How to plan when you don’t know the future

Posted on May 17, 2017May 17, 2017 by Danielle

We live in uncertain times. I can’t think of any time in my life that that statement wasn’t true—we can never know the future. When it comes to investing and the stock market, predictions are pretty much worthless—since I bought my first stock at 28 years old, I’ve heard just about everything: don’t buy stocks now (whenever!), bonds are not really safe, Dow will hit 30,000, Dow will go down the tubes.

Most recently there was the expectation that the market would crash if the current incumbent was elected. Now there’s the worry that it will crash if he’s impeached. That might have some basis in fact. The S&P 500 declined about 50% from 1973 to Nixon’s resignation in August, 1974, according to this article. (While I remember Watergate, I wasn’t all that interested in the market at that time.) But as the article makes clear, a lot of other economic factors impacted that recession.

Analysis is perfect in retrospect. The best time to invest is usually some time before you did. Those of us who have faced challenging life circumstances—divorce, unemployment, illness—also know what it’s like to try to plan the future when that future seems radically altered. During those times, people often believe they have no future. But we always have a future (unless we’re dead); it’s just a different future than what we planned.

As I wrote in my client newsletter the day after the election (email me if you want a copy) we can take some protective steps no matter how uncertain our personal or political future seems.

Build an emergency fund

There’s just no substitute for this. In the middle of a crisis, it’s hard to increase it, so do your best to build it pro-actively. And if you’re in a situation where you need to draw it down, do so in the most frugal manner possible.

Improve your earning power

Get more education, build skills, get quality career counseling, and get out of the office and network. Think through ways to build a side income—gig economy, small business startup with LOW or no investment, whatever you can do.

Think through whether it really makes sense to quit your job to start a business: could you test the idea part time? Have you written a business plan and had someone else vet it?

Most important, guard against lifestyle creep. When you get a raise or earn extra, hold on to it! Use the improved earnings to build up your personal safety net.

Diversify your investments

For at least the past 10 years, I’ve been hearing how bonds are a terrible investment. During that same period of time, the Vanguard Total Bond Index mutual fund has had an annualized return of 4.17%–not great, but better than leaving it in your mattress, and beating inflation handily. People who had 40-50% of their portfolio in bonds during the 2007-2009 crash lost far less than those who were 100% in stocks. But in the doubling of the market after the crash, people who had abandoned stocks lost a ton of potential increases. Neither you nor I nor any of those genius active fund managers are going to make the right single bet on the market roulette wheel at any given time, so the safety move is to spread bets (investments) widely.

Take care of yourself

Making yourself sick is not going to cause one bit of change in an ex-spouse or corrupt politician. Eat well, see the doctor and dentist, exercise, and get a hobby—build yourself up and distract yourself with pleasurable activities to control how much you allow yourself to get worked up. People make very poor financial decisions under stress, so delay major decisions until you can think straight and get some expert input. On the other hand, don’t become paralyzed—not to decide is to decide (Harvey Cox)—and avoiding decisions for very long periods mean you’ve lost control over your own life.

Join something bigger than yourself

Times of turmoil are great times to join a group, take a class, do volunteer or advocacy work. You’ll feel less alone, find ways to get input on personal decisions, and learn how to exert influence on issues that concern you. Studying history, learning to draw, joining a book or investment club, or becoming active in a political group can all impact your personal success, life satisfaction, and ability to envision a future you can plan for.

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Retirement Accounts: keeping the advice sane and safe

Posted on February 6, 2017February 6, 2017 by Danielle

When my daughter and I were at the Women’s March, I saw a number of signs saying I can’t believe I’m still protesting this sh*t (and they didn’t have an asterisk). I feel that way too, and I also feel that way concerning the fiduciary rule for retirement accounts. In fact, I can’t believe we’ve EVER needed to discuss this. The fiduciary rule was set to go into effect on April 10^th of this year, but the so-called current administration has issued an executive order on February 3 delaying the order until—who knows?

What’s fiduciary?

The fiduciary rule is simply a requirement that your financial advisor–fee-only, fee-based, hourly fee, commissioned, or maybe roboadvisor (although that’s not quite clear)—be legally obligated to act in your best interest. How on earth is this even controversial? You’re paying for advice one way or the other and the advisor is allowed to act in their own best interests? And keep in mind that this fiduciary rule only applies to retirement accounts. Even so, the brokerage industry has fought it tooth and nail. They claim this rule will squeeze out the little investor who won’t be able to get advice. Give me a break—there’s plenty of fee-only advisors, many hourly, and (shudder) you can get some advice from the robos. At least they won’t skin you alive.

