Wild Promises and Pixie Dust

A reader wrote to me this month, aggravated at some TV ads.  In her market, (South Carolina), a large financial company is running ads depicting people who made bad choices (didn’t save for kids’ college, didn’t plan for retirement)  With a soft Southern preacher accent, the advertiser is telling them to come in and sit down with their advisers.  Her impression from the ad is that the message is, “It’s ok you’ve made bad choices for the last 20 years.  Just y’all c’mon in and we’ll fix it for you.”  She called this message, “Pixie dust.”

I can’t discuss any specific financial company’s product in my newsletter without crossing the regulatory line, but she is right to be suspicious.

I can make my readers aware that, as human beings, we tend to value certainty over uncertainty. A lot.  The financial industry knows this.  Most human beings will overpay, or accept a lesser return or other tradeoff, for a product that appears to have some kind of guarantee.

We value this so much that we tend to overlook it if the guarantee has conditions, or loopholes, or possible higher costs down the road.  As long as the person informing us about it appears to be trustworthy and competent, we hear “guarantee” and (neuroscientists have shown this) a primitive part of our brains says, “YES! SIGN ME UP.”

Pay attention to which part of your brain is doing the listening.

1.  Ask to see the contract and the fine print.  If you don’t want to review it, find someone who enjoys that kind of reading.  (Hint:  I’ve been reading prospectuses and contracts for over 20 years and I love it.  The thicker, the better.)

2. Ask the nice, trustworthy, competent person how much they will make if you buy.

3. Ask what alternatives he or she considered before recommending this one.

4. Ask what could go wrong.

5. Ask what would be involved if you want out.

6. Ask at least one other adviser about the same product, preferably an adviser that will not make a commission on selling it to you.

Once you have your answers, then let the rational part of your brain make the decision.

College and retirement funding are ambitious goals that can be achieved in many cases, with time, ongoing financial education, informed decisionmaking, and a financial plan crafted with the family’s best interests in mind.

Perhaps that’s exactly what the advertiser is selling.

Then geez, why did they have to make it sound like pixie dust?

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True Confessions from the Porch

I have traveled a lot of places, but for the last three years, my favorite place has been my rocking chair on the porch in Live Oak, at dawn on a Saturday, with hot coffee and a pair of bird watching binoculars.
An hour after the sun comes up, I feel at peace, yet energized.  I do a lot of reflecting in that hour.
For some reason lately I have been reflecting on the fact that my business is about to enter its fourth year.  In some ways it feels like I just started, and in others, it feels like I have been doing this for a long time.  As part of my reflection, I recently remembered a humorous speech I gave in 2007 about the culture shock I experienced switching from corporate life to the life of a small business owner.
I am not Catholic, but I used Confession to provide a framework for my speech.  I hope my Catholic friends will not be offended – no disrespect is intended.  This is about reflection and, I hope, is in the spirit of a confession.   It went something like this:
“Father, I have sinned.  This is my first confession.  It has been said that the devil’s in the details.  Well, I have seen that devil, and it is me.  Father, three months ago, I had no worries about technology, and assistance with minutiae.  I had a human for voicemail, mobile Starbucks outside my window, subsidized health insurance, a salary, and expensive art in my office.
“But Father, I saw the shiny apple of entrepreneurship and I had to take a bite.  The Siren’s song of personal freedom beckoned to me and I went hither.  Father, I have done strange and terrible things ever since.  I have foolishly believed I have secretarial talents.  I attempted to create my own filing system and now cannot find things.  A mound of paper scraps of ideas cries out for my scatterbrained attention.
“Like squirrels in my yard, I dash to a different duty every 4 ½ minutes.  In fact, after I have climbed the tallest tree, I remember that I left an acorn at the bottom.  Once I’m back on the ground, I can’t remember why I went there.  Just as I find what I was looking for, the phone rings.  It’s Joe with another acorn for me.  Do I go get the nut or (winter’s coming), make a safe place for it first?  I know, I’ll do both at the same time.  I’ll be Super MultiTasker Squirrel!  But Father, could I just end up Super Skinny Squirrel, exerting all of my energy and never enjoying my acorns?  Is this good for my humility?
“Father, should I also be confessing how I don’t miss my bosses?  Or mind-numbing meetings that go nowhere?  That I now hit the Send button without further review by a five-person committee?”
Now, three and a half years after that speech, I would add, “Should I confess that I sleep so much better?”
Off and on for the first three months that I was “in business,” I wondered if I had made the right choice.  Since then, though, I realize the choice was one of the most challenging, but one of the best decisions I ever made.
I’ve heard that confession is good for the soul.  And I guess it must be true.

