What Do I Want My Money to Do For Me?
Most people HATE budgeting.
They hate the idea because it feels restrictive. They hate the process because it makes them afraid to admit where are their money is actually going. And they probably hate the word because budgeting doesn’t sound like something that’s fun to try.
Most people assume budgeting is about saving money but it’s really about how you choose to spend your money. One of the better books on the topic is You Need a Budget by Jesse Meachum, who does a wonderful job of re-framing the budgeting conversation.
He made three points worth highlighting:
- Design your financial life around your priorities. There’s an old adage that goes something like this: if you want to know where your priorities lie, take a look at your bank statement and your calendar.
Meachum rightly talks about the importance of prioritizing your spending:
Without a budget you have no way to prioritize your spending and may not even know where your money is truly going. You may stress about not being able to afford what’s important to you while you simultaneously spend on things you’d willingly nix if you could see the trade-offs. A budget lets you see exactly how your spending affects the rest of your life.
- Try to make your “emergency fund” obsolete. An emergency fund can often morph into a catch-all savings account that pays for expenses people know are coming, they just don’t know when. Most of the time these are not actual emergencies, but infrequent expenses you can plan ahead for.
Meachum breaks things down by your true expenses:
Whether expenses happen like clockwork (rent), feel impossible to predict (car repairs), or are just far-off dreams (cash for a wedding), they are all part of your true expenses. The key is to prepare a bit at a time by treating them all like monthly expenses.
He recommends adding line items into your monthly budget for these infrequent expenses so you can break them up into more digestible pieces. This turns it from an emergency fund into a more well-thought-out spending plan.
- Budgeting is personal. Rules of thumb can help with the decision-making process when there are too many choices but you have to pick your spots with these things, especially with your finances.
There are financial rules of thumb like the one that says you should allocate 50% of your money to necessities, 30% to wants, and 20% to savings or debt payments. The problem is the percentage approach fails to take into account personal circumstances.
Spending your money in a conscientious way will always require trade-offs. Many of those trade-offs are determined by variables like where you live, your chosen profession, your family situation, your level of savings, and your burn rate.
As Meachum says, “The point is to decide what your priorities are, and then make a plan to meet them.”
Adapted from an article by Ben Carlson of Ritholtz Wealth Management
Cashflow Modelling Explained
Many people struggle to actually ‘see’ what they will need to secure the sort of retirement they hope to enjoy.
In this short video, Cambridge Partner Andrew Nutttall diagrams the six key variables that you need to consider if you want to enjoy a secure retirement.
Second Quarter Market Update Released
Another three months have flown by, which means it is time for another one of our Adviser Scott Rainey’s much-anticipated quarterly market updates.
In this informative video you’ll learn:
- Why New Zealand isn’t just a great place to live, but the NZ Sharemarket has also been good place to invest
- How two record OCR lows in a row may not be the end of interest rate drops
- Why the last 12 months have been very much a year of two halves, and what this has meant for investors
- Plus plenty more interesting, informative and useful information
So grab a coffee, take 12 minutes, and have a look.
All The Financial Advice You’ll Ever Need (On One Page)
Here’s another excellent article from our own Andrew Nuttall. This ran in last month’s local law society publication ‘Canterbury Tales’ and contains the sort of advice we’d love to see taught in High School, but is equally relevant to people of all ages.
Jim Rohn, the author of ‘The Art of Exceptional Living’, once said, “success is nothing more than a few simple disciplines, practised every day”. Many of the most successful investors aren’t necessarily the smartest, or blessed with amazing talents, but do have the discipline to do the simple things well, and to do them over and over again.
Try following this simple set of rules, repeating them regularly and see how close to achieving your financial goals they will take you.
- Rule Number 1 – Make your own lunch and drink the boss’s coffee (and save $2,500 + per year).
- Rule Number 2 – Don’t borrow to buy a car! (or anything that depreciates)
- Rule Number 3 – The worst advice you can get can come from a well-intentioned friend or your neighbour.
- Rule Number 4 – Remember that the media is not interested in your financial success (they just want your attention to sell advertising).
- Rule Number 5 – Too many people spend money they earned…to buy things they don’t want…to impress people they don’t like.
- Rule Number 6 – Your investments shouldn’t be your entertainment.
- Rule Number 7 – Contribute to KiwiSaver and make a choice about where you want to invest (don’t just go with the default fund).
- Rule Number 8 – Save 10% of your income. (i.e. pay yourself first)
- Rule Number 9 – Pay off your personal debts as soon as you can and your credit card balance in full every month.
- Rule Number 10 – Insure for what might happen, set aside savings for the inevitable.
- Rule Number 11 – Remember that thrift is a virtue.
- Rule Number 12 – Diversification. It is investors only free lunch.
- Rule Number 13 – Remember that risk and reward are related – if it looks too good to be true it probably is.
- Rule Number 14 – Stop, think, plan, write it down, act, review.
- Rule Number 15 – Keep it simple and reduce your clutter to help you clarify your thinking.
- Rule Number 16 – Remember the above rules.
Please drop Andrew an email on email@example.com if you have some rule of your own to add and he will put you into a draw for a voucher at one of Christchurch’s new restaurants, The Permit Room in Victoria Square.
What’s Your Financial Personality?
Russ Alan Prince, one of the world’s most published authors on the topic of private wealth, has put together this list of nine financial personality types.
We all fall into one of these categories, regardless of how much we are worth. But the majority of the seriously rich among us fall into just three of them.
Read through this list of personality types to find out what category you fall into (or ask your nearest and dearest if you dare!). Then see if you can pick which three belong to the super rich – answer at the end of the article.
21 per cent Family Steward: Focus on taking care of the people they love. They care about education, their children becoming hard-working and successful and passing on an inheritance.
17 per cent Phobic: Doesn’t like investing, doesn’t want to learn about it or understand it. They like to delegate and have trust.
13 per cent Independent: Wants financial freedom and flexibility to do what they want, when they want. Money is just a means to this end.
12 per cent Anonymous: Very private people who don’t like sharing their financial position. Confidentiality is everything.
10 per cent Mogul: Enjoys the power, influence and control that money can give.
8 per cent VIP: Enjoys the possessions and social respect that comes from money. Prestige is important.
8 per cent Accumulator: Saves more than they spend, doesn’t show their wealth and might live below their means as money makes them feel more secure.
6 per cent The Gambler: Wants to beat the market and likes the excitement. It’s all about the returns.
5 per cent The Innovator: Likes things that are technically clever, new funds, and trading methods. They veer to complex strategies.
The three personality types you were looking for were family steward, the phobic and the independent. But, more importantly, which personality type were you?
Is Your Will Up To Date?
As a regular contributor to the Christchurch law society magazine, one of our Directors, Andrew Nuttall, has recently written a thoughtful article about wills.
Although aimed primarily at the legal profession, there is some great information here for all of us on a topic that, although none of us really want to think about it, is vitally important for us and those we will leave behind.
Over the last 30 years I have met with many prospective clients who do not have an up-to-date will. How much family tension have you seen that could have been avoided if clients had taken more care with their estate planning?
We have all come across people who need a will but are reluctant to contemplate their demise. We are all, however, going to need a will and having a relevant one makes it easier on those left behind. The inability to admit that their death will occur cannot be the only reason many are reluctant to have an up-to-date will. It has to be something more than that.
Historically, some lawyers have often given wills away for nothing – a mistake in my opinion by the way. Has this created a reluctance to pay for what is a valuable service? Why is it that people fail to address their estate planning appropriately?
» Have you subconsciously determined the objections to paying for a will are too pronounced to justify spending sufficient time with your clients to help them think carefully about their estate planning?
» Are your clients failing to recognise the value and peace of mind they will gain by having well-drafted wills and estate plans?
» Are you not recognising or underestimating the value and peace of mind you provide your clients by encouraging them to think about their estate planning?
» Has the importance of having an up-to-date and well-drafted will been under-mined by offers of “free” wills?
Wills are one of our most important documents, we are all going to need one.
Below is a list of, what I hope are, helpful suggestions that I have picked up over the years from estate planning lawyers:
» Have your client list their assets and liabilities, family members and any friends or organisations they might want to recognise – this may help them realise quite why they do need a will.
» Ask your client the following question. “If you had passed away yesterday what would you want to see happen to your assets tomorrow?” There is nothing like confronting your own mortality to get us thinking.
» Ask your client who would be the best people to be responsible and ensure their assets ended up in the right hands and their wishes are implemented? The prospect of their incompetent uncle making decisions can create some intent.
» Do not post out a draft will and wait for it to be signed and returned. Many people have neither the ability nor inclination to read a legal document – it ends up sitting on the kitchen bench, unsigned. Why not, at the conclusion of your initial meeting, make a time to meet again – a call to action and a commitment to do something all in one?
» If your client is reluctant to sign the newly-drafted will, urge them to do so as it is likely to be better than their existing, out of date, will or the non-existent one.
The Seven Hats of Financial Advisers
This article is in the next edition Canterbury Tales – our local Law Society publication – and is written by one of our Directors, Andrew Nuttall. Although aimed at the legal profession, it does a great job of explaining the many ways we help our clients, which go far beyond investment advice.
When people approach us for investment advice at a personal level, or in their capacity as Trustees, they can be inclined to see us as playing just one role – delivering market beating returns year after year. Unfortunately, we don’t have a crystal ball that allows us to always select the top performing fund or security with-out the benefit of hind-sight. However, helping trustees and other clients make sound decisions about their investments is our core role, and we have found that there are seven hats we aspire to wear without ever having to try and predict the future.