For eons now the SEC has been debating whether and how to employ the fiduciary standard for other investment accounts, and it looks like they’ll now be dithering until your children age into dental implants. Most people believe that any advisor they see is acting in the clients’ interest. Most people are wrong. So let’s take it from the top, yet again.

Difference between best interest and appropriate

Investment sales people (brokerages, bank investment departments, stock mongers, whatever) are only obligated to peddle something to you that’s appropriate for you, and boy, is that broadly defined. So, if it’s appropriate for you to be invested in the S&P 500, you can bet that you will be in the S&P fund that pays the highest commission to the broker, or that the brokerage pitches. I have never yet seen a broker-designed portfolio that included low-cost or no-load mutual funds, because even if those are in your best interests, they’re not in the broker’s best interest because they aren’t going to make any money from those funds.

How to get skinned alive

It can be even worse, depending on what you’ve blurted out to your broker. Before I ever became a financial advisor, my dad used a broker to invest his retirement savings. He adored T., who called him every few days—more than I did, as my dad liked to point out. He had told T. how he needed safety, but how he also wanted the most income possible. Dad had no idea that these were mutually contradictory statements. BTW, if you don’t know why, call me and I’ll explain. Since T. the broker had two options here, guess which one he took? The one that made T. the most money, which was selling my dad a whole raft of junk bonds—high income—which mostly went belly up, losing my 90-something father around $300,000 if my calculations were correct when I finally looked at what was going on in 2007. T. eventually exited the brokerage firm and dad was upset not because he’d lost so much money, but because T. didn’t call anymore; I have a sneaky suspicion it had nothing to do with ethics, sadly. My guess is he didn’t make his quota.

Despite all the firepower the brokerage industry could muster and all the rending of expensive business suits, the rule at best only applied to retirement accounts, which are presumably needy of more protection because—the only money the little guy has? A potential future burden on government support? Because people who have money in other accounts are sophisticated investors? Where’s my emoticon (dog running in circles) when I need one?

What, me worry?

I just saw an article where it was claimed that, well, not to worry. Since, the article argues, the brokerage industry has already moved toward the fiduciary standard for retirement accounts, they’ll do it anyway. With all due respect, I need that emoticon right away. I’ve noticed that when it comes to fleecing the consumer making the most money possible, or being freed from regulation, the brokerage and banking industry can move with lightning speed to change their policies, whereas when something is designed to protect the consumer, implementation will be as slow as regulators will allow. No regulators, no regulation. And please don’t tell me your broker is a nice guy and wouldn’t do that. I have some inherited very attractive “hi-yield” bond certificates I’d be happy to sell you.

Know what you’re getting

Really, with this new change, you have no hope but yourself (which is actually all you’ve got right now). How do you know you’re getting fiduciary advice? Ask you advisor to sign a statement, or review their registration brochure. Does it specify fiduciary? For all advice? Is there any mention on their website about being a member of SIPC ? (look in the tiniest print on the page, near the bottom)—that’s a broker. Next, look at what kind of investments they’re recommending. Are they no-load mutual funds? If not, why not?

I am a fiduciary. I’ll be happy to detail what investments I’m recommending, why, and exactly how I get paid. They’ll be in your best interests. Accept no less.

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How will the election affect your financial plans?

Posted on November 9, 2016November 9, 2016 by Danielle

What now? It’s very early to make predictions but I have at least as good a chance as the pollsters, right? We really don’t know what this incoming president will do, since his policy statements have been so thin, simplistic, and utterly without actionable detail. Nevertheless, some things seem obvious, so here are my thoughts on possible steps.

Never has saving been so important

One thing that seems pretty clear is that support for the vulnerable, the disabled, the elderly, and the ill will be diminished or eliminated. Even under Republican presidents there was opposition to much of the social support network, but now that the mandate seems to be for the ultra-conservative right wing, social programs and benefits are likely to be drastically cut. Certainly we’ll be unlikely to see any new initiatives. This means:

You won’t see any assistance to make education more affordable. If you have school loans, you’re not going to get any breaks. If you have children, saving for college will be critical. Without savings, it’s very likely you won’t see your children in college.
The incoming president has absolutely no plan to remedy the problems in Social Security. I can say with near certainty that you won’t see any impetus to bring benefits up to an actually livable retirement income. Without your own savings, you’re going to have a bleak old age.
Health care costs will be on you. Since the incoming president is unlikely to favor cost containment, single payer options, or public provision of service, we may well see a free-for-all where service providers scramble to snare the people who can actually pay out of pocket. Same goes for colleges, now that I think about it.
Charities won’t pick up the slack. The national mood to support the vulnerable seems to have disappeared. One of the most shocking things I’ve learned as a financial planner is how few people give to charities at all, and how small some of our contributions are. Especially in an economic downturn, charitable donations will lessen. Most charities are not able to float extensive programs for continuing care on their own, and depend on public, government support which is unlikely to continue.