Coffee, anyone?

Continue ReadingTrue Confessions from the Porch

Beyond That Cute Little Face: How to Choose the Best Pet For Your Family

Holly's Best Pet - Rescue Dog JD

When you’re face to face with an adorable animal, it’s easy to fall in love.  You’re not thinking about what it will cost to feed, train and groom that little (or large) ball of love.  Let alone what your vet bills, monthly meds and the occasional pet sitter will cost.

My colleague Kathleen Stevens of Balliett Financial Services had a great story about choosing her Newfoundland.  From start to finish, she did her homework, researching breeds, visiting dog shows and asking questions.

To drive home the importance of doing your homework, Kathleen cites a recent article in the New York Times that says that between five and seven million pets end up in shelters each year.  The responsibilities – and cost – of pet ownership are a big part of the reason.

So stay away from temptation until you’re sure you know what your long-term commitment looks like.  Kathleen can help you figure it out.

From buying a pet to moving to a new retirement community, make sure you are planning for all of your financial goals with professional help. Contact us today, subscribe to our award-winning monthly  e-letter, “The View From the Porch,” or check out our Resources page for more info.

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Helping Grandma Avoid Shady Money Managers

Know anyone who might be a potential victim of incompetent, unethical or illegal financial planning practices?

Many people, especially the elderly, turn to financial advisors to guide them to the best choices for their financial situations. Not all of these professionals, however, really have the client’s best interests in mind. The Federal Citizen Information Center, run by the federal government, recently added this CFP Board publication, Consumer Guide to Financial Self-Defense, to its catalog.

Learn to recognize the unscrupulous ones and protect yourself, friends, and family from their pitches.  The catalog can be found at: http://www.pueblo.gsa.gov.

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Did You Buy Something Big in 2010? Sales Tax Deduction Possible

Tax Tip: Sales Tax Deduction is Back on Schedule A

Did you buy something big in 2010? In 2010, your CPA probably told you the sales tax deduction went away on December 31, 2009. But, the tax act passed at the end of 2010 brought it back. If you bought a car, boat, RV, airplane, sound system for the man-cave, or took extra advantage of the holiday sales, save up the receipts and ask your accountant about getting an extra deduction.

Or, use the IRS’ Sales Tax Deduction Calculator at: http://www.irs.gov/individuals/article/0,,id=152421,00.html.

Continue ReadingDid You Buy Something Big in 2010? Sales Tax Deduction Possible

My Curbside Garbage Economic Indicator

After my recent trip to India, where garbage is omnipresent (see my travel blog at hollysholidays.wordpress.com if bicycling through developing countries with no physical preparation is of interest to you), I’ve been making comparisons about “here” and “there.”  Although India has three times as many people, and very few landfills that I could tell, I would wager we have a LOT more garbage.

Today is garbage pickup day in my neighborhood.  This morning on my walk, I was amazed at how many people’s garbage overflowed the giant bins the city provides for regular garbage, and how many had two or three full-to-overflowing recycle bins on top of that.  (By the way, are orange juice cartons and cat food cans really recyclable?)

