Tag Archives: financial affairs

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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Under the Hood

By Larry Luxenberg  

All investors crave simplicity. That can come at a high cost.

Many investors look at the title of the investment but don’t look under the hood.

A prime example is target date funds. These investments are one of the fastest growing investment products in history. According to the Investment Company Institute, more than $1 trillion is invested in target date funds.

A target date fund is is invested based on your retirement date. Essentially the only thing the investment manager knows about you is your age. But are all 52 year olds the same? Maybe some are skinny and some are fat. Some have plenty of money and some can barely rub two nickels together. Some will retire before 65 and some afterwards. Some will work part-time and some will retire in Central America. Few are average but that’s what target date funds assume.

It’s important to know a lot about an investor to decide how to invest for him. Otherwise you might take too much risk or not enough and returns and investors’ piece of mind might suffer.

Even more compelling, each target date fund is different. Investment managers have different ideas about how to invest for the average 52 year old.

It’s OK to invest in a target date fund but make sure you look at more than just the name. Otherwise, you may learn too late that you and the investment manager had different ideas about what was good for a 52 year old and the consequences may not be pleasant.

 

 

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Not Too Hot

By Larry Luxenberg  

Most investors worry about their portfolio performance when it’s dreadful. It’s also a good time to worry when performance has been very good.

Why worry when performance has been a lot better than the overall stock market? Isn’t that a time to celebrate and not worry for a change?

It may be that celebration is in order. It may be that you are a genius who’s picks have proven that you are superior to most of mankind. It may be that you have picked one of the truly great money managers.

It’s also possible that you have lucked into a good investment or your style is in favor.

More likely you are taking too much risk. Risk can show up in a wide dispersion of returns. That means sometimes the returns are very very good and sometimes those returns are very very bad.

With good reason, most of us are like Goldilocks. We want our porridge not too hot and not too cold. We want it just right.

Investment returns that are too hot can turn too cold quickly and oftentimes that leads to disastrous results.

Worrying about returns that are too good can save lots of tears later on.

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Nothing to Fear

By Larry Luxenberg  

In the midst of the Great Depression, Franklin Roosevelt  addressed the fear that was paralyzing America. In his first inaugural address, Roosevelt said that “We have nothing to fear but fear itself.”

There actually was a lot to fear. The economy was in terrible shape, people were dying and lives were ruined. But action was needed and fear got in the way of taking steps to improve people’s prospects.

Often, in less dramatic ways, I find investors’ fears preventing them from taking prudent risks that would improve the lives of themselves and their families.

The fear of a small loss prevents them from seeking a big gain. Even the near certainty of a large loss over several decades prevents them from taking action that has the high probability of generating at least some gain and most likely a big gain.

People have been so programmed about what is “conservative” investing that they aren’t open to taking a rational look at the data and adjusting their investments accordingly.

While Roosevelt has long since been consigned to the history books, the shadow of the Great Depression and the subsequent stock market crash still looms large in investors’ psyches.

We will regularly see large drops in the stock market and inevitably a crash from time to time but that is something to plan for, not something to relegate us to the sidelines forever.

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Paying for a Child’s Retirement for the Price of a Car

By Larry Luxenberg  

One of the best presents you can give a child is to fund their retirement. And it costs about the same as a modest car. The key to the gift is time. Having a long time to invest is critical but it costs you nothing but patience.

First let me explain how this works and then the four ways it could go wrong.

The initial step is to fund a Roth IRA. A child must have earned income but you can contribute an equivalent sum up to $5,500 a year to the child’s Roth. A Roth provides no deduction on the way in but if you hold it until age 59 1/2, there’s no tax on the way out. A $5,000 contribution to a Roth at age 20 and invested 100 percent in a diversified stock fund, earning the long-term return of stocks, would be worth $587,000 at age 70.

This sounds too easy so what could go wrong?

First, Congress could change the law so that the withdrawal would be taxed.

Secondly, inflation could eat up some or all of the returns. At the 3 percent inflation which has been the U.S. average in recent years, inflation would drive down the purchasing power by a third. Still, it would be a nice bundle to have in retirement.

Third, stocks could have disappointing returns. The longer one owns a diversified fund of stocks, the more likely that returns will be good but there are no guarantees in the stock market.