Money, as always, gives you flexibility and protects you even in severe economic downturns. If you have to pay, yourself, for all the services most Western democracies provide their citizens, you must have savings.

Try to arrange catastrophic protection on your own

There is unlikely to be any movement toward increasing protection of the elderly and disabled. Long-term care insurance appears to be a necessity for anyone but the super rich. There certainly won’t be any type of long-term care insurance provision at the government level, and most likely no regulation of the industry. Unless you want to face complete impoverishment in needy old age, you should consider the catastrophic protection long-term care insurance provides. Medicaid, for when you’re completely broke, is unlikely to receive enough funding to provide enough care for enough people.

Similarly, disability insurance becomes even more important. Getting Social Security disability, already extremely difficult, will certainly not become easier or more generous. Even those with some savings could easily be wiped out by a disability.

I can’t comment on health insurance, because all the alternatives look so bleak to me that I have no idea what may still be available in the next years. This is a significant drain on entrepreneurship and small businesses. One of the biggest blocks to people starting new ventures has always been the inability to secure individual health insurance. The insurance safety net now becomes more important while simultaneously becoming more damaged.

Review your employment situation

Even if laws protecting workers are still on the books, the federal agencies still have plenty of options on how to enforce them (or not). A professor of mine once said that the most important thing a president does is make the 250 or so critical appointments to agencies that actually run the government. I think it’s pretty safe to say that anti-discrimination provisions, OSHA protections, affirmative action efforts, and environmental protections will be dismantled as much as possible. If you get in an employment situation where legal protections might be important…well, I hope you have the savings and insurance to tide you over a long legal sojourn with a potentially poor outcome. Don’t forget, a president gets to appoint judges and prosecutors.

Do whatever you can to develop your technical skills. The only way to make yourself valuable in a recessionary economy is to acquire skills that are so in demand no one will care who you are: computer, health care, accounting, and engineering come to mind. These are skills that are valuable world wide.

If you’re in college or have children who are, it is with a heavy heart that I say it appears to be a poor idea to concentrate on the liberal arts. My own daughter majored in Anthropology, and my long-ago degree is in Sociology, and I have (all my life) rigorously defended the value of a liberal education. I still believe in it, because I don’t think education should be job-training; it should be developing the life of the mind. However, with the reality of the current developments, any student needs to think about how to add technical or in-demand skills to their education, at least as a minor or certificate program. This is the time to add pragmatic skills to education, because you can’t count on any help or justice except what you can muster on your own.

If you are part of any vulnerable group—women, minorities, immigrants, disabled, LGBTQ, to name a few—this advice goes double. As Cal Newport has said, be so good they can’t resist you. It didn’t work for Hillary Clinton, but I’m hoping your luck will be better.

Stay with diversified investments

I don’t know what the impact will be on markets as yet. I’m guessing socially responsible investments, green energy, and anything dependent on health care funding are going to take a hit, while military contractors will see windfalls. I doubt that defunct industries can be brought back. Will Europe become more attractive? Will the Fed have any tools left? As always, the only mitigation of catastrophe is to have eggs in many baskets.

It all depends on your personal situation, of course, but this may not be the time to pay off a house (locking up your cash). You may need it—it’s easier to lose a house than to go without critical health care. However, it may be the time to nail down a low-interest mortgage, because rates aren’t going any lower.

Take care of yourself

The future looks stressful beyond anything I have encountered in my lifetime, while the quality and availability of health care is almost certain to be drastically impacted. Try to improve what is in your control: lose weight, eat healthy (and don’t be a victim of the corporate manufactured pseudo food complex), try to get exercise. You’re going to need to try to stay as healthy as possible, as long as possible.

I hope it will be possible to compartmentalize some of this, to get relief by pursuing craft, authentic relationships, the pleasure of pets. I almost said the joys of nature, but the impact on our natural world and climate is likely to be catastrophic.

Think realistically about emigrating

For most of us, it’s not going to be easy or even possible. Without significant money to take with you, and skills so in-demand that you’d be embraced by any country in the world, you’re probably not going to be obtain residency, particularly if you need to work. And if you own a house, who do you think is going to buy it? Those immigrants that are being deported? It’s going to take a lot of planning and forethought to actually accomplish this.

Darn, tried to keep out that bitter tone. Did avoid naming He Who Must Not Be Named. I’ll do my best to help puzzle through how all this relates to your own personal financial picture. It’s never been a better time to shore up and plan for what is in your control, and take steps to protect yourself. Let’s work on this together.