The Miracle on 34th and Wall Street

Every movie ever made has the same basic beginning, middle and end.

In the first 10 minutes, our hero is blissfully ignorant of the trouble that awaits before… her son is kidnapped…. his love leaves him… people declare Santa Claus is nuts.

For the next hour and 50 minutes, you watch our hero attempt and fail to…. track down the kidnappers… win back the girl… prove that he really is Santa Claus.

Then in the climactic last 20 minutes, our hero emerges battered but victorious. Cut to the last scene as our hero…. hugs her child…. embraces his lost love…. dumps thousands of letters addressed to Santa Claus on the judge's bench.

As the moviegoer, we're safely along for the ride. The dramatic 110 minutes in the middle doesn’t scare us. We know how the movie will end. We've seen other movies just like it a bazillion times before.

Most of us haven't seen a bazillion movies about the markets though. So when the market tanks, we might panic and walk out of the theater before the climactic happy ending. If only we knew how it would end….

Did you know the market is down 5% three times per year on average?

Did you know the market is down 10% once a year on average?

Did you know the market is down 20% every 3-5 years on average?

And yet, over the last 100 years, the average annual return is 10%. Connect those dots, and you'll see that despite all the drama in the middle, it always ends well.

You just have to sit in the theater long enough to get to the climactic, happy ending.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Your Monkey Brain and THAT Guy

Our monkey brain gets really excited during the holidays. And like that one guy at the office holiday party, he's not thinking about the violent hangover that awaits.

But with 4 easy steps you can trick your monkey brain into enjoying the holidays, while your grown-up mind sticks to a budget and enjoys a spending-hangover-free January.

Step 1) Write down all the people on your gift list (don't forget your financial planner! I kid, I kid).

Step 2) Next to each name write how much you want to spend on them.

Step 3) Go to the bank and withdraw your entire holiday budget.

Step 4) Go shopping. If you're going to stores, pay in cash. If you're shopping online, remove whatever you spend and put it in a separate pile to pay off your credit card next month.

"Budget" is a four-letter word. Even the most disciplined of us hate budgets.

So don't will yourself to stick to a budget. Your monkey brain won't let you. It's an exercise in futility.

Instead, trick yourself into sticking to a budget. Your monkey brain will be too busy enjoying the holidays to notice.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation

Let's Keep This Between Us

Shh! Don't tell anyone what I'm about to tell you. It's a long-kept secret among the financial fraternity and they’d kill me for telling you.

The Rule of 72.

There are a lot of different ways to use it, but the most common is as follows:

If you get a 10% annual return on your money, you will double your money in 7.2 years.

If you get a 7.2% return, your money will double in 10 years.

Getting a 3.6% return? Your money will double in 20 years.

For you math nerds the formula is:

72 / X% = years to double

It also works in reverse. If inflation is 3.6% annually, in 20 years your money will be worth half what it is today. Eek!

The math isn't exact, but surprisingly close.

But let's keep that between you and me.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

A Deliberate, Hard, Selfless Thanksgiving Wish

Giving thanks is deliberate. You can't be thankful by accident. You have to make it happen.

Giving thanks is hard. Negativity and half-emptiness is easy. Gratitude and seeing the good isn't natural. But it gets easier with practice.

Giving thanks is selfless. You expect nothing in return. And yet by giving, you actually receive a vision of your life that's been dusted off and polished.

Before starting the "eat-nap-eat again" cycle this Thanksgiving, do the hard thing and take a moment to be deliberately, selflessly thankful for the all the people and opportunities and sunrises in your life.

And consider finding a moment every day to practice gratitude. It's not easy, but the upside is you can take that shiny image with you 365 days a year, not just the 4th Thursday of November.

I wish you a wonderful Thanksgiving this year.

And if you feel your ears burning today (or any day, really), know that it's probably me taking a moment to appreciate you.

The Benefit of ETFs No One Talks About

The world's not short on articles about the benefits of investing in ETFs (aka prepackaged fruit). Google "ETF benefits" and you'll find countless publications about:

1. Diversification

2. Low costs

3. Tax efficiency

4. Passive investments

5. Transparency

But the benefit that's most important to your financial success is never written about…

Predictability.

How are ETFs predictable? They take out the human factor. By buying all the stocks in the S&P 500, you remove the portfolio manager who's trying to pick the "best" stocks (or worse, a financial advisor (or you) picking the "best" stocks. Eeek!).

