Millennials Are Mooches…and Other Money Myths

millennialmoochers
There are plenty of stereotypes about how certain people behave around money — stereotypes I’ve often seen contradicted in my experience as a financial planner. Let me debunk some of these money myths for you.
Myth One: All millennials are mooches.
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What I Tell Clients Who Want to Buy Gold

Gold

Sometimes people want gold because of greed, sometimes because of fear. Here's what you should know before you buy it. Read More...
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How to Be Charitable…and Hold Onto Your Money


Bench in Yosemite
You can inexpensively plan for a donation from your 401(k) while retaining access to the account if you need it.
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What we think we know

Money_Myths_Infographic_Overconfidence_Final (1)

Can't see the graphic? Here’s an expanded version.

Do you think you’re “financially savvy?” Schwab says that may lead to overconfidence and poor decisions.

Schwab released results from a recent survey that shows people who consider themselves “financially savvy” answer financial planning questions wrong more of the time.

This is one of those surveys that makes a lot of sense to me. As a financial planner, my experience is that people who think they’re financially savvy are really good at one or two areas of personal finance. They really are savvy in say either budgeting , finding good deals when spending money, or are very interested in investing. While people who think they are savvy may, indeed, be savvy about one or two areas of financial planning, they don’t necessarily know much about, say disability insurance or social security.
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Buying a house? Avoid these five pitfalls

rentorbuy
An alert reader tipped me off to this really cool rent vs. buy calculator:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

The biggest mistake people make when buying a house is over-buying. Before I was a financial planner, I made this mistake myself. I focused on how much of a mortgage a bank would lend me, not on the fact that I still wanted to be able to take vacations after I bought.

Many times you make the decision about how much to buy in a period of about a month and you lock yourself into the expenses for years to come. Most people buy a place that’s nicer and more expensive than what they rent.

The biggest issue that people have with houses is buying one they can’t afford.

Here are five tips to avoid overbuying a house:

1. Put 20% down. Right now in Chicago if you’re buying a condo, make that 25%.

2. Buy a house that is 2-2.5 times your annual income. Live in New York City or San Francisco? Raise it up to 3 times your annual income if you absolutely must. You’re not getting away with anything; you’ll have less to spend on other things.

3. Trade up when your house is 100-125% of your annual income.

4. Realize realtors and mortgage brokers make more money when you buy a more expensive place. They don’t necessarily have your best interest over the long-term in mind.

5. If you don’t want to buy a house, don’t buy a house. A lot of people know they might want to move, or don’t want to take the risks and responsibilities associated with buying one piece of real estate. Follow that instinct, and save the money instead. Owning a home can make sense at certain times in your life and not in others. That’s fine.

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Why Investments Smell

Bad-smell
Why investments smell

Our fridge finally died; we could also use a new dishwasher. So, when we found that a local retailer was offering a discount for buying more than one appliance, my husband and I drove over.

I’m what the Kolbe personality profile calls a “Fact Finder,” so I had done my research. When we arrived at the store, I whipped out the print outs of the brand and models that we wanted.
We started with refrigerators. The one I had picked was okay, but there was a better one in a neighboring price range we both liked more that I hadn’t researched.

Then we went to the dishwasher I liked. Looked great. Then we talked to Pat, the salesperson.

Big news was the discount fine print (not visible on the ad or the in-store promotional material): to get the discount we drove an extra half hour for, the appliances had to be the same brand. The fridge and dishwasher we wanted were different brands.

Pat told us if we liked the fridge, we should just look at dishwashers from FridgeBrand. Wow, FridgeBrand’s dishwashers had so many features, it was unbelievable. From Pat’s presentation it was clear that it was a better machine and a good deal.

We told Pat we needed to talk to each other privately. Time for me to whip out my smart phone /information and fact find. Pat rolled his eyes. Was it because the store was closing or because of what I was going to find out? This is just the kind of mystery that I love to uncover. What was Pat thinking?

When my husband gave me a 3-minute warning, I spit it out. “With the fridge we like, just like all the fridges I’ve researched, 10% of the reviewers say the ice maker doesn’t work. Sometimes ice spills all over the floor in the middle of the night. One reviewer wrote a really vivid description!” I was going to continue when I looked at my husband whose look communicated, “the store is closed. It’s ten at night. Do you think I want to hear the vivid description of ice falling all over the floor?”