I suppose if I wanted to be a true economic scientist about it, I would have picked through the garbage to analyze it.  But I refused. (Maybe that’s why I don’t have a Ph.D. )  Nevertheless, I couldn’t help but notice large quantities of cardboard boxes.  You know, the kind that you get when you shop online?  Maybe it’s Christmas boxes, or maybe it’s after-Christmas-sale boxes, but, regardless, the impression I kept getting was, “What in the world are all these people buying in these boxes??”  As I was wondering that, a UPS truck passed me on the dead quiet street.  To deliver more cardboard boxes.  Which will end up in the garbage.

Our curbside pickup in the city comes twice a week.  Most weeks, my husband and I don’t use the recycle bin and we barely have one bag of garbage.   I’m guessing that’s because we don’t buy very much.  Ironic, isn’t it?  When we buy more, we throw away more.

I’m torn. As an economist, I should be happy about overflowing garbage bins.  We need the consumer-driven economic activity. But, as a personal financial professional, I have to ask, do we need all the stuff in the boxes?  Where are we putting all the stuff?  What do our closets look like compared to an Indian’s?    Is all this stuff making us any happier and producing a more fulfilling life than a newly-middle-class Indian who just got their first cellphone, a member of the first generation in centuries that doesn’t go to bed hungry on a regular basis?

I didn’t see very many cardboard boxes in India.  Mostly I saw candy wrappers and newspapers left on the side of the road for the goats.  That’s what I call India’s recycling program.

Hmm, I wonder.  Do goats eat cardboard boxes?

Continue ReadingMy Curbside Garbage Economic Indicator

Picking the Right Horse

Every year, financial magazines and newspapers come out with a “Best Mutual Funds” issue. They pick which ones have the best 1, 5, and 10 year track records. They print flattering reports on the fund managers and their philosophies. For once, then, I was surprised to see Fortune magazine, in December 2009, went back and analyzed what percentage of actively managed funds actually beat their assigned index. In other words, what percentage of the time would investors have been better off by just buying an index fund instead of picking one of those profiled in the magazines? A recap of the results, compiled by S&P:

For Large Cap (index is S&P 500): 37%
For Small Cap (index is S&P Small Cap 600): 32%
For Foreign Stock (index is S&P 700): 13%
For Int. Term Bonds (index is Barclays Interm Gov/Credit): 20%

In other words, somewhere between 13% and 37% of managers accomplish the mission of beating their assigned index. This data was compiled over a 5-year period. Academic studies that look at rolling 5-year periods find that the managers who fit in that 13% – 37% category changes. In other words, for a particular 5-year period, most managers who “rise to the top,” were at the bottom in some 5-year period prior to that point. So, the trick then becomes, picking the right “horse,” at the right time, and staying on it for exactly the right ride. For more information and data on how difficult this can be, see Stuart Lucas’s book on “Wealth,” or Burton Malkiel’s “Random Walk Down Wall Street.”

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Economics Forecasting is a Parlor Game

Thus spoke Chris Davis, CEO of Davis Venture Funds, at a conference I attended in May. For many people, “economics” is synonymous with the stockmarket. The assumption seems to be that if we can predict where the economy is going, then we can predict what will happen with the stockmarket. Further, if we can predict which sectors or countries are destined for short-term success or failure, then we can translate that knowledge into successful decisions about investing.

Data about the correlation between the health of the economy and the “health” of the stockmarket, however, repeatedly shows this to be a doomed strategy for investing. The market, in fact, is a leading indicator of economic upturns and downturns. This fact is so well established that the S&P 500 index is included in the top 10 leading indicators used by economic forecasters. Again quoting Mr. Davis, “This we know. 1. The market turns before the economy. 2. The sentiment turns after the market.”

In other words, economic forecasting may be a fun parlor game for investors, but it is useless as an investing decision tool. By the time we can see the economy’s direction, the market is ahead of it. Therefore, investment strategies that depend solely upon being in a sector, country, or market right before it rises, and out of it right before it falls, have an abysmal track record of success. See Princeton professor Burton Malkiel’s A Random Walk Down Wall Street or Carnation family scion Stuart Lucas’ Wealth for a synopsis of the numerous studies done on this subject.

