walsh set up a trust for Ruth at the Bank of Manhattan and had Ruth put all of his non-baseball earnings into the trust. By the early 1930s, the trust grew to over $200,000.

Despite the stock market euphoria, the bank invested the trust conservatively with seventy percent in bonds and thirty percent in dividend paying stocks. Even at the peak of the stock market in 1929, bond interest rates and stock dividend yields were attractive by today’s standards. Government bonds yielded close to 3 percent as did Blue Chip stocks while corporate bonds yielded 5 percent. During the worst years of the Depression, while economic activity plunged and unemployment soared, Ruth’s trust continued to have positive returns.

Eventually the bank returned almost half a million dollars in principal and earnings to Ruth. Left in his own hands, the money surely would have vanished with hardly a trace. At that time and for decades later, ball players usually ended their careers with little or no money left and having to enter new careers to support themselves.

Ruth was able to enter retirement having played in the first two All Start games and as a charter member of the new Baseball Hall of Fame with no concerns about money. Ruth could spend his time golfing and fishing with no money worries although he continued to earn money from endorsements and appearances for the rest of his life. He died at age 53 of cancer, having been one of the pioneers of chemotherapy and as a result having a short remission of his cancer.

In an age of heroic sports heroes and supportive sports writers, Ruth’s star shined the brightest. And through his fortuitous relationship with the pioneering agent Cristy Walsh, Ruth was also successful for himself and in breaking barriers for other players. Ruth often lived to excess and not all of his life was admirable but despite his humble roots he starred on the grandest stages and brightened the lives of many people around the world.

Much of the information for this story comes from The Big Fella by Jane Leavy, the Wikipedia article on Ruth and other stories available on the Internet about Ruth and books and stories on the financial conditions before and after the stock market crash of 1929.

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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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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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Less is More Sometimes

By Larry Luxenberg  

As a result of the pandemic and economic downturn, there are now two kinds of Americans: those who are spending less because they have less money and those who are spending less because they don’t have anywhere to spend their money.

For an economy that is two-thirds driven by consumer spending, that doesn’t bode well for a quick recovery and overall statistics. But despite the crude economic measures we employ, the true purposes of an economy are to satisfy people’s needs and wants. If we possessed better statistics, those measures might paint a different picture.

For the first group, suffering will be epic — high joblessness lasted 6 to 8 years after the Great Recession and food insecurity remained high even longer —  and the bleak statistics will adequately measure their distress.

But for the other 75 to 90 percent of Americans, the picture could be quite different. Economists assume that every dollar spent is for something a consumer wanted and if they can’t have it or have to substitute something else, their satisfaction is diminished. That, of course, is a good shorthand and adequate in normal times.

What we are living through is anything but normal and normal statistics don’t capture our current experience. As half or more of the population lives through an enforced idleness, satisfaction has to come through different means. A leisurely trip to the mall is out. A free zoom call with distant friends and relatives is in. People are reaching out more and spending less on leisure pursuits, apparel, fixing up homes and myriad other things.

Many people remind us that “if you have your health, you have everything.” For the million or more people who have contracted the virus and for the 80,000 or so who have died, their health is compromised or they have succumbed. Stress has soared and with it crabbiness, abuse, substance overuse and mental illness.

For others, who retain their health, many have regained an appreciation for the simple pleasures of life that do not carry dollar signs. For large segments of the population, such as the vulnerable elderly, their first impulse after a murky loosening or even an all clear signal will not be to shop until they drop. Their first, second and third impulse may be caution and to keep the purse strings tightly clamped.

The result could be continued high unemployment, the failure of many already shaky businesses, and continued weakness in measured Gross Domestic Product and other key traditional economic measures.

But what of true happiness? That’s a harder thing to measure. Many people hanker for a simpler time. Now that it has been delivered to their doorstop, they may find that they don’t like that imaginary simpler time. But others may find that spending and happiness are not the same and while traditional measurements of economic activity continue to look dreadful, they are fulfilled and much happier than the economists believe that they should be.

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Market Timing

By Larry Luxenberg  

The phrase “market timing” is of paramount importance to investment professionals but is difficult for most people to grasp. No matter how many times the subject is broached, most people cannot internalize the idea.

The concept comes down to this: if the stock market from time to time is going to go crazy and plunge, why don’t I just sell stocks before that and buy them back when it is safe? Why suffer those losses and that pain, when it can be avoided?

If that were possible, I would certainly sign up. But all of the evidence and my own experience of 45 years of closely following the stock market support the conclusion that only in retrospect is it possible to predict market downturns. Sometimes an investor takes action before a crash or a bull market and the media trumpets their success. But then the investor makes a second call and a third and the inevitable failure erases that guru from the scene.

A recent example was the hedge fund investor John Paulson, whose shorting of mortgage backed securities before the 2007-9 collapse was the subject of the book “The Greatest Trade Ever.” Paulson then proceeded to give much of that money back quickly with a series of disastrous trades.

The examples are endless and the academic evidence is even greater. Few investors even come close to equaling stock market returns over an extended period of time and only a handful have surpassed the market over a period long enough to be at all meaningful.

One reason that it’s impossible to time the market is that the stock market tends to move ahead of the news. Normal logic does not apply and the people who are most logical and analytical — scientists, engineers, mathematicians — have the most difficulty with this.

Over time, average market returns are powerful — in the U.S. for the last century on average the broad U.S. stock market has nearly doubled every seven years. Trying to do better leads most people to do much worse. If you take the bad with the good, you’ll get plenty of good.

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Survival Mode

By Larry Luxenberg  

With the economy in free fall, for most businesses it’s a sudden shift to survival mode.

Most businesses spend most of their time trying hard to grow, to innovate, to take on new markets and better serve old ones. Few people with a choice go into business just to survive. But that’s where we find ourselves today.

You can’t grow if you don’t survive. Businesses that worked hard for decades to flourish, now find themselves facing excruciating choices. Capabilities and staff that were nurtured for many years, long established relationships, beautiful facilities — all are now on the chopping block.

President Eisenhower, the wartime U.S. commander of the European theater said that in war everything and everyone is expendable. With an imploding economy, that same attitude and urgency must be applied to businesses.

With a brutal recession on the near horizon, thousands of businesses will not survive. Those that hunker down and go into self-preservation mode quickly have a good chance to not only survive but to thrive after many of their competitors depart the scene.

Austrian economist Joseph Schumpeter called this the “creative destruction” of capitalism. After every painful recession, there is a flowering of innovation. It’s easy to see the destruction. Much harder to spot the bright new industries and new ways of doing business that are coming along.

After the 90-91 recession that shook America to its core, the Netscape browser appeared in 1995, ushering in the Internet and a towering wave of innovation.

Out of the current difficult period, good things will develop but only to those who survive and are sufficiently nimble to spot the emerging opportunities.

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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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