How Do the Markets Really Work?

December 21, 2014 — Sam H. Fawaz

We all do it.  But what do we really know about investing?  A recent post about investing wisdom features a lot of interesting (and often overlooked) facts and figures, plus some insights from Warren Buffett, Jeremy Siegel, William Bernstein, Nobel laureate Daniel Kahneman and a few economists you may have heard of.

Regarding market predictions, the post had this to say: The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year.

According to Bloomberg, the 50 stocks in the S&P 500 that Wall Street rated the lowest at the end of 2011 outperformed the overall index by 7 percentage points over the following year.

Many of the items offered insight into how our investment markets actually work.  For instance:

  • Since 1871, the market has spent 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.
  • Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days during that time period. (Investing is never a straight path up.)
  • Polls show Americans for the last 25 years have said the economy is in a state of decline. Pessimism in the face of advancement is the norm.
  • A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.
  • There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and identifying a winning investment are two different things.
  • According to economist Tim Duy, “As long as people have babies, as long as capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.”

The post had a few zingers about some of the best-paid executives in the financial and investment community:

  • Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. Hedge funds are a great business to work in — not so much to invest in.
  • In 1989, the CEOs of the seven largest U.S. banks earned an average of 100 times what a typical household made. By 2007, that had risen to more than 500 times. By 2008, several of those banks no longer existed.

And finally, if you want to understand the difference between daily fluctuation and the underlying growth of value in the markets, consider this:

Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein: “He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”

If you would like to discuss your current portfolio or any financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Source:

http://www.businessinsider.com/things-everyone-should-know-about-investing-and-the-economy-2014-12

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Should We Fear—Or Cheer—Plunging Oil Prices?

December 18, 2014 — Sam H. Fawaz

Chances are, you’re celebrating today’s lower gas prices.  AAA reports that the national average price of gas is $2.48 today, the lowest since December 2009.  The result: an estimated $70 billion in direct savings for U.S. consumers over the next 12 months.  At previous prices, the average American was spending about $2,600 a year on gasoline, so the 20% price decline would result in $520 more to save or spend.

It gets better.  Even though gas prices (and, therefore, the cost of driving) have plummeted, the Internal Revenue Service is raising the standard mileage rates that people can deduct on their tax return for business travel, from 56 cents in 2014 to 57.5 cents per business mile driven next year.

Only the investment markets seem to think that cycling an extra $70 billion into the U.S. economy is a bad thing.  This past week, large cap stocks, represented by the S&P 500 index, saw their prices fall by 3.5%—their biggest drop since May 2012. Why?  The only possible explanation is that rapid Wall Street traders believe that lower oil prices will harm the economies of America’s trading partners, and therefore impact the U.S. economy indirectly.

So let’s take a closer look.  While U.S. consumers are cheering the decline in oil prices, and non-energy producing nations like Japan and countries in the Eurozone are seeing a boost in their economies, who’s NOT celebrating?

As it turns out, some of the biggest losers are American domestic shale oil producers, who basically break even when oil prices are at their current $50-$60 a barrel levels.  Any further drop in prices would slow down domestic energy production, and probably create a floor that would keep prices from falling much further.

Another big loser is the socialist government in Venezuela (remember Hugo Chavez?), which needs oil prices above $162 a barrel to pay for all of its social programs.  You can also sympathize with Iran, which reportedly needs oil prices to move up to $135 barrel to stay in the black, due to continuing sanctions from the world community over its nuclear program, and the high cost of supporting Hezbollah and its own military ventures in the Middle East.

The biggest loser is probably Russia, which requires oil prices of at least $100 a barrel for its budget to withstand international sanctions and finance its own military adventures against neighboring nations.  Economists are projecting that Russia will fall into a steep recession next year, when GDP could decline as much as 6%.  The nation is experiencing what economists call “capital outflows” of $125 billion a year—a fancy way of saying that wealthy Russians are taking money out of Russian banks and either investing abroad or putting their rubles in banks located in more stable foreign jurisdictions.  And in the process, they are exchanging their rubles for local currency, as a way to protect against the recent free-fall in Russia’s currency.  Bloomberg News recently published the below graphic which many Americans will find entertaining, but which is probably not happy news for Russian President Vladimir Putin.