When you take out the humans, you no longer rely on a crystal ball for your success. Instead, you hitch your wagon to the ongoing (but faltering) forward progress of humankind.

When you invest in an ETF, you aren't investing in a few hand-selected companies. You are investing in ALL of the companies.

And buying all of the companies gives you a looooong history with a MASSIVE sample size to forecast your long-term returns. No, it's not guaranteed. Even if you do the smart thing and stick with it through thick and thin, you may get a little less or a little more. But the key word is "LITTLE".

The variance your target long-term return will be small. So you can safely rely upon it in your financial plan to predict your long-term investment returns.

Only if you can predict your long-term returns, will you know if you're on track to your achieve financial goals.

ETFs are wonderful for all sorts of reasons. But the most important to your financial success is their predictability.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

What's an ETF? Prepackaged fruit.

ETFs. Index funds. You've read about them in personal finance columns. You've heard they're the investments you should own. And if you’re a Financial Zen client, you actually do own them. But really, what the ____ is an ETF?

Very simply, it's a basket of related stocks. Related how? Let's look at an example.

Take 500 of America's largest companies - Apple, JP Morgan, Chevron, Kraft Heinz - and throw them in the same basket. That's the Standard & Poor's 500 basket (aka S&P 500 Index).

Then log into E*Trade and buy one share of each. Your portfolio would mimic the S&P 500 index.

But buying one share of 500 companies would be a complete pain in the butt. And expensive. They would charge you a $7 commission for each trade. That's $3500.

Instead, you can just buy an S&P 500 ETF. Big financial institutions like Vanguard and iShares and Schwab have done all the work for you.

They bought a bunch of shares of all the companies in the S&P 500 and repackaged it into something you can purchase. If you buy one share of an S&P 500 ETF, you buy into fractional shares of all the companies in the S&P 500.

It's like the cellophaned fruit at Safeway. You could collect all the fruit and slice it up yourself, or you can buy the fruit in the cellophane that has already been collected and sliced up for you.

Just like the fruit, you'll pay a small premium to have someone else do the work for you. Most S&P 500 ETFs charge you about 0.10% per year.

So what the ______ is an ETF?

Prepackaged fruit.


DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

Should You Freak Out?


The market was down over 5% in October. Eek!

You should be in full-on freak-out mode if one of the following situations describes you…

1. Your rent is due tomorrow and your rent payment comes out of your long-term portfolio

2. You are retiring tomorrow and your living expenses come out of your long-term portfolio

3. Your kids' tuition is due tomorrow and your tuition payment comes out of your long-term portfolio

If you are dumb enough to use your long-term portfolio as a checking account you pay short-term expenses from, then you should not get a wink of sleep.

If you are smart and keep your short-term cash needs set aside safely in cash or bonds, then October was NBD - for you non-millennials, that means "No Big Deal". (I married one, so I can say that.)

Your money should be matched with its "purpose".

Long-term money is long-term, so who cares about a 5% down month?

And short-term money is safely set aside, so a 5% down month doesn't even affect it.

Should you freak out about October? Nah. If you're doing things right, it was NBD.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Watch Spike, Not Chester

Remember that Looney Tunes cartoon with Spike and Chester?

Spike, a big, lumbering bulldog, calmly and confidently strolls down the sidewalk with a toothpick in his mouth.

Chester, his annoying beagle sidekick, bounces all around him irritatingly asking, "So whadda ya wanna do today spike? Huh? Wanna play ball? Whadda ya say Spike? How 'bout we chase cars? Does that sound like fun? How 'bout beating up a cat? Wouldya like that Spike? Wouldya?"

Spike is the economy.

Chester is the stock market.

Where Spike goes, Chester goes. Where the economy goes, the market goes.

Just like Chester bouncing around Spike, the market bounces around the economy.

This month the market's down, while the economy calmly and confidently strolls down the sidewalk of growth.

Corporate earnings are at an all-time highs. Unemployment is at historic lows. Wages continue to grow. I'll spare you more positive economic indicators, but they are there.

Chester is annoying and distracting. Don't pay attention to Chester.

Watch Spike.


DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation

Stop Throwing Your Money out the Window

Pull out your wallet. Take out all the cash you have. Go to the nearest window. Open it. Throw it out the window.

If you have money sitting in a savings account at a big bank, that's exactly what you're doing every single day.