- The Expert: Investors need advisors who can provide an objective assessment of the state of their finances and then develop risk aware strategies to help them meet their goals.
- The Independent Voice: Our clients value an independent and objective voice in a world that is sadly still dominated by people either promoting their employers’ products or other securities that pay a commission and encouraging clients to buy and sell securities.
- The Listener: The emotions triggered by financial uncertainty are real. A good adviser will listen to client’s fears, tease out the issues driving those feelings, and provide practical long-term answers.
- The Teacher: Getting beyond the fear and flight phase often is just a matter of teaching investors about; risk and return, diversification, the role of asset allocation, and the virtue of discipline.
- The Architect: Once the above lessons are understood, the adviser becomes and architect, building a long-term wealth management strategy that matches each person’s appetites and lifetime goals.
- The Coach: Even when the strategy is in place, doubts and fears inevitably rise. At this point, the adviser becomes a coach, reinforcing the first principles and keeping the client on track.
- The Guardian: The long-term role of an adviser is that of a light-house keeper who scans the horizon for issues that may affect clients and keeping them informed.
Our industry (I believe that one day it will become a profession) is rapidly moving in a positive direction. The provision of prudent investment advice involves much more than making predictions on tomorrow’s winning asset classes, securities or products. There needs to be greater emphasis and focus on process, governance and investor outcomes.
Ten Years On From The GFC – What Have We Learnt?
The GFC (Global Financial Crisis) is widely considered by economists to have been the worst financial crisis since the Great Depression. Its effects were so wide-spread and profound that even Queen Elizabeth, whose personal fortune had fallen by more than $50 million, demanded economists explain why they hadn’t seen the crisis coming.
Around the world blame was distributed far and wide – lax regulations, too much regulation, excessive debt, irresponsible lending, complex financial products, compromised ratings agencies, an over-reliance on mathematical models, and just plain old greed were all cited as culprits.
But aside from a temporary seizure in short-term money markets, global share and bond markets performed as you would expect at a time of heightened uncertainty. Prices adjusted lower as investors demanded a higher expected return for the risk of investing.
And it wasn’t long before the markets started to see a reversal – By the end of 2009, the New Zealand market rebounded by more than 19% after a near 34% decline in 2008. Australia’s S&P/ASX 300 index performed even better, returning to almost the same levels as before the GFC.
Emotions are hard to keep in check during a crisis and there can be an overwhelming compulsion among investors to “do something”. But, as it turned out, those who listened to their advisors and stayed disciplined within the asset allocation designed for them have done considerably better than many people who capitulated and went to cash in 2008−2009.
An investor who had begun investing in the New Zealand market at the start of 2008 would still have experienced a 7.6% annualised return by the end of 2017. Using a global balanced strategy of 60% equity and 40% fixed interest, the return was 5.4%p.a.These results show we can do ourselves a favour, both materially and emotionally, by accepting that volatility is a normal part of investing and by sticking to a well-thought-out investment plan agreed upon in less stressful times.
This blog has been taken from an article by Jim Parker of Dimensional. Read the full story here
Putting the recent market volatility into a longer term context
In the first three weeks of January 2018 alone the S&P 500 crossed ten new record closing highs in 13 days of trading. Then, in February, the index lost all its gains from 2018 in a few days. Over the next 7 months it built up gains again, and then lost all them over the course of three weeks in October. What’s going on?
Let’s remind ourselves how markets work.
Prices went down because some investors decided to sell. But for every seller there is a willing buyer. The aim of the buyer wasn’t to lose money. The buyer bought because they felt that the discounted prices offered them enough return to justify the risk.
Markets bring optimists and pessimists together by finding a price at which they are both willing to trade.
This is our shorthand way of saying at least half the market participants transacting in the last few days thought it was a good time to buy. Not everyone believes the sky is falling, even if the sensational headlines promote such a view.
But what about our investors?
For our clients with a 50/50 portfolio, we recommend a seven-year time horizon at a minimum, and most have a 20 or 30 year time horizon. In other words, any of our investors that are planning to spend money out of their portfolio this year or next year probably have that money sitting in bonds and cash, not in shares.
So, the portion of the portfolio suffering the most from this recent volatility is the portion that an investor has almost no chance of spending or using any time soon. That’s important, because it means that, whilst it’s not particularly comfortable to see volatility like this, it has little practical implication on their portfolio or current lifestyle. For most of our clients, we hope they’d look on this current situation with a level of disinterest.
For clients that are regularly purchasing assets in their portfolios or via KiwiSaver, this is fact a positive development, because they’ll be able to buy more shares with their same regular savings contribution and that will help grow their long-term wealth.
And let’s remember, when we as investors agreed to purchase shares, we accepted this would generally lead to more volatile returns. However, it’s volatility such as this that gives shares their wonderful return characteristics. Without temporary dips such as this most recent one, shares would have the returns of cash – which would not help us reach our financial goals.
Shares are volatile. The chart below shows the quarterly return of a portfolio 98% invested in shares. It goes up and down a lot; there’s no way around it.
The chart below, however, shows the growth of wealth this same portfolio has produced since 1991. While the volatility was uncomfortable, it produced large growth despite the Asian financial crisis, the tech wreck, the Global Financial Crisis and anything else you want to throw into the last 20 years or so.
The critical point to remember in all this is the outcome that long term investors get to experience. It’s that share markets, on average, go up more than they go down, and that consistent exposure to these markets is a key driver of long-term wealth creation.
We know the markets can be volatile in the short term, but this is already factored in to our long-term strategies. The worst decision investors can make is to react to short term volatility in a way that jeopardises the achievement of their long-term plans.
If you are still concerned, we want to talk. Give your adviser a call and we’ll be happy to talk through the recent changes to your portfolio in the context of both your short and longer term goals.
Our thanks to Ben Brinkerhoff from our associate company, Consilium, for this great article.
“I’m at the top of my game – and I don’t feel old!”
Here’s a very interesting interview from retirement commissioner, Diane Maxwell, which screened on TV3 this morning. Well worth a read or watch in its entirety, but here are some of the key points:
– Most ‘retirees’ don’t feel old – ‘they are fit, healthy and active and want to get up in the morning and do something’.
– Most kiwis want to retire when they are aged between 68 and 72 NOT 65
– 63% of people don’t believe they will have enough to retire on when the time comes
Diane Maxwell was reluctant to put a figure on just how much any one person needs for retirement as needs and expectations vary. But she did suggest that one of the key tools to help was to always have a three month buffer – in other words enough money in the bank to tide you over for three months if you weren’t able to earn money during that time.
This was necessary regardless of age because it helped protect against a downward spiral of additional debt which could happen at any time, and seriously compromise long-term savings plans.
And what was the message she was getting back from those she talked to who had either reached or were close to retirement? “Don’t write me off – I’m at the top of my game, and I don’t feel old!”
Read or watch the full interview here
Now and Then
You are more likely to recognise the stairwell than the person here! That’s because it’s from the set of The Big Bang Theory – one of the longest-running and most popular sitcoms on our screens today. Its Executive Producer Dave Goetsch reflects here on how much his attitude to investing has changed in the last ten years. One of the biggest differences? Finding a good financial adviser.
Seeing all the recent headlines about the sudden downturn in the stock market has transported me back to February of 2009, when I was close to despair. It’s striking how different I feel now.
In February 2009, the stock market was down around 50% from its high, and everyone seemed to feel like the sky was falling. I was familiar with this state of panic because my relationship to the financial markets was that I didn’t trust them.
They were always going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it—sinking into a depression, knowing there was nothing I could do.
What a difference nine years make. I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing. I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do. I’ve learned that I can have a great investment experience if I just accept a few simple truths.
I have to understand the uncertainty of the market. The stock market, as measured by the S&P 500 Index, has returned about 10% per year over the last 90 years,1 but there are very few individual years in which it has ever actually returned that amount. In fact, how many of those 90 years do you think the S&P 500 was up more than 20% or down more than 20% for that year? The answer is 40. Astounding, right? I wish somebody had explained that to me decades ago. Then I would have known to look at stock market returns in terms of decades—not years, months, days, or hours. I would understand that so many of those articles and cable news pieces are just noise, designed to keep an audience obsessed and unsettled.
In order to be a long-term investor, you have to have a long time horizon. This can be hard to remember when you’re being assaulted by noise, but if you can stay strong, the results are stunning. By results, I don’t mean the investment returns, which hopefully are good. The return I’m talking about is how I feel every day. I worry less—not just about the future, but also about the present. Of course, I know that there are no guarantees when it comes to investing, but I feel like I’m going to be okay. I have a plan.
There’s no way I could’ve done this without a financial advisor. I needed someone who could not just talk me through what my asset allocation should be, but also help me work through how I felt about investing and what exactly I could do to change my perspective.
I was a mess nine years ago. Now, my outlook is totally different. The markets haven’t changed; they still go up and down. The difference is, I don’t anymore.
Thanks to our Associates at Dimensional Fund Advisors for the use of this article.
Welcome to James Howard
We’re delighted to welcome James Howard to Cambridge Partners. A Canterbury local, James received his BCom at University of Canterbury majoring in accounting, finance, management and information systems.