Fear or Cheer Plunging Oil Prices

It’s interesting that the markets seem to be worrying about low oil prices when the economies with the most to lose are not only less than minor trading partners, but actual political enemies of U.S. interests. Cheaper oil will eventually be regarded as a plus for our economic—and political—interests, but the downturn suggests that Wall Street traders are hair-trigger ready to be spooked by anything they regard as unusual.

If you would like to discuss your current portfolio or any financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://www.marketwatch.com/story/5-countries-that-will-be-the-biggest-losers-from-oils-slide-2014-11-20?page=2

http://blogs.piie.com/realtime/?p=4644

http://www.accountingtoday.com/news/irs-watch/irs-raises-standard-mileage-rate-for-businesses-72990-1.html?ET=webcpa:e3476082:a:&st=email&utm_content=buffer4179f&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

http://www.forbes.com/sites/northwesternmutual/2014/11/27/lower-oil-prices-give-a-gift-to-consumers/

Posted in Consumers, energy stocks, Financial Planning, General, markets, retirement planning. Tags: , , , , , . Leave a Comment »

No Shutdown, No Problem

December 15, 2014 — Sam H. Fawaz

The good news from Congress this week is that it looks like the U.S. government isn’t going to have to shut down again due to partisan political bickering.  Last week, literally at the last minute, on the day that current funding provisions would have expired, the U.S. House of Representatives created a new government funding bill that will keep the lights on until September of 2015.  The narrow 219-206 vote also gave the Senate a grace period until Monday to approve the legislation dubbed “CRomnibus” before everybody goes home for the holidays.  The Senate followed suit and sent the bill to the President for signature on Monday.

In all, the spending legislation comes to 1,603 pages, and both Democrats and Republicans seem to be unhappy about it—for, of course, very different reasons.  But when you get past the immigration and health care reform debate on the right, and the rollback of Dodd-Frank provisions that would have barred Wall Street firms from using taxpayer-backed funds to engage in risky derivative trading that angered politicians on the left, the bill really doesn’t have much of an effect on most of us.  It keeps domestic spending essentially flat at $1.013 trillion, while providing additional funds to fight Islamic state militants in the Middle East and the Ebola outbreak in West Africa.  There are no new taxes, and enforcement of the current taxes is likely to be less stringent after the Internal Revenue Service’s budget was cut by $345.6 million—roughly what it costs to hire 5,000 auditors.  Also defunded: the Environmental Protection Agency, whose budget has been rolled back to 1989 levels.  And a specific provision will prevent the Fish and Wildlife Service from adding a Western bird called the sage grouse to the protected species list.

Perhaps the most interesting provision in the House-passed bill, which is not mentioned in the press anywhere, can be found in Section 979, where our lawmakers set salaries and expenses of the House of Representatives at a highly budget-conscious $1.18 billion, with a “b”.

Now the House and Senate will spend a few days debating whether to pass extensions of 55 different tax credits, including tax deductions for research and development expenses by U.S. corporations, tax credits for renewable energy production plants, and a provision that would exempt forgiven mortgage debt from taxable income.

Sources:
http://www.vox.com/2014/12/11/7376585/cromnibus-2015-appropriations-details

http://news.yahoo.com/real-reason-obama-pushed-house-144001131.html

http://www.cnn.com/2014/12/10/politics/policy-riders-spending-bill/index.html

http://news.yahoo.com/u-senate-appears-set-pass-spending-bill-timing-153042041–sector.html

http://www.csmonitor.com/USA/DC-Decoder/2014/1210/From-marijuana-to-Islamic-State-five-things-addressed-in-new-budget-deal-video

http://www.scribd.com/doc/249716409/Congressional-spending-compromise

http://www.msn.com/en-us/news/politics/us-house-narrowly-passes-spending-bill-averts-government-shutdown/ar-BBgEXlY?ocid=ansnewsreu11

http://news.yahoo.com/tax-extenders-expected-win-u-senate-approval-within-152109690–business.html

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Investor Know Thyself

December 10, 2014 — Sam H. Fawaz

In an ideal world, emotions would play a very small role in the way people invest and manage their money. Everyone would thoroughly research their options, maintain realistic expectations, and keep counterproductive habits under control.

But in the real world, even well-informed investors sometimes make emotionally charged decisions that may threaten their ability to stay focused on important financial goals, such as accumulating enough money for retirement. In fact, such missteps are so common that many academics have done extensive research on “investor psychology” or “behavioral finance” to explain why some people tend to keep encountering the same obstacles in their financial lives.