The average interest rate in a savings account at a big bank is 0.1%. If you're storing a $50,000 emergency fund in there you are earning a mind-blowing $75 per year.

Online banks don't have to pay for their brick-and-mortar branches, so they typically offer rates on savings accounts that are much higher.

For instance, Ally Bank and Capital One pay 1.9% interest on their savings accounts. That's $925 per year in annual interest.

Don't throw your money out the window. Keep your emergency fund some place that's paying a good interest rate.

If you don't like Ally or Capital One, then click here to check out Bankrate's list of high-yield savings accounts.

They'll pay you an extra $850 a year to do it!

DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

Buckle Up

75% of people who fly through a windshield die. The chances of being in an accident like that are small. But the consequences are so great, we all take the precaution of wearing a seat belt.

Smart financial planning is (again) like safe driving. A minor inconvenience (like wearing your seat belt) can save you and your family's lives.

Life insurance - you'll probably never need it because you wear your seat belt (how's that for a tie-in?!). But if you ever do "need" it, your family will be very glad mom and dad were smart enough to deal with the minor inconvenience of getting insured.

Umbrella liability insurance - the chances of a CEO suing you for everything you've got - plus future earnings - after slipping on your sidewalk is small. But if it does happen, you'll be glad you paid the minor inconvenience of $500 in annual premiums for an umbrella policy.

Estate Plan - The chances of you and your spouse going down somewhere over the Pacific are minuscule. But if you left Junior at home with Aunt Jane, they'll be glad you dealt with the minor inconvenience of drafting your estate plan.

You buckle up every time you get into your car. Make sure you also buckle up financially.

Disclaimer: This article is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

65 mph in Your Driveway

If you're 200 miles from your destination, you're likely on a highway driving 65(ish) mph.

If you're 2 miles from your destination, you're likely on a city street driving 30 mph.

And if you're pulling into your driveway, 5 mph or slower feels right.

As you get closer to your destination, you drive slower and slower until you come to a safe stop.

Smart financial planning is just like safe driving. The closer you get to your financial goal (retirement, college, down payment), the slower you should be going.

The "speed" of your portfolio is determined by the ratio of stocks and bonds. Stocks are fast, bonds are slow.

A 30 year-old driving down the highway should have 90% stocks and only 10% bonds.

A 60 year-old driving down the city street should be around 50/50.

And an 80 year-old pulling into the driveway should be closer to 25/75 stocks to bonds.

(To be clear, I do not mean buying stocks of individual companies. Your "serious" money should be invested in low-cost, index stock or bond funds.)

You can drive a little faster or a little slower. Just make sure you’re driving at a speed appropriate for the road you're on.

Pulling into your driveway at 65 mph is not a great idea.

Disclaimer: This article is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

You're Having a Baby! Now What?

That’s so exciting! Congrats!

You'll soon be responsible for another human being! Woah. That's a heavy responsibility.

So now what? Now you get your $%&# together. You need to do 3 things before Junior comes along and if she's already here then you're behind the ball. Get on it!

(BTW if your friends (or your kids) are with child, share this article. I promise they won't know any of this and they'll appreciate the knowledge bomb.)

In order of importance, here's what you need to do for your child.

       1. Buy more life insurance. Why? If you don't have enough life insurance, your family will be UP - THE - CREEK - if something happens to you. How would your spouse raise your kids without your income? Would grandma & grandpa need to babysit while your spouse works a second job? Would they need to move to a smaller house and/or a cheaper area of the country? Your kids will probably have to pay for college through student loans, which could haunt them for the rest of their lives. Your wave of unpreparedness will ripple through your family's lives for the rest of theirs. Get the picture?

Have life insurance through work? Awesome! But I can pretty much guarantee it's not enough. If you're a typical Bay Area family, you need a $2,000,000 life insurance policy. You can't get that through work.

If you do only one thing on this list, get enough life insurance. Have a financial planner run a Life Insurance Needs Analysis which will tell you how much you need given your specifics. Then get a cheap term policy that will last until your kids are out of college and off the payroll. For a healthy 30-year-old, a $2 million, 20-year term policy is around $80/month. It's a no-brainer.

(Full disclosure, I do NOT sell life insurance. But this guy does. And he's awesome. He'll even buy me a beer if you get your life insurance through him.)