Successful investment strategies are as numerous and unique as individual investors themselves, yet what they all have in common is: 1) time in the market; 2) high savings rate; and 3) absence of fear and greed in decisionmaking. There is no proven formula to produce an economy that can feed, house, employ, and nurture its entire population. But, fortunately, if we stick to an investing strategy crafted just for us, we can feed, house, employ, and nurture ourselves for years to come.

Continue ReadingEconomics Forecasting is a Parlor Game

Might As Well Face It We’re Addicted to Miles

“But I get miles with that card!”

This I have heard many times when I ask about consolidating plastic in someone’s wallet. I said it myself in the not-too-distant past. A few years ago, I attempted to quantify what I was actually getting, and what I was giving up, by stubbornly desiring to earn “free” trips with my frequent flier miles.

After all, who doesn’t want a freebie? Miles and points feel like freebies for spending on “stuff I was going to buy anyway” (Uh-huh. Really?) In my consultations, I frequently come across the all-too-familiar psychological pull of freebies, and a steadfast reluctance to give them up.

My conclusion from my analysis? We are better off with cards that earn cold, hard cash. And some of us are better off with no cards at all. Here are four reasons:

Reason 1) Miles are something we crave that is not in our best interest. Recently my sister, the mother of a 7-year-old, told me about the latest kids’ fad, Silly Bands. Evidently kids are so crazy about these colored rubber bands that they collect, trade, barter, and, of course fight over them. To me, frequent flier miles and “points” are adults’ version of Silly Bands. They are like foreign currencies you can only spend abroad, or Monopoly money that is only good on the game board. With frequent flyer miles, airlines run the printing press for their currency. They also run the cash register.

Conversely, cash, specifically the U.S. dollar, is boring, but is spendable almost anywhere. If I have a fee-less card that pays cash back (and I do), I get a discount on what I have already spent, rather than on something I might spend in the future.

(Of course I am assuming the card gets paid off every month. For anyone who does not do this, a discussion about miles is irrelevant. Comparing the cost of interest relative to the benefit of miles is like comparing the Empire State building to my house.)

Reason 2) Miles “Inflation.” Some say when they look at how many miles or how many points they get, compared with, say, 1% cash back, the miles and the points are worth more.

What if you can get a $500 ticket for 25,000 miles? That’s twice the cash back rate. However, my observation lately is that airlines are reducing available seats for frequent fliers, increasing fees, and increasing miles required per flight. Here is a personal example. I earn miles the old-fashioned way – by flying. In December 2009, I was looking at a January 2010 trip to Canada. Although the airline appeared to advertise my “miles” price would be 25,000, those seats did not happen to be available for the flights I wanted. But, voila, the seats magically appeared if I was willing to spend 50,000 miles. On top of the miles price, the airline charged a “booking fee” of somewhere between $20 and $50, each way. I would have paid between $40 and $100 for the sake of getting a “free” trip, and inflated away my miles value from a penny per mile to half a penny per mile. Overall, the airlines’ inflationary printing press is making sure that miles are worth less and less. (Additionally, for this reason, I use my miles as soon as possible. Tomorrow they could be worthless, and there would be no “airline FDIC” to save my miles. Is the miles program too-big-to-fail?)

Reason 3) Time Value of Money. Continuing the currency analogy, with my cash-back card, I get to use my cash right away, because my card applies it against my purchases. Miss Miles-Card has to wait until she spends $25,000 to get to use her Silly-Band-Monopoly-money miles, assuming she can get a ticket for 25,000 miles. How long does it take to spend $25,000? Is reaching the $25,000 mark something that should be rushed for the sake of accumulating miles?

Reason 4) If I meet someone with a spending or saving “problem,” (meaning anyone who has not saved enough to meet their goals but has had time and circumstances to do so), I look to the credit cards. Even if they have sufficient income or assets to pay off the cards every month, the problem with using credit cards, psychologically, is that they provide no limit or check on our spending. They encourage spending behavior, not saving behavior. Studies show that, on average, if we use credit, we spend 130% of our income.  Our society is filled with enough stimuli telling us what we “need,” or “should have,” or “have to have,” and not enough messages about how to get them responsibly. Credit card companies team up with airlines to bombard us with ads for earning miles and points. Miles and points! More miles and points! Even more miles and points! I am suspecting that miles-and-points must be wildly profitable to the ad-sponsoring enterprises, and not-so-wildly-profitable for me.