Behavior Insights

As you might imagine, different financial attitudes can result in very different consequences. For example, the behavior known as “anchoring” is the tendency for investors to hold on to a belief based on their own limited experience, despite the availability of contradictory information.

For instance, someone who lived through the Great Depression might be more likely to be a conservative investor, while someone who did very well in the market during the 1990s might tend to be a more aggressive investor. Of course, history shows that that type of decline or growth experienced by such individuals, is more the exception than the norm. As such, one possible result of anchoring is making long-term investment decisions based on misguided performance expectations or incomplete facts.

Overconfidence in one’s own abilities is another mindset that could make it more difficult to achieve lasting financial security. Why? Because it may lead investors to ignore sound advice, misunderstand goals, and potentially implement inappropriate investment strategies. On the other hand, a lack of confidence may be to blame for the “fear of loss” (or “fear of regret”) that causes some nervous investors to adjust their portfolios too often — or not often enough.

You’ve Got Personality

It can also be insightful to think about what type of “financial personality” you have. “Impulsives,” for example, are prone to spending spontaneously and not saving enough. “Planners,” however, are in the habit of setting aside as much as possible and sticking to an appropriate investment strategy.

If you would like to discuss your financial personality or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Posted in Fee-only, Financial Planning, General, investing. Tags: , , . 1 Comment »

Providing for Pets

December 7, 2014 — Sam H. Fawaz

This past summer, the entertainment world lost one of its most prominent and popular figures: Joan Rivers. When her estate planning documents were unveiled, it became clear that she was a careful planner of her legacy–and also a devoted pet owner. One of the most interesting details of her estate plan was the careful provisions Rivers made for her pets.

Rivers left the bulk of her estate to her daughter Melissa and her grandson Cooper–an estimated $150 million in total value. The two rescue dogs who shared her New York residence, and two other dogs who lived at her home in California, were beneficiaries of pet trusts, which included an undisclosed amount of money set aside for their ongoing care, and carefully written provisions that described the standard of living that Rivers expected them to receive for the remainder of their lives.

Traditional pet trusts are honored in most U.S. states, as are statutory pet trusts, which are simpler. In a traditional trust, the owner lists the duties and responsibilities of the designated new owner of the pets, while the statutory trusts incorporate basic default provisions that give caregivers broad discretion to use their judgment to care for the animals. Typical provisions include the type of food the animal enjoys, taking the dog for daily walks, plus regular veterinary visits and care if the pet becomes ill or injured. The most important provision in your pet trust, according to the American Society for the Prevention of Cruelty to Animals, is to select a person who loves animals and, ideally, loves your pets.

The trust document will often name a trustee who will oversee the level of care, and a different person will be named as the actual caregiver. In all cases, the trusts terminate upon the death of the last surviving animal beneficiary, and the owner should choose who will receive those residual assets.

Some states have different laws that require different arrangements. Idaho allows for the creation of a purpose trust, and Wisconsin’s statute provides for an “honorary trust” arrangement. There are no pet trust provisions on the legal books in Kentucky, Louisiana, Minnesota and Mississippi, but pet owners living there can create a living trust for their pets or put a provision in their will which specifies the care for pets. A popular (and relatively simple) alternative is to set aside an amount of money in the will to go to the selected caregiver, with a request that the money be used on behalf of the pet’s ongoing care.

It should be noted that a pet trust is not designed to pass on great amounts of wealth into the total net worth of the animal kingdom. The poster child of an extravagant settlement is Leona Helmsley’s bequest of $12 million to her White Maltese, instantly putting the dog, named “trouble,” into the ranks of America’s one-percenters. Rather than confer a financial legacy on an animal, the goal should be to ease any financial burdens the successor owner might incur when caring properly for your loved animals for the remainder of their lives, including food and veterinary bills.

How long should you plan for the funding to last? Cats and dogs typically live 10-14 years, but some cats have lived to age 30, and some dogs can survive to see their 24th birthday. Interestingly, estate planners are starting to see some pet trusts extend out for rather lengthy periods of time, as owners buy pets that have longer lifespans. For example, if an elderly person has a Macaw parrot as a companion, the animal could easily outlive several successor owners, with a lifespan of 80-100 years. Horse owners should plan for a life expectancy of 25-30 years, and, since horses tend to be expensive to care for, the trust will almost certainly require greater levels of funding. On the extreme end, if you know anyone who happens to have a cuddly Galapagos giant tortoise contentedly roaming their backyard, let them know that their pet trust would need to be set up for an average 190-year lifespan.