Finally, the child could mess things up in a variety of ways: invade the account early, change the investing approach or some other, unanticipated way.

Still, for the price of a regular car or less than a full semester at a good college, a parent could prepay a child’s entire retirement. An interesting idea and one I believe in strongly enough to try it.

 

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Before the Big Day

By Larry Luxenberg  

A wedding is a wonderful thing and lots of excitement surrounds the big day.

Often overlooked are some of the things that could be done to make sure this milestone marks a lasting and fulfilling union. As financial advisors, one of the things that gives us the most pleasure and sense of accomplishment is helping a young couple get started on their new life.

If possible we like to sit down with them well before the wedding and help them begin to chart their financial future. It’s hard for any couple on their own to have a good dialogue about money. With a neutral party present, it’s much easier to get that dialogue started and we hope it will last a lifetime. We help a couple sketch out the broad outlines of their financial lives knowing full well that there will be continual adjustments.

The important thing is that they can talk with each other about money in a constructive, unemotional way. Finances are one of the biggest sources of tension for a couple and a leading cause of divorce.

Getting started on the right foot, with the help of a financial advisor, can make a big difference in whether the young family prospers or founders.

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Preparing Your Estate

By Larry Luxenberg  

Prosperity and cyberspace have combined to make dealing with estates more difficult than in previous times. Rather than leaving a mess behind — the proverbial shoebox of unorganized documents  — one can make the task of heirs a lot easier some simple and easy steps. Put together a list of all of your financial accounts, the institutions where they are held, current balances and contact information. Add to that list the professionals you deal with and relevant passwords. Many people accumulate a hodgepodge of accounts, insurance policies and other assets, some with small balances, and it’s easy for someone not familiar with these accounts to overlook some. The guesswork at an emotional time to piece together someone’s financial life can be daunting even if you do manage to find everything. Many do not. Evidence of that is in every state capital where abandoned or lost accounts total in the billions. Some simple steps can space loved ones a lot of grief so don’t put this off and leave a mess behind.

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Aging and Financial Decisions

By Larry Luxenberg  

Most of us expect that as we age, our capacity for making complex financial decisions diminishes. A professor at Texas Tech, Michael Finke, has compiled research that supports this supposition. From my own experience working with elderly relatives and clients, I believe this to be the case. Most of the “old old” that I’ve dealt with haven’t had the capacity or perhaps the interest in these complicated matters. For many, they simply don’t want to tackle these issues. They are more likely to want to visit with family and friends or pursue their passionate interests or merely handle the tasks of getting through the day. It’s important that we prepare for this stage by designating a trusted relative, friend or professional to step in and handle these matters when we no longer are capable of doing so  at the level we were in our peak years. A decline in skills may be combined with more difficult issues such as the onset of early stage dementia, paranoia or other cognitive impairment. There is no way to sugar coat the difficulty of living through or taking care of someone who is afflicted. But at least if we prepare for the typical decline or even worse issues we can prevent needless financial devastation as well.

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Hamilton’s Blessing

By Larry Luxenberg  

Interest in the U.S. national debt seems to have diminished. Its importance has not.

Even with extraordinarily low interest rates, interest on the debt takes up one out of ten dollars of federal expenditures. If rates rise to more normal levels, even if the debt stabilizes, interest on the debt could easily double or triple.

Recently we came across a book titled Hamilton’s Blessing about the history of America’s debt going back to the founding fathers. It’s instructive that in earlier years the debt ran up during wars and crises and in between times was paid down.

Except for three years at the end of President Clinton’s term, that hasn’t happened in more than half a century.

While not an imminent danger, no initiative in Washington shows promise for getting this problem under control. The Tea Party made some noise but disappeared during the great budget compromise of 2015, when spending ramped up again.

At the least, the government should be extending the term of the outstanding debt while rates remain extraordinarily low.

The debt need not be a crushing burden but needs to be dealt with in all its dimensions in an intelligent way before it becomes an insoluble problem.

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Contingency Plans

By Larry Luxenberg  

The Sun Doesn’t Always Shine
We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.

Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.

Many of these people are do it your selfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away.

What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like. What happens to a couple who are living together for many years when the storms finally roll in?

Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?

I told him the question is wrong. We know the market always goes up and down. The long-term trend for a century has been up but we know the market will go down and we need to plan for that.

We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy. We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.

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