       2. Get an estate plan. Why? Without one, if you and your spouse get hit by a truck while the kids are at home with the babysitter, your kids will be UP - THE - CREEK. The State of California will decide who takes care of your children. Then the State of California will make the guardian's life a living hell. They'll require the guardian to track and literally submit receipts for every single penny of yours they spend on raising your kids. And then when the kids turn 18, they will inherit whatever is left. All of it. (I don't know about you, but I was an idiot at 18.)

Please note, a will is NOT an estate plan. A will is a suggestion that the court may or may not follow. An estate plan is instructions that must legally be followed. In your estate plan, you will designate who takes care of your kids, who takes care of the money for your kids and when your kids will inherit your money once they are adults. Unless you want the State of California to make those decisions for you, you need an estate plan.

(Have a financial planner walk you through the estate planning decisions you need to make. Then rope in an estate attorney, like this one to draft the documents. She's awesome. She'll even buy me a beer if you draft your estate plan through her.)

       3. Get a college savings plan. Why? Sending your newborn to UC Berkeley in 18 years will cost $250,000. If you use a 529 Plan to start saving early, you won't actually have to save $250,000. Money in a 529 Plan grows tax-free as long as it's used for college expenses. The sooner you start saving, the more time it will have to grow. And the more time it has to grow, the less you'll have to save (and the less taxes you'll have to pay).

How do I know all this? Because we are experts in helping young families. It's The Financial Zen Group's bread and butter.

The Financial Zen Group can develop a Life Insurance Needs Analysis for you. We can walk you through the decisions you need to make for your estate plan. And we can help you establish your college goals and develop a savings plan.

But whether you leverage The Financial Zen Group or some other independent, fee-based financial planning firm, please get help somewhere. This stuff is way too important and way too complicated to try to figure out on your own.

I'd argue it's not hyperbole to say - your kid's life could depend on it.

Disclaimer: This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Pulling One over on Uncle Sam, The Finale

Last week was my 10-year anniversary, so we gave Uncle Sam a break. 

The two weeks prior to that we learned that if we sell at a loss, we can use that loss to offset gains elsewhere  OR use it for up to a $3,000 tax deduction per year until it's all used up

Over the long-term (10+ years), your portfolio will grow.   Over shorter time periods, it will be up or down.   But when it's down, it never stays down.  So you want to take advantage of the temporary downturns by realizing losses (aka selling). 

Uncle Sam's not as dumb as he looks.  He won't let you sell to realize the loss, then turnaround and buy it right back.  If you buy the exact same thing back within 30 days, it's called a "wash sale" and Uncle Sam will pretend like you never sold anything in the first place.

The problem is that you always want to stay 100% invested. 

You just sold your red delicious apples and while you're waiting 30 days to buy them back, apples really take off.  They're up 10% in a month and you missed it.  Saving on taxes will be a small consolation.

The key - and very technical - term is "exact same thing".  

Instead you sell red delicious, realize the loss and immediately buy granny smiths.  You'll still be invested if apples skyrocket this month, and meanwhile Uncle Sam won't care since they're not exactly the same. 

Pretty cool, right? 

As for investments, you can sell your Vanguard S&P 500 fund, realize the loss and immediately buy the iShares S&P 500 fund.    As far as you're concerned, they're the exact same investment.    As far as Uncle Sam is concerned, they’re not.  Because they are from different investment companies, it won't trigger the wash sale rule.

Tax loss harvesting is like checking your credit report every year.   You know you should, but you never seem to get to it.   Working, raising a family and occasionally relaxing get in the way of harvesting your tax losses.   

Wouldn't it be nice if you knew someone who could do that for you?   Then you could live your life AND pull one over on Uncle Sam.

Oh wait!  I heard somewhere that The Financial Zen Group does this for people.   Maybe you should check em out!  - www.financialzen.com

Disclaimer: This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

 

My 10 Year Anniversary

This week marks my 10-year anniversary.  On August 25th, 2008, I rolled into the office of Wachovia Securities for the first day of my new life as a financial planner.   What followed was 7 years of hell. 

If you've gone through - or are going through - your own hard-fought battle in pursuit of a worthy goal and a higher purpose, I tip my hat to you.  Whether you're starting a business, overcoming the loss of a loved one, writing a book, wrestling your health, funding a charity, or working 90 hours a week to become partner, I salute you.  You are in the arena.  

Whether you know it or not, you have initiated yourself into an elite fraternity.   We don't have any secret handshakes or fancy uniforms, but we recognize each other.  