If you would like to discuss your estate planning or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
http://www.dailyfinance.com/2014/09/11/what-joan-rivers-just-taught-pet-lovers-about-estate-planning/
http://www.dailyfinance.com/2014/08/14/robin-williams-estate-plan-spares-his-heirs-drama/
http://www.1800petmeds.com/education/life-expectancy-dog-cat-40.htm
http://abcnews.go.com/US/leona-helmsleys-dog-trouble-richest-world-dies-12/story?id=13810168
http://www.aspca.org/pet-care/planning-for-your-pets-future/pet-trust-primer

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Why Losses Really Do Matter

October 28, 2014 — Sam H. Fawaz

Everybody who told us that the steep market drops earlier this month wouldn’t last can rightly claim they’re right.  When the S&P 500 was down 7.4% during a two-week sell off, there was no way to know whether we’d have to endure more of the same.  Staying the course turned out to be exactly the right strategy, but that doesn’t mean that we shouldn’t be concerned about downside risk.  In fact, during the downturn, all of us should have been working hard to keep our portfolios from falling as far and as fast as the American indices.

Isn’t this a contradiction?  There is no contradiction between holding on during market downturns and building portfolios that are unlikely to keep pace with a bear market free-fall.  You hold on because no living person knows when the stock markets will recover, but history tells us that they always do seem to recover and eventually deliver returns that are higher, on average, than the returns you get when the money is safely stored under your mattress.

But you also pay attention to downturns because the further your portfolio falls, the harder it is to recover.  There’s actually a rational reason why you tend to fear losses more than you enjoy your gains.

The mathematics show the asymmetrical effect of losses vs. gains.  If your $1 million portfolio loses 10%, falling to $900,000, then it requires an 11.11% gain to get you back where you started.  It doesn’t seem fair, but that’s how it is.  A 20% loss requires a 25% gain, and if your portfolio were to drop 40%, you’d need a subsequent 66.67% gain to climb back to your original $1 million nest egg.

Chances are, you know how we fortify portfolios against losses: we include a variety of different types of assets–including bonds which, against every single market prediction at the start of the year, are actually delivering positive returns almost all the way across the maturity spectrum.  We include foreign stocks, which haven’t exactly been knocking the lights out this year, but which will, someday, offer strong gains when the U.S. markets are weakening.  Also, we take profits on positions that have reached their price targets and hedge portfolios with inverse funds.  All of these different movements tend to have a calming effect on the portfolio’s returns, not always in every circumstance, but fairly reliably over time.

The result?  A smoother ride puts more money in your pocket.  If an investor experienced returns of +20% and -10% in alternate years over the next 20 years, a $100,000 portfolio would grow to just under $216,000.  If a more diversified investor experienced a smoother ride of 10% a year, her portfolio would grow to just under $673,000.  The power of steady compounding is a marvelous thing to see.  The drag of losses can be debilitating to a portfolio’s growth.

You won’t experience either of those trajectories exactly, of course.  But if you can somehow avoid the worst of the market’s falls, even if it means never beating the market during the up-cycles, you raise your chances of long-term success.  If you can do this and remain invested through a lot of uncertainty, like we experienced earlier this month, chances are you’ll enjoy better long-term returns than a lot of the “experts” you see screaming at you to buy or sell on the cable finance channels.

Oh, and that 7.4% drop?  The S&P 500 has to go up 8% to recover the ground it lost in that two-week period.  As of today, we’ve recovered that entire loss.

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Bequest or Beneficiary: In Estate Planning, the Difference Is Crucial

September 26, 2014 — Sam H. Fawaz

When planning your estate, be sure you understand the differences between bequests spelled out in a will and beneficiary designations incorporated in retirement accounts.

The scenario plays out over and over again in attorneys’ offices: A family brings a parent’s will to be probated. The will is complete, well-thought-out, and takes into consideration current tax law. But under closer examination, the attorney discovers that the deceased’s estate plan doesn’t work. Why? Because a substantial portion of the parent’s assets pass by beneficiary designation and are not controlled by a will.

