Investing—who can you trust?

Posted on November 7, 2012November 7, 2012 by Danielle

An awful lot of hot air has been blowing lately about trust and believability. Now that it’s the morning-after, maybe we can recover from all the campaign ads and go back to pondering the usual scoundrels. I have the secret to success, however, at least when it comes to investment safety. Follow these principals and you’ll avoid most of the ways you can be skinned alive.

If it sounds too good to be true, IT IS. Not like I haven’t said this before, but look beneath the hood of any scam, and you’ll find our own personal greed has something to do with it. No, we’re not smarter or cleverer or luckier than the next guy and that nice man isn’t keying you in on a privileged deal—not a legal one, anyway. If you are truly in on an insider deal, well, I hope your mug shot looks good on the front page of the Wall Street Journal. But for most of us, guaranteed returns better than the return of the specific market are a sure sign you’re talking to a crook—unless it’s a federally-insured savings account, and you’re not going to make any money at all on that one. Ask investors in David Lerner (or many other) non-traded REITs—you can’t get an 8% return in this market without getting more than a whiff of fish.
Just because he’s nice doesn’t mean he’s honest. If you’re selling some crap, especially something that’s hard for the consumer to evaluate, you’d better be nice or you’ll be eating cat food. But there are some professions where “nice” doesn’t count as much as an honest answer and advice based on expertise: doctors, attorneys, accountants, and financial advisors. Get a Lab if you want nice. Similarly, just because he belongs to your church, or says he loves older people, or graduated from an Ivy League school doesn’t mean he’s honest or competent. In fact, that’s one of the best ways to scam people with their guard down.
Understand what you’re buying. If you don’t know how it will make money, what will cause it to go up or down, and why you should include it in your portfolio, don’t buy it. You don’t know what you’re doing, and probably neither does the “advisor” if they can’t explain it to you. And why is he selling it to you? Is there a monthly bonus contest going on?
Know what it costs you. You have to pay for advice—no one works for free. If you get “free” info off the internet, you’ve probably just gotten either a)something worth what you paid for it or 2)good background but not specific enough for your personal situation. If you just went to a “free” lunch at Maggiano’s and the nice young man told you that they were fee-based and didn’t generally collect commissions, you are about to pay four or five $$ figures for that lunch. Any reputable fee-only advisor can tell you exactly what you’re going to be paying, whether hourly or based on assets-under-management fees. Know how someone gets paid and you’ll know where their interest lies. Management fees and fees on retirement plans can be jaw droppers once you find out how high they really are.
Educate yourself. Read more than the sports section or the movie reviews. Every day, every newspaper, magazine, and a myriad of financial websites run articles on annuities, asset allocation, target funds, emergency funds, and on and on. Force yourself to read at least one article a day. Jeez, just read this blog! You can eat the elephant one bite at a time—you don’t have to know everything instantly, but over time you’ll find you’ve begun to get a grip on even the most complex issues (I nominate annuities for that title).
Don’t leave it all up to your spouse. Two heads are better than one, and after years of ignorance it’s very hard if you suddenly have to go it alone.

Follow these principles and Bernie Madoff wouldn’t have been padding around in custom embroidered velvet slippers. My clients wouldn’t be bringing me portfolios full of A, B, and C shares, IRA accounts with 29 different mutual funds, 57 varieties of annuities, and life insurance they didn’t need at 3x the cost of term. With decent planning and a healthy dose of skepticism, they’d enjoy far greater prosperity and some peace.

Emergencies and emergency funds

Posted on October 31, 2012October 31, 2012 by Danielle

Hurricane (Photo credit: Chalky Lives)

Are you flying without a net? So many of us believe nothing will ever happen to us, that we’re too young, too lucky, or too far in debt already to put a chunk of cash into an “investment” that makes nothing. At least nowadays it’s hard to make any money at all on easy-access money. For most people, it’s a hard job to save three or six months living expenses and make nothing on it. I want you to re-frame that thinking.

The recent events thanks to Hurricane Sandy provide lots of good examples as to why you might need access to cash in a hurry. I know you have your credit cards, but although they are okay for last ditch emergencies, those emergencies are the kinds of things that begin to dig people into a deep ditch that it’s hard to climb out of. Let’s look at some ways this can happen.

The most horrible way, of course, is that a tree falls on you and kills you. Even if you have great life insurance, it’s going to be a while before that pays off. Will your spouse be able to return to work immediately after such a tragic experience? Think your children might need some help coping? It can take some time to sort out the emotions AND the finances, particularly if the loss is completely unexpected. Cash on hand doesn’t solve the problem, but it sure is great to have one less thing to worry about.

What if something happens that doesn’t actually kill you, but leaves you disabled? Great, you’ve got disability insurance for that, right? (At least you do if you listened to me.) But what about the cost of care? The reduced ability of your spouse to work long hours? The loss of your own hard work around the house? The emergency fund can cover it.