And to my fellow brothers and sisters, I offer the following words of advice.   It's the letter I would have written to myself 10 years ago at the start of this journey. 

 

August 25th, 2008

Rick,

Your hero's journey begins today.

And like a mother's wish for her child, I wish I could protect you - or at least prepare you - for what lies ahead.   But I can't.    And on second thought, I'm not sure I would even if I could. 

To protect you would steal from you all you are about to achieve.  You can only know the peaks of success after you know the valleys of defeat. 

And to prepare you - to have you truly understand the emotional pain and self-doubt and sleepless nights you are about to endure - would scare you away from ever beginning. 

So instead, I will just offer you the following advice: 

Have faith. 

Have faith in the journey.  You can't possibly imagine how hard this will be.  It will be harder than anything you will do in your lifetime.   Your reward will be a strength of character you could not possibly manifest without this journey. 

Have faith in yourself.   You can't imagine how deep the well of self-doubt is.   From yourself and well-intentioned loved ones, you'll hear whispers.  "It's okay if you turn back."    "You gave it your best shot.  There's no shame in quitting now." DO. NOT. LISTEN.  Your reward will be a belief in yourself so deep you'll be able to summit any mountain you choose in this lifetime.

And have faith in your mission.   You can't imagine how infinite the river of rejection is.    You will have more doors slammed in your face.  More phones slammed in your ear.   More "no's" slammed in your brain than anyone should ever have to endure.  But you will also hear "yes".  You will make a tangible, positive impact on people's lives.  That will be your shining beacon in navigating the foggy river of rejection.   Your reward will be making a dent - YOUR dent - in the universe. 

There will be times when you think you can't possibly go on.  When that happens, let your faith give you the encouragement you need to just take one… more… step….  

And one day after thousands and thousands of steps, you'll arrive.  The dragon will lay slain at your feet.  You'll be living your dream. 

Only then will you realize the hardship you are about to endure was a small price to pay.  You'd willingly pay it a thousand times over. 

Have faith.   Enjoy the ride.

Sincerely,

Your future self

P.S.  You're gonna love it here! 

Pulling One over on Uncle Sam, Part Deux

Last week after visiting Financial Zenutopia, we sold the apples at a loss (wahh!), and left the paper gains in the oranges alone and didn't realize them.

So we're sitting here with a realized $20 loss in our apples, and we determined that we can use that to offset gains in any other fruit.   But what if we don't have realized gains in any other fruit?  What then?

Then we can use the loss to offset our income.    As in, the money you get direct deposited every month.  THAT income.  

Let's say instead of a $20 loss in apples, it was a $20,000 loss instead.   Does that mean you can deduct $20,000 against your income?   Not exactly.

The bad news is you can only deduct UP TO $3,000 per year.   The good news is the $17,000 left over after you do that doesn't go away.   You keep it until you use it.   (It's called a "capital loss carryover" in finance-ese if you want to Google it.)

So let's say the following year, you DO sell your oranges and realize a gain of $17,000.   You can use the leftovers from the previous year's realized loss to offset that.  Now you've used up all your capital loss carryover from the previous year. 

Or maybe you don't sell anything and just use it to offset income every year at $3,000 a pop until it's all used up.   That works too. 

The catch is that you have to offset capital gains first, before you offset your income.   Income tax rates are higher than capital gain tax rates, so it'd be better to offset income first, gains second. But Uncle Sam won't let you do that.  So don't even try.

That's enough fruit for this week.  So far we've learned about realized vs. unrealized capital gains and losses.   And we learned what a capital loss carryover is.  

Look at you speaking finance-ese!  And you thought finance was hard!

Next week, we'll pull it all together to really stick it to our Uncle!

Pull One over on Uncle Sam

Isn't it fun legally pulling one over on Uncle Sam?   It's one of life's greatest pleasures.

But he makes paying taxes so #%$@& complicated that you're probably missing some very easy (and legal) ways to pay less taxes.  And that means you're missing out on all the fun!

Let's visit Financial Zen utopia , where you can invest in fresh fruit.   You own a diversified portfolio of apples, oranges, pineapples, grapes and blueberries.   A veritable nuclear bomb of anti-oxidants.  Good for you!  You're gonna live forever!

This year the price of oranges went way up.   But the price of apples went way down.

The $100 you invested in oranges is now worth $120 (woohoo!).  The $100 you invested in apples is now worth $80  (whomp whomp).