Following his graduation, he joined EY, working in the International Tax and Transfer Pricing department. His involvement with the company spanned almost a decade, and included three years in the Netherlands working in the Operating Model Effectiveness team.
Along with New York, London and Singapore, the Netherlands is one of EY’s key hubs for Operating Model Effectiveness, so this was an excellent opportunity for James to challenge himself and gain valuable professional experience in this area. On a personal level, it provided him and wife Kate with an opportunity to fulfil a dream to see more of the world.
“I had a blast and learnt a lot and, to be honest, if it was a bit closer to home we might have stayed,” he says with a smile. “But ultimately the 26-hour flights home become a bit much for both of us. And, as much as we loved our time overseas, we’re very happy to be back in Christchurch closer to our family and friends.”
After initially returning to EY in Christchurch on his return home, James moved to Otakaro Ltd – the crown-owned entity which is responsible for delivering the anchor projects currently underway as part of the Christchurch rebuild. Here James provided Commercial and Economic Advisory in the Strategy and Planning team. “It was great learning and a good experience but ultimately not what I was looking for” explains James. “I missed developing relationships with clients and working with those clients to create value and achieve their goals.”
James loves skiing, mountain biking “Basically any outdoor activities. I also used to be an avid rower, however it’s been a few years since I’ve sat in a boat…” He is still involved in the sport though, as he sits on the board of Southern Rowing Performance Centre.
Life is for Living
All the technical talk about investment and superannuation and asset allocation overlooks a few key principles for everyone – life is for living and it’s important to strike a balance in all things, including saving versus spending. Jim Parker from Dimensional – a highly regarded author and business journalist – has shared these great insights about how to manage the tension between enjoying what you have today and putting money aside for the future.
How Much Do You Need?
Feeling more comfortable about saving for retirement often comes down to setting out in practical terms the kind of lifestyle you want. You also need to consider the costs of aged care and inevitable medical bills. Your Cambridge Advisor will be able to sit down and help you work out how much is enough – and the sooner you can do this, the better.
Finding Your Own Balance
Most people are constantly trying to strike a balance between enjoying life now and ensuring they have the resources to enjoy life later. The good news is there is no ideal balance. It depends on your own goals, needs, resources and expectations. But there are ways of thinking through this challenge.
How do you strike the right balance between saving for the future and enjoying life now? Start by accepting there is no such thing as perfect.
The YOLO Principle
Many people live unnecessarily frugal lives in retirement for fear of running down their principal. But isn’t enjoying the money you’ve saved the entire point? Yes, there is a risk of running out of money. Equally, there is a risk that you never enjoy what you have. Tony Isola recommends the ‘YOLO’ Principle (You Only Live Once).
Which is the bigger worry in retirement – running out of money, or failing to enjoy the money you have saved? Only you can answer that question, but having a clear picture of what you have and how long it will last will definitely help you decide.
Do you know what you are entitled to?
It is the time of year where we begin to reminisce on the year that 2017 has been. A main feature for New Zealand has, as it does recurringly, been the election. As both major parties tried to win over the public, superannuation was one topic that was heavily debated. At the time this all got caught up in the election whirlwind but as the memory of the election starts to dissipate with a government now being formed, the logical question to ask is where will all your income come from once you retire?
For many, that income will be derived from a variety of sources including:
- New Zealand Superannuation
- Personally owned investments, e.g. share dividends or property rental
- Private pensions
- Government Super Fund (GSF)
- Any ongoing salary or business income from your own efforts
Since superannuation has been the term thrown around the most in recent times it is important to understand exactly what it means.
It is a relatively simple system, isn’t income or asset tested. A millionaire couple living in a mansion in Herne Bay, Auckland will receive the same amount as a couple living in a cottage in Hokitika. It’s fair to say that retirees in New Zealand have it good!
However, it does require you to be over the age of 65 and must have lived in New Zealand for only 10 years cumulatively since the age of 20, and 5 of those years must have been since the age of 50. We know now this age will not be changing for the next three years at least!
There are some reciprocity rules which do consider time spent as residents in another country as residents, as residence in New Zealand. As of March 2016 these are the current payments that you would then be entitled to:
We said it was simple and it sounds simple. But there are a few things you need to be aware especially for those with only one partner being entitled to the payments, household arrangements, those who have worked overseas and done extended overseas travel.
If any of these circumstances apply to you it is important to discuss with a financial adviser and so you are aware and can be well prepared when you decide it is right to stop working.
The content from this blogpost is from our book ‘So You Think You Are Ready To Retire’ a self-guide book to prepare you for retirement, it can be purchased here:
For a made to measure advice around your retirement contact us.
Work and Retirement: No Longer Oxymoronic?
During the last years before we retire, we may have fleeting thoughts about how nice it would be to not work. Finally, without work there would be time for the activities that we only get a chance to do in the weekends or annual leave. But we must consider work with a glass half full approach. “What is the good stuff?” Or perhaps you could ask yourself, “if you won the lottery and money was no longer salient, would you still work?”
There is always the option of traditional retirement and doing just what the above example explains, completely leaving the workforce and enjoying the golden years, filling time with leisure activities. But there are other choices:
This involves arrangements such as working part time or taking, job sharing, or taking on casual consulting roles. This way you can still get the benefits that work provides but you also can take time for more of the leisure activities that traditional retirement is all about.
This is similar to gradually retiring but is a strategy used more commonly by those that are self-employed.
This is the concept of retiring to the workforce after being out for a long time. Maybe you were a stay at home mother and now while the last child flees the nest you are wanting to stay busy, gain a sense of purpose and social contacts. This is becoming increasingly common and is always an option.
The superannuation age of 65 is not the age that you have to retire. You should not feel like your time is up just because of your age, as the old saying goes ‘age is just a number’. If you have more to give and love to be involved, then retirement may not be for you.
Increasingly the term “work” is moving away from what it traditionally was. There is no hierarchy or structure for what it must look like or be. Work in retirement can take form in many different types: volunteering, boutique store assistant or even a second career.
The content from this blogpost is from our book ‘So You Think You Are Ready To Retire’ a self-guide book to prepare you for retirement, it can be purchased here:
For a made to measure advice around your retirement contact us.
The 8 Different Stages to a Happy Retirement
Although many pre-retirees look forward to retirement as one long (well-earned) vacation, in reality there are often six to eight different phases.
The fantasy stage is those last years of work prior to retirement. The concept of a retirement lifestyle is more fiction than fact, but right now you dream about all of the things you want to do in this next phase of life. Dreams of trips to be taken or toys to be bought mark the fantasy stage. This is what most people think of when they think of no work or responsibilities.
The excitement stage is the year prior to retirement. Pre-retirees focus on the retirement date in the same way as we would the start of a holiday or anticipation of a special event. Here you should focus on finalising plans and strategies for the future.
The stress phase is when reality sets in. Now that retirement has started, it’s common for new retirees in the first year to focus on fears and concerns about this new life. Going from a busy and well-structured life to unstructured time is not as easy as it sounds. Often the routine of work is missed and some struggle to find a replacement.
The honeymoon phase kicks in one to three years after retirement. Retirees try to do all of the things that they had dreamt of in the fantasy stage. This is the perpetual long weekend.
The routine stage kicks in around roughly the three-year point. This is after the initial glow wears off, and the fact that retirement is a day-to-day way of living becomes apparent.
The disenchantment phase commonly occurs between four to six years after retirement. However, it can occur any time. Most often, the disenchantment stage is marked by recognition of your mortality. Depression is common and due to health issues or a bereavement, a retiree’s spirit is often challenged.
A reorientation occurs when a successful retiree makes an adjustment to his or her new reality.
The final stage of contentment is reached when the retiree begins to adjust to the new life he or she has created. Those who struggle to accept and adjust to this new way of life are likely to stay in the disenchantment stage.
The content from this blogpost is from our book ‘So You Think You Are Ready To Retire’ a self-guide book to prepare you for retirement, it can be purchased here:
For a made to measure advice around your retirement contact us.
4 Reasons Why Women Need to Be Invested in Their Families’ Financial Situations
Men are often said to have more familiarity with financial matters, but there is more than a 90% chance that at some point the woman will be the sole financial decision-maker in the household.
Why is this the case?
Women live longer. Women born today are expected to outlive men by almost four years (Statistics New Zealand, 2015). This means they need to save more than men because it is likely they will have more years of retirement to fund. Women represent just over half (51.3%) of the total New Zealand population. However, they represent 54.1% of the overall population above the age of 65, and 64.3% of the population above the age of 85 (Statistics New Zealand, 2014). Therefore, many women will need even more help to handle those extra years, given their prospects for greater longevity.
Women tend to be the major caregivers for elder parents. Caregiving and managing parental assets will affect both men and women, but will probably be more relevant for a woman than a man (Department of Labour, 2011).
Women are more likely to live alone in retirement. Issues such as household budgeting, health care, financial planning, legacy issues and investment management will be increasingly taken on by women.
Women will take an active role in family finances in the future. Increasingly, more women control the family finances. Our advice has always been that the woman in the relationship should be prepared to take over family finances at a moment’s notice.
For a made to measure advice around your retirement contact us.
Use the “Gun” Test
The more time we have available to make a decision, the more we are likely to vacillate between one option and another. This usually happens because we forget about what’s most important to us. To break the jam in these cases, a Stanford University professor came up with a novel technique.
Can’t make a decision? Torn between two options? Try the ‘gun’ test, says engineering professor.