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

The upside of these arrangements is that when the account holder dies, the monies go directly to the beneficiary named on the account, bypassing the sometimes lengthy and costly probate process. The “fatal flaw” of beneficiary-designated assets is that because they are not considered probate assets, they pass “under the radar screen” and trump the directions spelled out in a will. This all too often leads to unintended consequences — individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

Unnamed or Lapsed Beneficiaries

Not naming beneficiaries or failing to update forms if a beneficiary dies can have its own unintended repercussions, which can be particularly damaging in the case of retirement accounts. For instance, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred. This not only would generate a tax bill for the children, it would also prevent them from stretching IRA distributions out over their lifetime.

Planning Priorities

Given these very real consequences, it is important to work with an estate planning professional to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.

You should also review your beneficiary designations on a regular basis — at least every few years — and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.

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Are Daughters a Better “Investment?”

June 28, 2014 — Sam H. Fawaz

As Father’s Day has now passed for this year, a new survey from the online account aggregation firm Yodlee.com and Harris Interactive tells us that the financial relationship between fathers (and parents) can be very different for their sons vs. their daughters.  The survey found that an astonishing 75% of young adult men (age 18-34) are receiving financial aid from their parents, compared with 59% for comparable age daughters.  The financial dependency extends deep into adulthood; among sons aged 35-44, fully 32% are still living at home, while only 9% of women in that age bracket sleep in their former bedroom.  Even those numbers understate the disparity, because more than a third of the women who are living with their parents are doing so to support them in old age, something that sons are, according to the report, far less likely to do.
 
Overall, daughters are 32% less likely to need their parents’ money, and twice as likely to move back home because they’re unemployed.  By age 45, the survey found, most of these stark differences in financial independence have faded; sons lag only a few percentage points behind daughters in these two areas.  But then a new discrepancy emerges.  The survey found that older sons are half as likely as daughters to support their parents in old age. 

If you have any questions about any financial planning or money management services, please don’t hesitate to contact us or visit our web site athttp://www.ydfs.com. As a fee-only fiduciary financial planning firm, we always put your interests first, and there’s never a charge for an initial consultation or any sales pitches.
 
Sources:  

http://www.businessinsider.com/daughters-require-less-financial-support-2014-6
 
http://time.com/money/2861530/daughter-better-investment-than-son/

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Retirement Spending Revisited

June 28, 2014 — Sam H. Fawaz

How much are you going to spend in retirement?  What once seemed like a simple question has become incredibly complicated in recent years.
 
Why?  First of all, a diminishing number of people actually plan to leave work and embrace leisure on a full-time basis, and those who do, seem to be doing it later than people from earlier generations.  Of the oldest baby boomers, who are now age 68, only 52% are actually retired;  21% are still working full-time.   According to a Gallup survey, 37% of Americans say they plan to work full-time past the age of 65, but that may be underestimating the actual shift in preference.  A 2012 survey conducted by Transamerica found that just 19% of workers expect to retire full-time by age 65.
 
When people DO leave the workplace, it now appears that some of the assumptions about their spending habits will have to be revisited.  The default assumption for many retirement plans is that what you spend now for things like food, clothing etc. will remain pretty much the same the day after retirement as they were the day before.  Your home mortgage may or may not go away in retirement and the expenses related to commuting to and from work will diminish.  When you sort it all out, you end up with a baseline spending plan, which includes a new car every few years, dining out occasionally, making home improvements and other basic necessities.  These expenses have traditionally been assumed to increase each year roughly with the inflation rate.
 
On top of that, it was assumed that in the vigorous early years of retirement, people would spend more on travel and country club memberships than they did when they were working, so their overall expenses would go up the day after they retire and gradually diminish as they found it harder and harder to play 18 holes of golf every day.  At some point in the age curve, health expenses would start to rise.  The people who study retirement expenditures talked about a “smile” graph of expenses, where it cost more to live and play in the earlier and later years of retirement than in the middle years.
 
