Tag Archives: Personal Finance

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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What You Keep

By Larry Luxenberg  

The easy thing to do when you are investing is to look at how much your portfolio is going up or down.

But that’s not what’s really important. What’s important is how much of your investment portfolio, you get to keep and how much goes to Federal, state and local taxing authorities.

For example, an IRA defers taxes until you take the money out. Under current law, once an investor turns 70 1/2, he has to start taking money out of the IRA. This is called a required minimum distribution.

When an investor takes money out of the IRA, he has to pay ordinary income taxes on the withdrawal. This can be a third in combined taxes or even more.

If he has a Roth IRA and is over $59 1/2 and the Roth has been open five years, he probably won’t owe any taxes.

If he has a regular taxable account — no retirement savings vehicles — and owns mutual funds, he may owe taxes even if he doesn’t do any trading himself for the year. Mutual funds must distribute most of their income each year to avoid saddling their shareholders with double taxation.

In a strong stock market, like the market this year, gains accumulate in actively managed mutual funds and taxable distributions can be quite high.

Investors need to be aware not just of their investment returns but of how much of those gains they will keep. That makes a huge difference in long-term financial well being.

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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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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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A Great Casino

By Larry Luxenberg  

After one of the worst endings to a year in stock market history, it’s easy to despair and bash the market. When the stock market is collapsing, it’s hard to take the long view and be optimistic. But if you do, you’ll soon realize that the U.S. stock market is generally a friend to investors.

We have good data on the U.S. stock market since 1926. For those 92 years, including 2018, the stock market has been negative for a calendar year only 25 times. That’s using the Standard and Poor’s 500 as a measure for the stock market and including dividends. Of those 25 negative years, 15 years, including 2018, had losses of 10 percent or less. In 6 of those years, the market declined by less than 5 percent. In only 3 of the 92 years has the S&P declined by 30 percent or more. Only 4 times has the market declined for a second consecutive year.

The 4 bad times — with two or more consecutive years of losses — were during the Great Depression (1929 to 1932), the start of World War II (1939-41), the deep recession in the 70s after the Arab Oil Embargo and Watergate (1973-74) and the recession and tech collapse around 9/11 (2000 to 2002).

Other than those 4 times, the broad market has never had two or more straight declines. Of the 92 years, we’ve had 67 positive years or 73 percent of the time.

Following the most recent financial crisis, in 2009, after the Great Recession, the year started terribly, down more than 20 percent in the first few months but ended up by 26.5 percent. In 1987 following the crash that included the single worst day in U.S. stock market history, the market closed the year up by 5.2 percent.

Most people think of the stock market as a casino. But if you are a long-term investor, over the last century, you are the house and 3 out of 4 years, you are a winner, often by a large amount. I like those odds. Over the course of my 36 year investment career, the Dow Jones Industrial Average has gone from 800 to more than 23,000 as of year-end 2018. If you ask me, that’s a great casino and no cause for alarm just because of the recent unpleasantness.

 

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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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Digital Assets

By Larry Luxenberg  

Digital assets are usually dismissed as a futuristic concern. But every estate I’m involved with now has at least some digital components and they are usually needlessly troubling. We spend much of our lives now in the digital world whether it’s on email or Facebook, Instagram or Twitter.

If we have a small business or a profession, some of the value of our business is certainly wrapped up into the digital world.

Last night I spoke to the Rockland County Estate Planning Council (http://www.rocklandcountyepc.org/   about the growing importance of planning for digital assets.

With many of us this might be small — airline points or deposits at paypal — but for many estates this could already be a big number. Most of us have trouble from time to time accessing our digital accounts. Imagine how difficult it will be for an executor to do this.

A good first step is to make an inventory of your digital assets and accounts and then figure out how an executor might access them. You can give such a person separate authority to act on your digital accounts.

This is not accepted in every jurisdiction but in the fast changing digital world, this is a good first step.

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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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