A Stanford professor says the ‘gun test’ can help you make big decisions
By Shana Lebowitz, Feb. 5, 2016
Read original article here:
You can drive yourself crazy deciding whether to attend grad school, take a job offer, or marry your partner.
What if you make the wrong choice, and as a result, wind up unhappy, unfulfilled, and unsuccessful?
In these situations, it may help to use an unconventional strategy that Stanford engineering professor Bernard Roth calls the “gun test.”
Roth, who is the academic director of Stanford’s Hasso Plattner Institute of Design (the d.school), recently published a book called “The Achievement Habit,” in which he outlines techniques for making big life decisions considerably easier.
Here’s how the gun test works: When a student of his is wrestling with a big life decision, he points his fingers in the form of a gun at the student’s forehead and says, “Okay, you have 15 seconds to decide or I’ll pull the trigger. What’s your decision?”
According to Roth, everyone always knows the answer.
“Even if they do not ultimately take that path, this exercise usually releases the pressure built up around the decision-making process and gets them closer to a resolution,” he writes.
In other words, the point isn’t so much to choose as to realize that youcan choose — and that you’ll feel so much better afterward.
Another strategy Roth relies on is the “life’s journey method.” When a student is vacillating between two possible paths, he asks the student to pick one of the choices and then imagine what life would look like as a result.
In the book, he uses the example of a master’s student deciding whether to enroll in a Ph.D. program. The student realizes that if she enrolls, she’ll graduate and get a job in academia; get married and buy a house; have kids; raise the kids; get older and die.
If she doesn’t enroll, she’ll get a job in the industry or start a company; make a lot of money; get married and buy a house; have and raise kids; get older and die.
“The point of this,” Roth writes, “is to get people to realize that there is no way to know where a decision will lead.”
The best way to move forward, he says, is to demonstrate a “bias toward action” and not to be afraid of failure.
These two concepts are key to a strategy called “design thinking,” which Roth says can help solve any problem — from how to build a better lightbulb to how to lose weight.
No matter what problem you’re trying to solve, you’ll want to minimize the amount of time you spend deliberating so that you start doing something as soon as possible. Even if the path you take doesn’t quite work out — and it very well may not — you can always try again.
Roth writes: “I believe it serves people best in life to accept that decisions are part of the process of moving forward and that there are so many variables that it’s a waste of time to try to see the endgame.”
Read original article here:
Price vs Value
Spend the Money for the Good Boots, and Wear Them Forever
By Carl Richards, Feb 1 2016.
Many people, in considering whether to pay for any good or service, will rank price ahead of everything else. But seeking to pay the lowest dollar for everything can come at a cost. In this article, Carl Richards says consciously paying for quality can deliver greater value in the long term.
When making a decision about a purchase, it’s sensible to distinguish between price and value. Read article here:
Failure: A Checklist
The surest road to regret.
One of the biggest mistakes people make in coming to a money decision is thinking they can never change their minds. Another one is insisting that price is everything. In this article, columnist Morgan Housel supplies a checklist of factors he’s seen drive bad decisions about finances.
A key to making good money decisions is being aware of behaviours that lead to failure. Here are a few of them.
Most people focus too much on how to get ahead by making the right decisions. In a world where most businesses go under and most investors trail an index fund, an obsession with how to not fail can be a more effective mind-set. Doing so requires knowing the behaviors that are likely to cause failure. Here’s a checklist of bad decisions I’ve witness over the years.
- Always remember: Success is due to your intelligence and effort. Failure is due to the political party you didn’t vote for.
- View “changing your mind” as a character flaw and something to be avoided.
- Associate complexity with added value.
- Surround yourself with people who agree with you or are too afraid to tell you you’re wrong.
- Treat information that goes against what you believe as an attack on your intelligence.
- Seek the council of people working on commission.
- Accept past correlations as a clean prediction of the future.
- Compete on cost rather than service.
- Prioritize in this order: Quarterly results, annual results, long-term results, and — if there’s anything left over — reputation.
- Develop strong opinions for things you have no personal experience in.
- Study the habits of successful people. Ignore habits which require serious, time-consuming and mentally exhausting effort. Double down on those which mimic your current hobbies.
- Use current popular sentiment to gauge future outcomes, especially when it’s highly emotional.
- Dream big. About your future paycheck. Don’t let the intervening effort or social sacrifices required to get there become part of the story.
- Expect to achieve overnight what successful people took decades to accomplish.
- Leverage up to the point of needing your forecasts to be accurate in order to survive.
- Focus heavily on analytical ability, discounting common sense as too simple-minded.
- Treat employees as workers rather than people.
- Always ask, “How can I achieve the same investment returns they did, but faster?”
- Consider your last day of college the last day you need to study and learn.
- When you win, adjust your expectations upward by the same amount, ensuring that your ability to feel the joy of progress takes the form of a treadmill.
- Risk what you and your family rely on for a chance at something superficial and unnecessary.
- Since failure is not an option, discount contingency plans.
- Be genuinely surprised at the occurrence of recessions and bear markets.
- Consider a degree from a prestigious school as an entitlement to success.
- Look for patterns in complex adaptive systems, like the economy and stock market.
- Get tired of being patient.
Check those boxes and you’ll be disappointing in no time.
Original article here:
Responding to Stock Market Volatility
By Robert Powell, Special for USA TODAY
How should the average investor react as global stocks experience volatility? Charisse Jones with five tips for the every day investor.
If you haven’t figured this out by now, it’s time you did: Stocks are risky. They are risky — as in volatile — over the short and the long term.
But that doesn’t mean you should avoid investing in stocks … except maybe Chinese stocks. Nor does it mean that you should just ride out the jaw-dropping volatility in the market, either. What to do?
- First, turn off the TV. Joseph Tomlinson, a certified financial planner with Tomlinson Financial Planning, in Greenville, Maine, suggests “turning off CNBC” and not reacting to these sorts of events by trying to time the market. “Don’t attempt a strategy of bailing out temporarily until things ‘calm down,'” he says.
- Second, think big picture. The longer your investment time horizon the more likely it is that you can not only ride out this current crisis, but continue to invest in stocks as they go “on sale,” as some investment experts like to say during times like these. People today can expect to live on average to nearly 80. So someone in their 20s has an investment time horizon of at least 60 years, and for someone in their 40s its four decades. And, while past performance, as the famous investor warning goes, does not guarantee future results, stocks over the long term have gained on average 10% to 12% per year since the late 1920s.
“Millennials shouldn’t be concerned with volatility,” said Dirk Cotton, a financial adviser and author of the Retirement Café blog in Chapel Hill, N.C. “They have decades to recover from losses, and risk enables them to earn higher returns.”
On the other hand, pre-retirees — those in their 50s and early 60s — as well as retirees have shorter investment time horizons, say 20 or 30 years, and can’t afford to put their retirement lifestyle at risk. They just don’t have as many years to recover from bear markets as do Millennials and Gen Yers. So they might revisit how much they invest in stocks.
As a general rule, consider subtracting your age from 100. That should tell you how much to invest in stocks. So, if you’re 50, consider investing 50% in stocks and 50% in bonds. And if you’re 25, consider investing 75% in stocks and 25% in bonds.
- Third, review (or create) your investment policy statement. Investors, no matter their life stage, should always have an investment policy statement (IPS) for their portfolio. It’s a blueprint outlining how much to invest in stocks, bonds and cash given their time horizon, risk tolerance and investment goals.
Your IPS — not your emotions — should tell you when to rebalance your portfolio, when to sell and buy. Again, regardless of life stage, the tumult in the Chinese market, might be a chance to buy, not sell, stocks.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch.
It’s Not All in the Timing
Went to cash? Here’s the next mistake you’ll make
By Eric Rosenbaum, January 24, 2016 3:00 PM
How about that 550-point intraday dive last week in the Dow! Did that finally get you to sell?
Oh, c’mon, that was “so last Wednesday.”
Surely, when all the major indices ripped higher on Friday, and stocks registered their first positive week of the year, and that diving-Dow had two straight days with triple-digit gains, you had plowed right back into the stock market and banked all those big gains.
It seemed like the panic and the paranoia were over — until the Dow dropped by another 200 points on Monday.
Vanguard Group CEO Bill McNabb said on Monday that investors should expect the volatility to last longer — and expect less from stocks for up to a decade .
And so far in January, investors have yanked near-$7 billion from U.S. stock funds, according to Thomson Reuters Lipper data. Investors have also put more than $3 billion into money market funds — the market’s under-the-mattress cash equivalent. But the more alarming data comes from last month, when investors pulled $48 billion from stock funds. That is eerily similar to 2008, as the financial crash hardened: Investors took $49 billion out of stock funds in Sept. 2008 and $55 billion out of stock funds in October 2008.
Kudos to investors for the great timing. Except for the fact that from 2008 to 2012, the S&P 500 generated a cumulative return of 8.6 percent.
Here’s the problem: If an investor missed the 36 percent drop in the S&P 500 in 2008 — or even worse, bailed on the markets mid-carnage — they probably also missed the 26 percent gain in the S&P 500 in 2009, and the next three positive years for the index that followed.
In 2011, investors pulled another $94 billion from stock funds, and in 2012 another $129 billion, when the S&P 500 was up 16 percent. Hundreds of billions of dollars pulled out of stocks during a period of time when a stay-the-course strategy would have netted an 8.6 percent cumulative gain. Not a shoot-the-lights-out strategy, but nothing to sneeze at either in today’s low-return — not to mention nil savings rate — environment.