What’s wrong with that?  For one thing, when you look at the Bureau of Labor Statistics data on what people actually spend in their later years, it contradicts this comfortable smile pattern.  People between the ages of 65 and 74 tended, on average, to increase their annual spending levels between 1.11 percentage points and 1.78 percentage points more per year more than the inflation rate.  Over that decade of their lives, any assumption that used the inflation rate would undercount their aggregate spending by somewhere between 11% and 19%.  People age 75 and older accelerated their actual spending to (again over the course of the next decade) between 13% and 22% more than the inflation statistics would suggest.  After that, healthcare costs would start to dominate the spending pattern.
 
To make things more complicated, the statistics suggest that retirees tend to cut back on their spending whenever the investment markets go down.  In 2009, people age 75 and older, on average, spent less than they did the year before, and they actually spent less than that in 2010.  That same year, the average spending of people age 65-75 declined a remarkable 3.55%.  As your wealth goes down, so too does your spending.
 
How can we predict these things in advance?  We can’t.  And it’s important to remember that these broad statistics don’t apply to your individual circumstances; they just suggest things that most of us should watch out for.  The only clear conclusion of the research, thus far, is that we should probably make conservative assumptions about spending, and hope we’re pleasantly surprised as the years go on.

If you have any questions about retirement spending or planning or would like to discuss your personal circumstances, please don’t hesitate to contact us, or go tohttp://www.ydfs.com.  We are a fiduciary fee-only financial planning firm that always puts your interests first.
 
Sources:
 
Retirement:
http://capricorn.bc.edu/agingandwork/database/browse/facts/fact_record/5670/all
 
Spending:
http://www.marketwatch.com/story/hedonic-pleasure-index-going-beyond-the-cpi-2013-01-23
 
http://www.advisorperspectives.com/newsletters12/47-fallacies2.php

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Bad Money Moves to Avoid

May 25, 2014 — Sam H. Fawaz

What are truly the very worst investments and financial products you can buy with your money? Those things that when all things are considered provide you the lowest chance for profit. 

According to the AARP, they include five primary types: alternative investments, time-shares, equity-indexed annuities, private and non-traded REITs, and oil drilling partnerships. You can read why each are to be avoided right here. To that list I would add most permanent (whole, universal, variable) life insurance policies, deferred annuities and non-publicly traded partnerships. 
 
In that same article, AARP also provided five clues to watch for to tell you when something isn’t right about an investment that is being sold to you. These are all good things to watch for:
 
1. An impossible promise: There’s no such thing as high returns with little or no risk. The best opportunities typically go to institutional investors: it’s much easier to raise money from a few big fish than to solicit thousands of small fry.
 
2. Complex terms: Perhaps the offer comes with hundreds of pages of technical and legal disclosure, and you’re required to sign a document saying you read and understood it all. Good investments are easy to grasp. My rule is never to buy anything I couldn’t explain to an 8-year-old. Ask yourself: would they write hundreds of (legal) pages to protect you or themselves?
 
3. A ticking clock: If you hear that this investment opportunity is available only for a short time, it’s the reddest of flags. The salesperson doesn’t want you to think it over or ask others for their opinion. Run, don’t walk away from these investments.
 
4. Fancy language: That would be words such as “structured,” “managed,” “deferred,” “derivative,” “collateralized” and even “guaranteed.” Of course, there is nothing wrong with an FDIC guarantee on your CD. But leaving cash at a bank or brokerage firm is a bad investment if you are earning 3 percent or less: you’re losing ground to inflation. A higher-paying CD is a better option if you’re not willing to take risk with your money.
 
5. A stranger calls: Be very careful of accepting a free-lunch “educational seminar.” I have yet to meet someone unknown to me who truly wanted to and could make me rich. Someone once said that you truly can’t afford “free”, and I have come to believe it.
 
Millions of investors fall prey to bad investments usually out of fear or ignorance. In addition, no matter how smart you may be or how much experience you have, studies also show that all of us can be very gullible and blinded by our greed.

Nevertheless, knowing what to avoid is an important part of being successful with investing and managing risk. Most of the time, anything sold to you by others as terrific alternatives to equities and fixed income, especially those with lots of hype, complexity and outrageous fees, must be avoided. Eliminating these bad investments from your consideration and portfolios is a must if you desire to give yourself the best chance for long-term investing and financial success.

If you have any questions about any investments or insurance products you might be considering, please don’t hesitate to contact us or visit our web site athttp://www.ydfs.com. As a fee-only fiduciary financial planning firm, we always put your interests first, and there’s never a charge for an initial consultation.

Sources:

AARP

The Kirk Report

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