But it's all just paper gains and losses until you sell them.

If you sold the oranges, you would have a $20 realized gain and have to pay Uncle Sam a tax of 15% or about $3.

What happens if you sell the apples?   Well then you have a $20 realized loss and Uncle Sam pays YOU $3.  

Gotcha!   Just seeing if you're paying attention.  It totally doesn't work that way!  That'd be nice though, wouldn't it? 

What would actually happen is you can use the $20 loss in apples to offset the $20 gain in oranges.  

Then the net gain for the year is $0 and you wouldn't owe Uncle Sam anything.  Take that, Unc!

But what if you sell the apples, but don't sell the oranges?   What can you do with that $20 loss?  

You can use it to offset gains elsewhere - in grapes or blueberries or pineapples - OR if you don't have any realized gains anywhere then you can use some of it to pay less income taxes.

Even too much fruit isn't good for you.   That should be a digestible amount for this week.  Next week I'll show you how to stick to Uncle Sam - Every. Single. Year. - regardless of what your apples are worth. 

Disclaimer: This blog is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

How to Not Eat Cat Food

We are all just children staring at marshmallows.  

"Psychologist Walter Mischel… described the interaction between emotion and cognition in the famous marshmallow experiments of the 1960s and 1970s. They presented four-year-olds with a marshmallow, telling them that they could eat it at any time or wait and eat two marshmallows when the experimenter returned. They found that children who were able to wait longer did so by cognitive strategies such as covering their eyes, singing songs, or imagining that they faced a cotton ball rather than a tasty marshmallow." (Finance for Normal People: How Investors and Markets Behave)

Aren't we are all just children staring down the temptation of a marshmallow?   We know if we don't eat one now, we'll get two a little later.  So why is it so hard not to eat that marshmallow…right…this…second?

It's simple.  Our monkey brain places more value on rewards that are more immediate (even if they're smaller) than rewards that are further away (even if they're larger).  It's called "Hyperbolic Discounting".

That makes sense.   Our monkey brain has been around for millions of years.   It's been appropriately trained to worry about the present more than the future.  

Until the last 30 years, considering how your actions today affect your future wasn't all that important.  You worked.  You retired and got a pension for a few years.  You died.  

But now we need to survive for 30 years after the money stops rolling in.   This is a brand-new human experience and one we are not very good at yet.

So how can we beat our monkey brain and avoid eating cat food out of our kid's basement?

Cover your eyes.  Sing a song.  Imagine cotton balls. 

Just don't give your monkey brain the opportunity to decide.

Save first.   Don't give yourself the choice to save or spend because we know how that one goes.  PAY. YOURSELF. FIRST.

Set up automatic savings to put away at least 10% of your income - 401k, IRA, savings account.  Where you save it isn't nearly as important as just saving it.   And if you're an overachiever your bogey is 20%. 

Your monkey brain won't like eating cat food any more than you will.   Do both of you a favor and box it out of your decision-making process.  Your monkey brain is much better at running from saber-tooth tigers than saving for retirement.   

 

Disclaimer: This blog is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

The Only Three Times You Should Sell

Assuming you're already invested in a well-diversified portfolio of low-cost index funds, the only 3 times you should sell...EVER...is:

1.      Your financial goals change
2.      Your risk tolerance changes
3.      You portfolio needs rebalancing

That's it.  (And in that order.)  

It doesn't matter if your portfolio drops 20% in a month.    It doesn't matter who gets elected president.  It doesn't matter if another Great Recession happens.  It doesn't matter if an asteroid is heading for the planet.  YOU. NEVER. SELL...  


...Unless:

1. Your financial goals change.  If were planning to retire in 15 years, but woke up today and decided you will retire next year, then your financial goal has changed.  You need to adjust your portfolio to make it more conservative.  That will involve selling some of the aggressive investments and buying more conservative ones.

2. Your risk tolerance changes.  Risk tolerance is a finance-y way of describing what kind of rollercoaster ride you're comfortable with. Some people love the "Demon Drop from Hell" and other people prefer the merry-go-round.   But if "younger you" invested in the Demon Drop and "older you" now prefers the merry-go-round, then you need to adjust your portfolio accordingly.   That involves selling some aggressive investments and buying more conservative ones.