It’s what Lipper’s head of Americas Research, Jeff Tjornehoj, calls the dilemma of the do-nothing investor: More often than not, the do-nothing investor does better.
“It’s a rocky ride, but the do-nothing investor would have been fine and avoided headaches,” Tjornehoj said, referring to those who stayed invested through the crash. He added, “If you know precisely how to move between stocks and bonds and everything else, you would have done better, but how many investors know how to do that?”
“The big issue is that when you go to cash, you have to be right twice,” said Mitch Goldberg, financial advisor and president of Dix Hills, New York-based ClientFirst Strategy. “First, you have to be right about getting your timing correct when you sell. If you are selling because it is your panic reaction in a down market, I think it’s fair to say you probably got that part of the decision wrong. The second part you have to get right is the timing of your buy orders. And if you are waiting for the perfect time to buy, you’ll never pull the trigger.”
And here’s a key that many investors who plan to be smarter than the “herd” miss, especially in markets like the one investors faced last week, with huge swings in the norm day-to-day. A move to cash works against the investor to a greater degree when there is greater volatility.
“Friday’s rally in global equity markets is a case in point of how investors who just binged on cash are missing out on a big rebound,” Goldberg said. “It’s tough to time, and missing out on the best days of the year has a restraining effect on long-term performance,” Goldberg said.
Allianz Global Investors provided an example of just how much investors can lose out in just a few days. The Allianz economic research and strategy team looked at the period from 1973 to the end of 2014, comparing four different approaches to investing in the U.S. stock market. Investors who missed the three biggest days of each year see their gains go down dramatically.
In the first approach, $100 is invested on the first day of the year and another $100 dollars added at the start of each year thereafter. The total return over the four decades was $52,251.
In the market-timing approach, if an investor invests the same $100 at the start of each year but misses the top three days of the year, the total return was $2,953.
The best return of all came from investing $100 on the day of the lowest index level of the year — the best day of the year to invest — and adding $100 on the lowest-index-level days of subsequent years. That approach netted a total return of $54,355.
“The problem is that we can never predict when the best days will occur, so we have to stay fully invested all the time to experience them,” Hooper said, adding that most days in any given year (both positive and negative) will typically produce a net flat performance.
Those “big day” misses, or gains, compound over the years.
The key problem I see when investors go to cash has a lot to do with procrastination,” Goldberg said. “They think about getting back into the market in a conceptual way, but when it comes right down to it, they often don’t because they didn’t implement a disciplined strategy to get back in. If the stock market bounces and rips higher, they say to themselves, ‘I could’ve gotten in lower, so now I’ll wait for another pullback.’ Then the market pulls back and they say to themselves, ‘I’ll wait to see if it goes lower.’ And so on.”
Tim Maurer, director of personal finance for The BAM Alliance of financial advisory companies, said that the field of behavioral finance has demonstrated how our brains often think (wrongly) when it comes to evaluating the pain of losses versus the pleasure of gains.
Maurer said to consider the decision between staying invested after a market decline or moving to cash as a four-step process:
- The pain of staying invested is that I could lose even more.
- The pleasure of moving to cash is that my worry is eliminated and I’m guaranteed not to lose any more.
- The pain involved in moving to cash is that I’ll miss the upside, thereby eliminating my opportunity to recoup recent losses in the next market up move.
- The pleasure in staying invested is that I’m giving myself a better chance to achieve my financial goals in the long term — the reason I invested in the market in the first place.
He said the four-step process has one purpose: to bring the vast majority of investors back to the conclusion that they shouldn’t get out of the market.
“The market has historically paid investors a premium over cash and bonds precisely because it requires investors to endure times of volatility,” Maurer said. “Without volatility, we’d have no reason to expect higher long-term gains.”
A few weeks ago — amid one of the many recent bouts of extreme daily selling — a friend asked me whether they should sell their Facebook shares. I asked, “And replace them with what?” She didn’t have an answer.
Another friend, in his 40s, texted in a panic to ask if it was the time to get out of stocks. I asked him what stocks, in particular, he meant to sell. He said no stocks, just moving his retirement portfolio as a whole out of equities. I replied with several exclamation points — you can imagine the words that preceded the punctuation yourself.
“At the start of December, I addressed a roomful of high-net-worth financial advisors and asked them, ‘How many of you expect the market to fall more than 10 percent in 2016?'” said Allianz’ Hooper. “Nearly every hand in the room went up. And yet now that the market has experienced the sell-off, many are not viewing it as a healthy correction but are panicking and fearing the worst.”
Hooper said the psychology is easy to understand. Sell-offs are by nature disorderly and create a contagion of fear, and investors believe that when stocks go down 10 percent in value, there’s something “the market knows” but a Main Street investor doesn’t.
“In reality it is just a herd, and herding is a dangerous activity for investors,” Hooper said.
There is always a good case to be made for rebalancing from stocks that have run up a lot into stocks that seem undervalued. Maurer said it’s good to be “greedy” like Berkshire Hathaway chairman and CEO Warren Buffett through stock rebalancing. But when Lipper fund-flows data shows net negative flows in equity funds, that’s not what’s going on with the mass of retail investors.
Goldberg is a “big proponent” of raising cash at times , but said the time to do it is when stocks are rising and then wait patiently for new opportunities. “I never feel pressure to be fully invested at all times. But I do not believe in going to cash as an ‘all or nothing’ trade,” he said.
Cash proponents will argue that staying invested is a disaster-in-the-making for retirees. Goldberg said retirees are naturally the most fearful, but it’s the cash mentality rather than staying in equities that is the “never-ending wealth destroyer pattern.”
“You’re now giving up on an asset class that historically has been a hedge against inflation,” Goldberg said. “Sure, inflation is nonexistent according to headline statistics. But if you pay for health insurance, which as a senior could easily be sending a big proportion of your income on health care, you know you are ground zero for inflation pain.”
In fact, if any retiree has a portfolio constructed with investments that would collectively go to zero in a stock market correction, the only question worth asking is, Who designed your portfolio, and how quickly can you fire them?
There’s a reason that famed investors like Vanguard Group’s Jack Bogle and Buffett sound like a broken record with the “stay the course” mantra .
It’s not just because their millions and billions allow them to do so with comfort — though that helps.
It’s because they’re right.
Listen to Your Financial Plan
One large investment bank says “sell everything”. Another says “this is a buying opportunity”. Who should you listen to at a time like this? In his latest New York Times column, Carl Richards suggests this is when having a clearly articulated financial plan pays off.
Market volatility can be hard to take. But having and sticking to a financial plan can make the ride easier. Read more here… http://nyti.ms/1OXg0d4
Avoiding “Lucky Fool Syndrome”
Watching the Olympics a few weeks ago, I got pulled in to the drama of short-track skating. It has to be one of the more entertaining Olympic events. The races are fast, and almost anything can happen. If you had a chance to watch the women’s 500-meter final, you saw a perfect example of the fine line between skill and luck that drives this sport.
Seconds after the race started, Elise Christie of Britain made a passing move in the second turn that caused her and Arianna Fontana of Italy to crash. Park Seung-hi of South Korea then slipped in the next turn. Only one skater, Li Jianrou of China, didn’t fall down. While the other skaters managed to get back up, there was no way for them to catch Ms. Li, and she won the gold medal.
Ms. Li is clearly an exceptional athlete (she was overall world champion in 2012), but it’s impossible not to see the role that simple luck played in the race. Even she described her win as “very lucky.” Skill may have gotten her to the Olympics, but luck played a role in her gold-medal victory.
So if Ms. Li, a world-class athlete, is willing to acknowledge the role of luck in her success, what makes it so hard for the rest of us? Well, we like thinking we’re just that good, particularly if we’re talking about our investment success. As a result, we become the lucky fools that Nassim N. Taleb described in his book “Fooled by Randomness.”
“Lucky fools do not bear the slightest suspicion that they may be lucky fools — by definition, they do not know that they belong to such category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets (our hormonal system does not know whether our successes depend on randomness),” Mr. Taleb wrote.
What sets off the lucky fool syndrome? Psychologists call it the self-attribution bias. It means we’re inclined to take all the credit for things going well, but we have no problem blaming outside forces when things go wrong. On top of our bias, we have a very difficult time separating skill from luck.
As a result, we’re susceptible to the lucky fool syndrome and the problems that come with it. In a 2013 study, the researchers Arvid Hoffmann and Thomas Post highlighted how a self-attribution bias can hurt investors and lead to repeated mistakes because they “simply attribute bad returns to factors beyond their control.” The same study also showed that when we ignore the role of luck, we’re also blind to bad investment behavior like overtrading or underdiversification.
Knowing that these issues exist, we have a choice. We can continue to float along on a cloud of serotonin, playing the fool and suffering the consequences, or we can challenge our biases. It’s not easy to make the right choice, but it’s doable. It starts with getting a better handle on the difference between skill and luck.
Michael Mauboussin, the managing director and head of global financial strategies at Credit Suisse, suggests clearing up the confusion with a simple question:
“There is actually a very interesting test to determine if there is any skill in an activity, and that is to ask if you can lose on purpose. If you can lose on purpose, then there is some sort of skill. Investing is very interesting because it is difficult to build a portfolio that does a lot better than the benchmark. But it is also actually very hard, given the parameters, to build a portfolio that does a lot worse than the benchmark. What that tells you is that investing is pretty far over to the luck side of the continuum.”