“In other words, the fridge is fine.”

He started walking toward the cash register. “Oh, and the dishwasher?” I said. He stopped. “Several reviews say it smells.”

“It smells?” he asked.

“It doesn’t clean well either. One person says the smell kind of goes away, but yeah, 10% of the people say it smells.” We don’t want a dishwasher that smells.

Fee-only
This got me thinking—how much would I have had to pay Pat to give me an honest opinion?
I suspect that Pat knew reviewers say the dishwasher smelled.

As a fee-only financial planner, I put my client’s interest ahead of my own. I’m upfront about my fees.

What would it be like if I could walk into an appliance store and have it work like we operate our business?

How much would I have to pay to get the salesperson’s actual opinion and expertise? What would it be like if I could say to him, okay, here’s what, $100, $300 $500? Now tell me what makes the most sense for us. I’d really like to live in this world!

Commission
In the financial services industry, there are advisors, who, like Pat, make money based on commission. This causes an inherent conflict of interest. Commission sales people make recommendations based on their own agenda.

Just like FridgeBrand was offering some undisclosed incentive to Pat to sell their dishwashers, financial companies give advisors financial incentives to sell their mutual funds, life insurance, and annuities.

Unfortunately, a lot of these products smell.

Fee-based
There is another type of financial advisor, called “fee-based,” who charges the client a flat fee
and gets commission from the financial companies. More smell!

Not only that, I believe the label “fee-based” was developed to confuse consumers into thinking that the advisor is “fee-only.” This kind of deception reminds me of the fine print that says—oh, yeah, and by the way, you’re going to drive an extra ½ hour for nothing.

Thankfully, the public is catching on. Just like the Internet has sparked reviewer sites like consumersearch.com that report on the best products, there are a growing number of fee-only financial planners. Fee-only is still a small portion of the industry, but it’s clearly what consumers want.
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Market at All-time High: good time to sell?

Wall Street Thumbs Up
USA Today says that stocks are at all-time highs. So is it a good time to sell? Well…probably not.

Here’s why.

Let’s take a closer look at our article. Hmm. They say that the large companies are doing well and small companies are doing well, too.

Okay, that’s two market segments. What about the rest? I generally recommend investing in 8 market segments, not 2. Here they are:

Large Cap (large company stocks)
Large Cap Value (large company dividend paying stocks)
Small Cap
Small Cap Value
International
Emerging Markets
Long-term bonds
Short term bonds.

Reason 1: What happens every year:
Every year, some of these segments go up and do better than the other segments, and some don’t do so well.


So while large cap stocks and small cap stocks did well in 2013, there are other segments that didn’t do so well.

Here’s a chart of the last 15 years. It shows which segments did the best. There are people who can make a ton of money if they can figure out the pattern here. Turns out, which segments outperform the others are pretty much random.

In other words, you can’t predict it. There is no pattern.

Reason 2: You have to put your money somewhere

Let’s say that you do want to sell your mutual funds and ETFs that have done so well. Where are you going to invest the money? The money’s got to go somewhere. Since what happens next year can’t be predicted either, you have no way of knowing if you’re going to take money out and invest in something that does well in 2014.

The Solution: Invest in a well-diversified portfolio and rebalance every year

When you rebalance, you sell some of the winners and buy more of the segments that are cheap right now. Research says that rebalancing once a year is about right.

As a financial planner, I try to smooth out the financial roller coaster—to make money into a low-drama part of life. However
when the market is at a high, I say—hey, it feels good. Hang on; enjoy it.

Life is inherently paradoxical; when is the opposite of this advice true?

If you own individual stocks, it could be a great time to sell. If you own company stock options, it could be a good time to exercise them.

Bonus prediction
I don’t generally make predictions. However, I’m going to make one right now. The deficit is going to go down. We might not hear about it because the deficit going down doesn’t cause anxiety or grab headlines.

Why will the deficit go down? Because a lot of workers with stock options will exercise them and pay tax on the income. That was a huge factor in reducing the deficit in the 1990s; I think it will work now, too.

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