3. Your portfolio needs rebalancing.  Let's say your target portfolio is 50% stocks and 50% bonds.    Recently the stock market has done really well and the bond market has not.   As a result your portfolio is now 60% stocks and only 40% bonds.   So you need to rebalance back to 50/50.  That means you sell some of the stock investments and buy more bond investments.

As Warren Buffet said in his 1990 Shareholders letter:  "Lethargy bordering on sloth remains the cornerstone of our investment style."

And as Rick Valenzi said in his weekly newsletter July 26, 2018:  "Your portfolio is like soap.  The more you handle it, the less you have." 

 

DISCLAIMER:  This blog is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Do You Have Enough Life Insurance?

Unless your kids are out of the house, then no.  Probably not. 

PLEASE NOTE: I do not sell life insurance.  I dropped my insurance license when I left Wells Fargo. I do not make a single, red cent from clients who buy life insurance.   

So what I'm about to tell you is conflict-free and completely objective. 

Life insurance replaces your income if you're gone.  It's that simple.  If you kick the bucket today, your spouse and kids will miss you.  But they'll really miss your income.

So how much life insurance do you need?  Let's use an example to find out.

Assume your living expenses are $10,000 per month, not including your mortgage payment which has a balance of $1,000,000.    You and your spouse both work and contribute equally to your monthly expenses.   And you want to pay for your two kids’ college educations, which will be about $250,000 each in 15 years.

If that describes you, then you would need a $2,000,000 life insurance policy today.   

  1. $2,000,000 is enough to:
  2. pay off the mortgage,
  3. send the kids to college and
  4. make up for the lost $5,000 of monthly living expenses.  

Now ask yourself  - Do I have enough life insurance?  Even if you’re paying for the "3x your salary" option at work, I bet you're still underinsured.

Clearly, I've drastically over-simplified things to make the point easy to understand.  

How much life insurance you need is very specific to you and your family.  Things to consider include - but aren't limited to: 

  • income
  • spending rate
  • savings rate
  • current savings
  • college goals
  • home ownership
  • risk tolerance
  • other financial goals…
  • and on and on and on 

As part of the financial planning process, a good Certified Financial Planner will complete a Life Insurance Needs Analysis to determine how much life insurance you actually need. 

Now if only you knew a good Certified Financial Planner… hmmm.   Oh wait… I've got a guy!

Check him out here - www.financialzen.com and schedule a free consultation here – www.calendly.com/financialzen   

Is Your Home a Good Investment?

We're talking about your primary residence.  Where you watch your kids grow up.  Where you have your friends over for dinner.  Where you watch America's Got Talent every Tuesday.

Is THAT a good investment?

And we're not talking about the pride of ownership.  Or the fulfillment of providing for your family.  Or the sentiment of all the memories you've built inside those walls.

We're talking cold, hard cash.  Dollars and cents.   Is your home a good financial investment?

To answer that we need 3 things:

1.       The increase in your home value

2.       Inflation

3.       Comparison to other investments

Let's look at the last 30 years.  Below is a chart mapping average home prices from 1988 to today for the Bay Area (Go Giants!) and the country:

image001.png

If you bought a house in the Bay Area in 1988 for $79,000, it'd be worth $390,000 today!  Not too shabby!   That's nearly a 500% total return!   That's an annualized return of 5.4%!

If you bought a house in Anytown, USA for $86,000, it'd be worth $248,000 today!   You tripled your investment!  Yay!!!

But what about inflation?  Whomp whomp.

Inflation has been roughly 3% per year since 1988.  When you factor in that a dollar today is worth much less than a dollar in 1988, the picture's not so rosy.

image002.png

If you bought a house for $101,000 in the Bay Area 30 years ago, it'd be worth $233,000 today in 1988 dollars.   That's a whopping 2.8% annualized return.  Boo!

If you bought in Anytown, USA for $111,000, it's now worth $150,000 today in 1988 dollars.  That's a 1.0% annualized return.   As the leader of the free world would say - SAD!

Finally, let's compare what the inflation-adjusted returns of the S&P 500 has done over that time frame.

Since 1988, the stock market has returned 7.6% annually (vs. 2.8% for a Bay Area home or 1.0% in Anytown).  That's adjusted for inflation and assumes you reinvest dividends.

If you forget inflation, it's annualized return is 10.4% (vs. 5.4% for a Bay Area home or 3.6% in Anytown).

So there are a LOT of reasons to buy a house - pride, fulfillment, memories - but making money isn't one of them.