So if investing involves a fair bit of luck, then the next step is to measure where our success falls on the luck-skill continuum. Plus, the more we measure, the more likely we are to avoid the bias and act the lucky fool. After all, investing leaves a pretty clear trail of breadcrumbs.
Start by pulling out tax records and year-end brokerage statements that lay out the facts. If we’ve been cruising along and assuming we’ve done something special, it’s time to put on our no shame/no blame hat and look at all the data. For instance, many investors I know designate a small portion of their portfolio as a play account. Because it’s a play account, they feel comfortable betting on riskier investments, and sometimes those riskier investments deliver an excellent return.
But it doesn’t take much for us to project that small success across our entire portfolio. So we need to ask ourselves how our whole portfolio did. Then, we need to calculate our rate of return and compare it with the return of index funds representing the broad market.
My experience shows this test will surprise almost every investor. The numbers will invariably make the case that what we thought was a spectacular success can’t compete when it’s measured as a part of the whole and compared with a benchmark. With this knowledge, it becomes a bit easier to counter our bias and avoid the lucky fool syndrome.
It’s easy to get sucked into believing that investing success is all about skill. I suspect it follows the rule that the smarter you are, the smarter you think you are, and that’s a problem for investors who believe intelligence determines our investment returns. It becomes a self-confirming cycle if they see great investments returns. The great returns verify the original idea that our smarts determine our investing success, and the next investing success starts the cycle all over again.
We can interrupt the pattern, and avoid the mistakes that come from it, by testing the context of our success with a second, simple question: Were the markets already going up? Even though it’s tempting, we shouldn’t confuse being a genius with a rising market. For instance, if we experienced superior returns in 2013, it’s very difficult to attribute our success to skill. However, we’re inclined to be very selective when we look at our success. We highlight the events that confirm our bias and ignore the facts that point to outside forces.
In this case, we’ve got the data to test our theory. How did we do in a non-record-breaking year? Did we see incredible results or were they close to the benchmark? If it’s the latter, it’s hard to argue that our smarts have built a portfolio that does a lot better than the benchmark.
Look, I understand that we really like how the lucky fool syndrome makes us feel. Besides all that lovely serotonin flooding our system, we love the idea that we’re really that good and capable of beating the market. That said, I doubt any of us wants the consequences of being the lucky fool. So it comes back to the choice I raised earlier: Do we float along or do we challenge the bias?
Read original article here.
Daniel Kahneman: The Trouble With Confidence
The Trouble With Confidence
Nobel Prize-winning psychologist Daniel Kahneman lists the “over-confidence effect” as one of the most common ways people fool themselves. In this short video, Professor Kahneman explains that over-confidence often runs in tandem with the contrary tendency of loss aversion.
Human beings can at once be irrationally over-confident and unnecessarily loss averse. How is that?
14 Meaningless Phrases That Will Make You Sound Like a Stock-market Wizard
Media insiders will tell you that market pundits save their blushes when their forecasts prove to be wrong by using “weasel words” — slippery phrases that provide an easy out. In this article, the writer lists 14 meaningless phrases that can make you sound like a market guru with actually saying much.
Being a financial forecasting pundit often comes down to mastering a few meaningless phrases.
Here are 14 of them:
The path to financial security is less likely to be paved with perfect investments than with prudential decisions. Indeed, it’s the avoidable risks that often stand people in good stead—whether it is not paying too much in fees or not listening to television finance gurus. Sound investing often comes down more to avoiding mistakes than kicking perfect goals every time. Read Original Article here.
Ben Carlson was spot on this week when he wrote “there are many different ways to make money in the markets. But I think that there are a few universal ways to lose money.” Here are some ways to ensure you are unsuccessful managing your finances:
- Spend more than you earn.
- Refuse to budget.
- Track your investments daily.
- Do what the “experts” on CNBC recommend.
- Frequently change strategies.
- Purchase products with high fees.
- Avoid having a plan at all.
So much of being successful, financially and otherwise, simply consists of not making the big mistakes. You don’t have to hit homeruns – just don’t strike out. To paraphrase Shane Parrish, avoiding stupidity is easier than seeking brilliance. Charlie Munger said “It is remarkable how much long-term advantage people like [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Rather than focusing on perfection, look to minimize the errors.
Millennial Planners – A TOOLBOX FOR YOUNG AND ASPIRING FINANCIAL PLANNERS
Conquer Stock Market Volatility Forever
Global stocks fell off a cliff in mid-August and they ‘ve been showing their mean streak since.
Shock and terror are spreading as though the zombie apocalypse has arrived. But why?
Besides the famous certainty of death and taxes, there’s another bit of unpleasantness that everyone can count on: The stock market will go down. The silver lining is that it has always gone back up.
“On average, the stock market, as measured by the Standard & Poor’s 500 index, experiences four declines of at least 5% every year. The average intra-year decline is 14%,” says Andrei Voicu, CFP professional, director of market and portfolio strategy at Coury Investment Advisors in Pittsburgh.
Stock market corrections, downturns or pullbacks should come as no surprise. Even 100-year floods happen every so often. By choosing investments that reflect your needs and risk tolerance, stock market volatility should be reduced to what it really is: mostly noise.
What’s your plan?
Having an investment plan in which you are reasonably confident helps allay free-floating anxiety and address questions about what to do in reaction to events over which you have no control.
“That is the easy first thing: Do you have a plan about your investments and overall financial outlook?” says CFP professional Jonathan Duong, CFA, founder and president of Wealth Engineers in Denver.
An investment policy statement can help map out the direction investments should take. It’s also useful to have handy when anxiety starts to mount about the economy. You are prepared for contingencies and girded for worst-case scenarios.
These are the questions your investment policy statement will answer:
What is your goal?
Pro tip: Quantify your goal if possible. For instance, I need $3 million when I retire in 30 years. Armed with this data, you can calculate the rate of return needed. That will dictate the level of risk in your portfolio — or the extra amount you’ll need to save to hit that goal if the level of risk is not feasible.
“Without expectations for risk, there cannot be expectations for return,” says Duong.
How long will you be investing in the stock market?
Pro tip: “The longer the holding period, the less the probability of losing money. Historically, there were no 20-year holding periods with negative returns,” Voicu says.
What is an appropriate asset allocation plan?
Asset allocation is what financial professionals call spreading money around various types of investments, such as large-cap stocks, small-cap stocks and high-quality corporate bonds. It should be based on your goals, time frame and risk tolerance.
Pro tip: Think about worst-case scenarios, such as the recent financial crisis. The S&P 500 lost more than 55% between Oct. 1, 2007, and March 5, 2009. Some portfolios lost more than that and some lost less. Smart asset allocation and diversification can lower the risk in your portfolio and improve returns.
“If the market trends down 5%, find out how far your portfolio has fallen. If you’re down an equal amount or more than a major index like the Dow or S&P 500, you may find you’re taking more risk than you like,” says Robert Laura, president of Synergos Financial Group in Brighton, Michigan.
What is your process for rebalancing or selling investments?
Pro tip: “Maintain a disciplined investment approach. Stay invested and reallocate your portfolio to its intended target allocations if they get out of range. Rebalancing may reduce risk and is an automatic way of buying low and selling high,” Voicu says.
If an investment really is a stinker, “take the time to find out if it’s a company-specific issue or something across that industry,” Laura says.
“Market pullbacks are common and every industry goes through cycles, so it’s important to develop a process to both select and sell investments based on what’s happening and not just feelings or short-term headlines,” he says.
Planning short-circuits panic
There can be unforeseen and expensive consequences to blindly selling in scary market conditions, including transaction costs and opportunity costs. It typically costs money to buy and sell investments. Depending on your holdings, it could cost money to get out and get back into the market.
Selling low also locks in losses.
“Trying to time markets in the short run is counterproductive, as the odds are against you. You have to guess right twice: when to get out and when to get back in. If you don’t guess right, long-term returns will be compromised and short-term paper losses may turn into permanent ones,” Voicu says.
Employing patience and taking the long view will help you get to the other side of market tumult battered but intact.
“Only the investors who stick with their investment plan harvest the returns from stocks,” Duong says. “Jumping out does not lead to success.”
In times of duress, use market volatility as a gauge for your risk tolerance. When market conditions return to calm, fine-tune your approach to investing to be better prepared next time.
Don’t worry, the market will tank again.
The Battle Between Your Present and Future Selves
At the time of writing this article, our family has a major milestone pending; our youngest children (twin boys) are turning 21. As you can imagine, they have planned quite the event and we have all spent some time sorting through the numerous collections of photos taken over the past 21 years. This has proven to be an interesting exercise, as we have been able to look back and reflect on the experiences and moments that have helped make us who we are today.
The photos have reminded us of many things; how busy we have been, the very happy moments, the times that were not so easy, and those we missed altogether by being too tied up with work.
While we can’t turn back the clock, I have found myself thinking how interesting it would be to relive some of those times; to have another chance to reconnect with those personalities of five, ten and fifteen years ago. Essentially we are the same people, but in many ways we have all changed a great deal.
My reflections have reinforced how quickly the years pass, and how important it is to continue trying to maintain a balance between living for today and preparing for tomorrow.
Our present self is the product of our experiences and past decisions. Although many of our successes may be the result of earlier planning and hard work, the past has gone and we no longer have any influence on it. We can, however, influence our present and our future.