Roof blows off or basement floods? Your homeowner’s insurance will cover that. Except for the deductible, that is. And if you’re meeting the deductible on you house, your wrecked car, and your health insurance all at once, well, the emergency fund is there.

If you don’t have it, what happens? All these things go on your credit card (provided you can even find a repairperson that will take credit cards!) How about if your employer folds or is forced to lay off, or just can’t pay for the days closed? You could have a big bill and much less ability to pay, a double whammy that really digs people into debt.

Most of the people I see in financial trouble haven’t wildly spent themselves into debt by staying at the Ritz or driving a Rolls. Rather, they’ve had some unforeseen disaster for which they had no backstop. Don’t go there. Think of your emergency fund as an insurance fund, and the low return as the (fairly cheap) cost of that insurance and you’ll be much more at peace with the low return.

On a college planning note, those of us touring colleges might consider asking about the college’s disaster emergency plan. It’s something you never think about until your freaked-out child calls you from a disaster area. My daughter’s school, Bryn Mawr, did a fantastic job of coping, keeping everyone safe and getting the power back on (thereby avoiding Revolution and preserving the mental health of teenagers who can’t live without wifi,) and getting enough Public Safety officers in the field to personally yell at all the ninnies who kept calling to ask about what was happening (duh). Send your child off to college with a good flashlight and batteries (they never buy them), a blanket thick enough to live in, a small first aid kit, and some cash which is NOT TO BE SPENT except in, well, an emergency. Just like yours.

Middle class tax “relief”

Posted on October 24, 2012October 24, 2012 by Danielle

Mitt tin man (Photo credit: JonMartinTravelPhotography)

I’ve been trying to keep a lid on my personal political views on the off chance that there’s someone in my area who actually likes Mitt but jeez, I’ve just about bitten through my tongue. And I’m only grinding my teeth over the second debate—I got stuck on Mitt announcing with glee that under his tax plan (I guess he has one somewhere) the middle class taxpayer would no longer pay taxes on dividends, capital gains, or savings.

Ugh, these dumb statements are making my box of rocks so heavy that I just have to say something…and Barack, why didn’t you jump on that? You need a fee-only financial planner on your debate team. (If I have one complaint against our President, it’s that he has no instinct to go for the jugular. Actually, maybe that’s not so bad.) Aside from the fact that none of us actually pays taxes on savings, a large share of my clients aren’t exactly living off their currently-taxable dividends or capital gains, either. Whoops, that would be Mitt himself, who might just get out of paying anything at all, much less the pitiful 13% or 14% his accountants couldn’t figure out how to weasel out of.

I’m happy when my clients are maxing out their 401ks or 403bs and maybe managing a Roth or some sort of IRA and a college savings plan. For most people, the bulk of their investments are already sheltered in these accounts, or plunked into their house. People who have significant investments outside of their retirement savings are also less likely to be “middle class” by any usual income tax definition—they’re at least waving at the 1%. BTW, the top 1% is actually those earning over $343K, but since both candidates seem to like a $250K figure, let’s just go with that.

So let’s just say you somehow managed to accumulate or inherit $100,000 in a brokerage account or some mutual funds that are in plain vanilla taxable accounts. Let’s say you plunked that $100K in a Total Stock Market Index fund, which yields about 1.8% right now (I’m not considering capital gains here, just the dividends, because I’m assuming for now that you just hold on to it). So, each year you’re getting $1,800 in dividends and paying $270 in taxes. Gee thanks, Mitt, I’d sure like to give up my home mortgage interest deduction and get back $270 instead. In other words, these ballyhooed savings are pretty insignificant compared to the stuff that might really count—like more secure retirement funding, college cost reduction, etc. I’d be willing to give up that $270 if I didn’t have to cough up $25K/year for college or wring my hands about long-term care insurance or the myriad of other things we Americans are “free” to purchase in the open marketplace, but which every other Western nation provides for their citizens.

How about retired people—maybe that will help them? Let’s ignore the 1/3 of retirees that are living on Social Security alone—after all, Mitt does (ignores them, that is). For most of the people I see who would fall into the “middle class”, the bulk of their income is coming from 401ks, 403bs, etc., and those withdrawals are taxed as ordinary income, anyway. There are very, very few people who could be classified as both “middle class” and who have significant income from capital gains or dividends. There’s another name for people who live on investments that generate significant capital gains, interest, and dividends—they’re called “rich”. Or maybe, friends of Mitt.

And what about the clients that ARE coupon clippers (bonds, not newspapers)? No one yet has come into my office saying that lower taxes would solve all their money problems. Across the board, my clients are worried about retirement, college costs, job security or business viability, and the cost of long term care. On the other hand, I do see plenty of people who feel they’ve been robbed by the financial “services” industry, whatever their income, investment or education level. But I doubt that that’s on Mitt’s radar. After all, those folks are friends of Mitt, too.