Miles addiction can be a tough habit to break. What if, instead of “banking” miles, we just “banked” 1% of our spending? Would we be as satisfied with watching that savings account balance grow as we are watching our miles account grow? I admit, like my 7–year-old niece and her Silly Bands, I get a thrill watching my collection grow. But even a .25% savings account pays better than miles.

Continue ReadingMight As Well Face It We’re Addicted to Miles

Selecting a Trustee: Talent, Temperament and Time

Professional advisor or trustee

Selecting a trustee: talent, temperament, and time. Sometimes an estate planning attorney will recommend setting up a trust. One of the decisions to make in setting up a trust is selecting a successor trustee.  Who is the best person or persons to step into this role if you are unable to? Should it be a family member or a professional trust company?

The requirements for this role often boil down to talent, temperament, and time.

Following this outline, here are some questions to ask when considering a person, or an institution, as a successor trustee:

Selecting a Trustee: Talent

First, talent. Is the potential trustee detail-oriented? For example, trustees are required to provide annual accountings to beneficiaries.

Are they familiar with keeping track of which money is considered “principal,” and which is considered “income”? This can make a difference when there are both current beneficiaries and remainder (future) beneficiaries.

How familiar is the trustee with the spectrum of investments? Does he, she, or it understand the risk factors of all kinds of investments? Would he, she, or it know which investments are in the best interest of the beneficiaries? Trustees are “fiduciaries,” which means they are liable if their investment choices are not considered to be in the beneficiaries’ best interests at all times.

That said, would the trustee understand when it is wise to watch pennies, and when it is “pound-foolish”?

Selecting a Trustee: Temperament

Next, temperament. Will naming this person cause family tension?

Will they have conflicts of interest?

Do they have problems dealing with other family members?

Can they be sensitive to family dynamics and unbiased in decision making?

Will this person put my interests ahead of his or her own?

Selecting a Trustee: Time

Finally, time. Will serving as trustee pose a time burden on a person? Trustees must have time to:

  • review and pay bills,
  • review investment decisions (jointly or with professional investment managers), and
  • communicate with beneficiaries as necessary.

How is the health of the potential trustee being considered? Will the beneficiaries likely outlive this person?

Further Questions

For shortfalls in any of these areas, an estate planning attorney should be consulted on whether any of the following may help:

  1. Naming two or three people as co-successor trustees.
  2. Considering a current co-trustee or –trustees.
  3. Considering a “trust protector,” a third-party person who oversees the trustee and can replace them if they are doing an unsatisfactory job.
  4. Having a family meeting to discuss the  provisions of the trust with the successor trustees, attorney, financial planner, and accountant.

For some, a corporate trustee has distinct advantages. Corporate trustees have entire staffs of trust officers and lawyers. They have accounting systems set up to provide accountings and pay bills. Most have salaried staff investment managers with performance-based bonuses. They purchase stocks, bonds, and funds at institutional pricing with no markup to clients.

Additionally, trust companies operate as unbiased professionals, with experience handling reasonable and unreasonable family members. They have loads of liability insurance. Finally, beneficiaries can’t outlive (most) corporate trustees. If the corporate trustee goes bankrupt, client accounts are protected and can be transferred in-kind to another corporate trustee or custodian.

Of course, corporate trustees come with a price. Normally the fee is a percentage of the assets being managed. A family member may not charge anything although by some state statutes, they can. The decision to make is whose talent, temperament, and time is worth it.

For a listing of local estate planning attorneys, look up your local Estate Planning Council at https://www.naepc.org.

Continue ReadingSelecting a Trustee: Talent, Temperament and Time