But we humans do not find it easy to visualise ourselves five or ten years from now. As a result of this, the battle between our present and future selves is fought on particularly uneven footing. Typically, living for today takes precedence over securing options and choices for the future. As prominent English Lawyer and Economist, Nassau William Senior wrote in 1836:
“To abstain from the enjoyment which is in our power, or to seek distant rather than immediate results, are among the most painful exertions of the human will”.
Take some time to create a vision of your future self, ten years from now, and answer these questions: Where am I living? What does my balance sheet look like? What debt do I have? In what type of work am I involved? What income do I earn? What is the source of my income? What is my weight? What are my pastimes? Who am I close to? What experiences and opportunities have I provided for myself and those close to me over the last ten years?
Asking these questions may help you identify gaps between your present financial self and your future financial self, but there may also be gaps that we ourselves can’t see. This is why many of us gain benefit from seeking the opinion of an independent person such as a lawyer, accountant, or financial adviser.
I trust this article has given you some things to contemplate. You may find that you are now able to bridge the gaps between your present and future self, so that in ten years’ time you can look back with a sense of fulfilment and contentedness, free from regrets.
Interested readers might also like to view Ted Talks Daniel Goldstein
Andrew Nuttall is an Authorised Financial Adviser at Bradley Nuttall Limited. Readers should be aware that this article is of a general nature and not personal advice.
His Disclosure Statement is available on request and is free of charge.
Solutions to Financial Challenges
In light of interviewing a number of lawyers and allied professionals, financial adviser Andrew Nuttall makes some suggestions for working toward financial security.
A number of the people I interviewed mentioned that the best earners are not necessarily the most wealthy. Some senior practitioners indicated concern for younger practitioners that may not be financially ‘savvy.’
Nearly all senior practitioners reported that now more than ever there is a greater need to plan for the future, as business life can change rapidly. The 2008 Global Financial Crisis reminded all of us of this. A senior commercial partner suggested I emphasise to readers that life is about having options. He advised that it was very important to take time to think about how you would like to be positioned 10 years from now, and to engage in deliberate planning. He went on to suggest that everyone needs to think carefully about the next stage of life and explore their own expectations, goals, and desires for themselves and their families. They then need to put plans in place that will help move them in that direction.
It is widely acknowledged that lawyers lead very busy lives with constant demands and high expectations from clients, partners, and family members. This can result in what might be called the ‘plumber’s leaky tap’ syndrome, where people spend more time planning their summer holidays than planning the finances to fund them. Most people tend to put off the important-but-not-urgent tasks.
We suggest taking time to consider the following:
1. Establish where you are now
2. List your assets and liabilities
3. Think about what you want to achieve with your money, then write it down
4. List what you want to achieve for you and your family in the next three, five, and 10 years
5. Assess the level of income you require to maintain your desired current lifestyle
6. Think about the level of income you will require to enjoy the lifestyle to which you would like to become accustomed
7. Consider the level capital or investment assets you will require in order to reach your goals and fund your lifestyle (this is often the missing link to good planning)
8. Write down the date by which you would like to be in a position to have the choice to ‘untie yourself from the time sheet’.
It is not a simple task to answer all these questions, however determining the answers – particularly to question 8 – can help bring you peace of mind, knowing that you are stewarding your family’s financial resources prudently.
Coach or mentor
Many of us have experienced the benefit of having a coach or mentor. The coach is someone we can discuss things with and who helps us to set achievable goals. Sometimes a coach will point out poor technique or an area that requires attention.
A coach will also pick us up when things are not going so well, helping us to stay motivated and get back on track.
A coach will also identify when an external expert is required, and engage with the best person. A coach will facilitate thought and discussion, help set targets, evaluate progress, and fine-tune activities. Having a good coach helps us extend ourselves and reach a level of performance that we may not otherwise attain.
All lawyers know the benefit their clients receive from seeking expert advice, as well as how it saves time and money. Why not take your own advice and get your financial house in order by working with an experienced independent wealth manager?
Over the years I have found that through working together, in a consultative manner, you will have a far greater probability of achieving your financial and lifestyle goals. You will also save yourself time, enabling you to be more efficient at home and at work.
I would suggest that lawyers spend time with their life partners and address some of the above questions, in addition to considering the possibility of ‘outsourcing’ and using a trusted adviser. l hope that many readers will be encouraged to plan their finances so they are able to achieve balance and financial well-being in their lives.
Finally, if your goal is to enjoy life more and worry less about finances, try not to pay too much attention to the financial media. The media’s focus is almost exclusively on headline grabbing, short term opportunities and disasters, rather than long-term strategy and planning.
Andrew Nuttall is an Authorised Financial Adviser. His disclosure statement is available free of charge and on request. He can be contacted by phone on 03 3649119 or via email at firstname.lastname@example.org
Are You Ready for Retirement? (part 2) Improving Your Probability
This is the second in a series of ‘Are you ready for retirement?’ articles.
Read article one here.
Gavin and Jenny look at each other before posing the question we know is coming. “What do you mean we have a 25% probability that we can retire now?”
At this point, we have to jump in.
“It’s not that you have a 25% probability of being able to retire. You have a 100% probability of being able to retire. That choice is totally yours. Our job is just to ensure your portfolio will provide you with the retirement you want, and it’s our job to be honest no matter what. As we run the numbers, it doesn’t add up. But don’t worry, there’s good news coming…”
“What’s the good news?” Gavin interjects with a smirk.
Let’s just take a step back and review…
Gavin was a successful executive and had worked his way up to the top of his division. With that came increased income and improved lifestyle. However, stress was the unwelcome companion and now Gavin wanted to walk away, earlier than planned. That’s why they were talking to us.
Gavin and Jenny are both 60 so they are looking at five years of higher withdrawals (taking them to age 65), and then 30 years of lower withdrawals (thanks to government superannuation). They both feel 95 is a very generous life expectancy – unfortunately, both sets of parents have passed away, none living past age 86.
All the above looks achievable, and indeed it may be. But we know that the future is uncertain. So, rather than Gavin and Jenny simply crossing their fingers and hoping for the best, we can look at the probability that a 60% growth and 40% defensive portfolio can produce the planned withdrawals and leave their two children the estate they’re hoping.
And the answer is…it’s unlikely to. We calculate the probability at approximately 25%, which is far too low – Gavin and Jenny want at least 75% certainty built into their plans.
That can perhaps be summarised as the bad news, but we prefer to call it the honest reality. Fortunately, there’s a path forward. You see, as much as Gavin and Jenny want a definite lifestyle and to leave an estate, they also have flexibility.
For example, we ask Gavin and Jenny, “You’d like to leave an estate of $400,000, in today’s dollars, for your children. Is that set in stone or is there some flexibility there?”
Gavin cuts in, “Yes”. But Jenny looks less sure.
Gavin, sensing his wife’s uneasiness, says, “Listen honey, we’re leaving them the house. That’s paid for and worth at least $750,000 now, and it may increase in value.”
Jenny responds, “True, but I’d like to leave at least $100,000 in the portfolio for each of them, to tide them over until the property settles.”
Gavin turns to us, “I agree. But yes, we do have some flexibility with that one.”
It turns out that, when we pose the question properly, they have flexibility on most items.
It was now obvious to everyone in the room that certain factors just meant a lot more to Gavin and Jenny than others. And in order to do our job properly, we really need to understand that.
“Gavin and Jenny, you’ve done a great job thinking through your flexibility here. But it’s clear to everyone that some of these items are a higher priority than others. Let’s talk about your priorities. Of all the above, what’s the most important factor to making your retirement what you most want it to be?”
First and foremost, they have no more money to put into the portfolio. This is everything. There’s no flexibility there. We rank that number one, for obvious reasons.
For the next highest priority, the tone of Gavin’s voice says it all. Work is a stress.
He exclaims, “I feel if I work another two years, I’ll live five less.”
Check. ‘Retire now’ goes next on the list. And since they can’t save if they’re retired, we put that factor with it.
This wasn’t an easy conversation. As is often the case, husband and wife have different priorities and have never really discussed them. However, putting everything on the table, Gavin and Jenny were very accepting about what the other wanted. We’re told that some of the most honest conversations partners have, occur in our offices. It’s just about asking the right questions.
And here’s the good news for Gavin and Jenny. “Not only can you retire, but you can retire right now, with high confidence your portfolio can provide for you.”
The look on Gavin’s face says it all, “Thank you!”
Jenny looks at Gavin, genuinely pleased with how happy he is, “But how?”
Ah, let’s explain that…in our next article.
Note: Gavin and Jenny are a fictitious couple but are based on the experiences of many clients we work with.
If you’d like discuss your retirement plans with Bradley Nuttall, please click here to arrange an appointment.
Harvard Study: Are Financial Advisers Giving “Good Advice”?
Harvard and MIT Professors sponsor the largest ever mystery shop on financial advisers. What did they find?
I’m sorry to say but there is a large, compelling and growing body of research that shows that most households make very poor investment decisions. The reasons why are fairly well documented: we are overconfident, follow the crowd and are ruled by emotions like fear and greed. Every single independent study that I’m aware of shows that buy and hold investors do better than the average investor fleeing in and out of markets and following hot tips. Collectively, academic researchers call the bad investing instincts we all share “biases”.
In the academic world, all that is old hat. But a recent study by the National Bureau of Economic Research (Massachusetts) conducted by professors from Harvard, MIT and the University of Hamburg (and commented on recently in the NZ Herald) added an interesting twist to the discussion.
“We ask whether or not the market for financial advice serves to de‐bias individual investors and thus correct potential mistakes they might make.”
In other words, do advisers prevent their clients from making financial mistakes based on their emotional biases? Good question!
To find their answer, researchers distinguish between “good advice” and “bad advice”.
What is good advice? From the study:
“We define ‘good advice’ as advice that moves the investor toward a low cost, diversified, index-fund approach, which many textbook analyses on mutual fund investments suggest, see for example Carhart (1997).”
Bad advice does just the opposite: it exploits investors’ built-in biases to encourage the high cost and poorly diversified investments that are in the adviser’s best interests to promote.
Armed with these definitions, the study sent out mystery shoppers to perform 284 audit visits to financial advisers.
So what were the results? Not good.
Again, we quote from the study:
“These results suggest that the market for financial advice does not serve to de‐bias clients but in fact exaggerates biases that are in the adviser’s financial interest while leaning against those that do not generate fees. In our index fund scenario, the advisers are even advocating a change in strategy (away from low fee index funds and towards high fee actively managed funds) that would make the client worse off than the allocation with which he or she started off.”
As much as this report looks bad for the financial advice industry, here at Bradley Nuttall we want to stand up and applaud. Finally, researchers understand that advisers are part of the problem. By and large, advisers do more to encourage poor investing behaviour than correct it. Why? Because most advisers (but not Bradley Nuttall) are paid, at least partially, by the “high fee actively managed” investments they recommend. It’s a flawed model.
But there are other reasons bad advice is so pervasive.
Good advice is hard to give. It often means that you tell a prospect or client what they emotionally do not want to hear. This decreases the chance they want to work with you, because your advice doesn’t “feel right”.
Combine this emotional hurdle with the fact that advisers can get paid handsomely to give bad advice – and that bad advice often has the air of exclusivity or inside knowledge that investors love – and you can see why we have a problem.
It’s good advice to suggest that investors will be compensated for the risks they take. The higher the risk, the higher the long term returns will be.
Bad (but emotionally satisfying) advice gives clients the expectation that, due to the adviser’s inside knowledge, there are high-return/low-risk investments out there just waiting to be picked off. This almost always leads to disappointment, as the figure below portrays. Good advice steers clear of get-rich-quick, can’t-lose and glamorous investments.
We strongly advocate the findings of this academic study. Bradley Nuttall has been giving good advice, defined in the study as “low-cost diversified efficient portfolios”, for over a decade now. And to ensure we are never compromised we do not take any revenue from investments we recommend, which is one reason the costs of the investments we use are about four times lower than the industry average.
However, our experience is that investors are confused. They hear so much noise; so many calls to buy or sell; so many worrying and conflicting reports, that distinguishing between good and bad advice is almost impossible.
Who do they trust?
How are they to know?
Here’s hoping that this report, and more like it, will start to have an influence on the hard working investors who simply want financial security and peace of mind.
Those investors, like all others, have biases. But we know that good advice delivered with honesty and integrity can make a big positive difference.
That’s the difference we try to make every day.
Are You Ready for Retirement? (part 1)
How do you know if you’re ready for retirement? We reveal our process step by step.
Gavin and Jenny looked tired. They sat down across the table clutching their financial documents. We poured a cup of tea for everyone and prepared to have an honest and open conversation.
Gavin looked over to Jenny, then on to us, “What I really want to know is, am I able to retire?”
And that’s the important question thousands of New Zealanders are asking themselves each day. With their permission, we like to rephrase it slightly, “Am I financially independent?”
In other words, “Is work now optional?”
…And If not now, then when and how?
That’s the right question to ask…and an almost impossible question to answer.
Because almost everyone wants (or should want) an answer with three or less letters: “yes” or “no”.
But the most honest and truthful answer any professional could provide is,
“Let me look at what retirement means to you. You know – your lifestyle and longevity, the estate you’d like to leave your children and so on. Then I’ll be able to tell you the probability that the results work out as well as you’ve described, if not better.”
The key word there is ‘probability’. Unfortunately, that’s an 11 letter word! But it’s an important word because it acknowledges that the future is not certain. All assets – cash, fixed interest, property and shares – may have greater or lower returns than anticipated.
Some advisers hold out that they can predict the future. Other advisers embrace that the future is uncertain and we need to plan on that uncertainty so we don’t get caught out. We’d fall into the latter category.
Further, given that most of us want to plan on a long retirement, say 30 years or more, how can anyone claim for certain what returns will be like 30 years from now? 30 years ago from today it was 1982. A lot can change in 30 years.
So turning the question, “Am I able to retire”, into a question about probability is the most appropriate and honest way to answer the question.
The reality is simple – if retirement to you means living on $120,000 per year plus government super but an honest conversation with your adviser led you to believe that wasn’t sustainable, you’d probably adjust down your lifestyle. And doing so would increase the probability of you being able to achieve your retirement goals.
So whatever the probability, we must always understand it’s adaptable to change.
How do we calculate the probability you’re ready for retirement? We really need the following pieces of information as a minimum:
- When do you want to be financially independent?
- How long do you want to plan for retirement?
- What amount of net spendable cash do you want per year?
- How much do you want to leave your heirs and beneficiaries?
- How much can you save per year between now and when you aim to be financially independent?
- What percentage of growth assets are you are willing to take in your portfolio?
- What is the current amount dedicated to becoming financially independent?
- What certainty would you like that your goal works out at least as well as you’ve planned on, if not better?
It is the combination of these answers that define for you what “financial independence” really means. I’ve never met two people with the same answers… ever. Retirement is very personal and very unique and thus your retirement strategy must be personal as well.
With the answers to these questions we can determine the probability that your retirement will be as good as you’ve described, or even better. By ”even better,” I simply mean that, as the years go on, you can take larger withdrawals than planned for, leave your heirs a larger estate, etc.
With the answers to these questions we’re well on the way to answering Gavin’s initial request, “What I really want to know is, am I able to retire?”
But the honest truth is…there’s still a lot to do in order to turn the answers into a strategy that will work.
And, when the answer comes back to Gavin and Jenny, “The probability is only about 25% that this will work out as well as you’ve described or better,” what do they do now?
More on this next time…
If you’d like discuss your retirement plans with Bradley Nuttall, please click here to arrange an appointment.
KiwiSaver officially commenced in New Zealand on 2 July 2007, which means it will soon be approaching its fifth birthday.
For ‘early adopters’ who were 60-65 years old when they initially established their KiwiSaver accounts, this time-frame has added significance.
Why? It’s because KiwiSaver members become eligible to withdraw their funds when they qualify for NZ Super (currently age 65), as long as they have been a KiwiSaver member for five years.
If you are not sure how long you’ve been a member, the IRD advise that the commencement date of a KiwiSaver account is typically determined by the date on which funds are first deposited.
For the KiwiSaver members who are not able to withdraw their funds in the near future, you should be aware of three further ‘tweaks’ to the KiwiSaver scheme which were announced by the government in the 2011 Budget –
- Reduced government tax credit
The annual government tax credit of up to $1,042.86pa was halved to a maximum of $521.43pa and this change has already been in place since 1 July 2011.What this means is that for the first $1,042.86 of your personal contributions to KiwiSaver each year, the government will now contribute an extra 50 cents per dollar.In the early years of KiwiSaver the government matched your contributions dollar for dollar up to a maximum payment of $1,042.86, but with over 1.9 million New Zealanders now in the scheme, the government could not continue to afford contributions at this level.
- A broader tax on employer contributions
From 1 April 2012, all employer contributions to KiwiSaver accounts are to be taxed at the employee’s marginal tax rate.What this means is that if your employer has been contributing the minimum 2% to your KiwiSaver account, then up until 1 April 2012 these contributions have been tax free. From 1 April 2012 onwards these contributions will be taxed at your marginal tax rate.If your employer contributes 2% to your KiwiSaver account and your marginal tax rate is say 30%, then the after tax contribution from your employer will effectively reduce to just 1.4% of your salary.
The calculation is as follows –
2.0% gross employer contribution
less 30.0% employer superannuation contribution tax
= 1.4% net employer contribution (after tax).
Note: If your employer has been making voluntary contributions to your KiwiSaver account above the 2% level, then the contributions above 2% were already incurring employer superannuation contribution tax. The change advised in the 2011 Budget was simply to have the employer superannuation contribution tax apply to the first 2% of employer contributions as well.
- Changes to minimum contribution rates
From 1 April 2013 the minimum contribution will rise from 2% to 3% for all employee members and for all employers.
Although these various changes dilute some of the savings incentives that KiwiSaver first offered on its launch in 2007, it remains a very attractive long term savings vehicle.
For first-time workers joining the scheme today, it is quite conceivable that the combination of compulsory employer contributions and government contributions (via kick-start and annual tax credits), will exceed the total combinations you make directly out of your own pay.
In a world where most Western governments are deeply in debt and unhelpful demographic trends are placing increasing pressure on the affordability of universal pension schemes (such as NZ Super), many people, both here and overseas, are probably not putting enough money away for their future years.
While KiwiSaver alone may not be enough to fulfil someone’s complete range of retirement aspirations, it at least provides all working age New Zealanders with an attractive and constructive opportunity to significantly improve their quality of life in retirement.