What does saving money and planning for your future have to do with your physical health?
As it turns out, plenty.
A recent article in the New York Times titled, Your 401(k) is Healthy. So Maybe You Are, Too really caught my attention. According to the article, “a new study from the journal Psychological Science finds that people who are good at planning their financial future are more likely to improve their physical health-and then actually become healthier.”
“The research, scholars say, offers keen insight into the sorts of people who are likely to make short-term sacrifices in the name of a brighter future. It suggests that there is something very abstract and fundamental about caring for the future. The sort of person who invests in retirement is the sort of person who takes care of their health.”
“Employees who contributed regularly to their 401(k) plan were not only more likely to take steps to improve their health but also, in aggregate, had a 27% improvement in their blood scores. Non-contributors continued to suffer health declines. The 401(k) contributors also showed relative improvements in safety behaviors, like seatbelt use.”
Saving and planning for today in order to have an abundant and financially secure tomorrow. Sounds simple, right? Well, ask any Spiritus client, and they’ll be the first to admit that this goal is much easier said than done. Yet, that does not stop them from doing what’s needed. They’re able to think from the end, visualize the future they desire, stay on track and course correct when needed.
In addition to the personal satisfaction you’ll receive when you know your financial house is in order, it turns out these smart money habits actually increase your overall wellness. There are many reasons why making the time for financial planning is a great investment, but hands down, nothing beats the benefit of optimizing your health by planning and designing your future.
Stanford School of Business Study
As if one study this month illustrating the health benefits of saving and planning weren’t enough to have you pat yourself on the back for doing the right thing with your money and your life, along comes another study conducted by the Stanford School of Business that will be published in October.
“According to the study, individuals who feel powerful are more motivated to save. The cycle consists of saving money, feeling powerful, and feeling more inclined to continue to save. Individuals who felt powerless, on the other hand, tended to save less money and engage in consumption to compensate for their lack of power.”
"A sense of power is different from other factors that influence saving behavior, such as education, upbringing, and income level. We show that very subtle shifts in feelings of power can have quite an impact on saving. This is very important because it’s something that’s easy to change.”
Make Peace with the Past, Increase Your Financial Intelligence & Feel Powerful
Anyone who has ever been in therapy, or read a single self-help book is familiar with the term 'baggage' in terms of a relationship. But have you ever considered the damage caused by your 'money baggage'?
When you schlep your old and toxic ‘money baggage’ around from relationship to relationship, or from childhood to adulthood, or from starving artist to international superstar, you name it, you’re choosing, whether consciously or unconsciously, to burden your present and your future with the past.
It could be the time you needed to file for bankruptcy because you were young, stupid and got in over your head. It could be the time you bet the farm on a long shot investment that you were sure would make you rich, only to later lose everything. Or it could be the realization that you neglected planning for the future and now at 55, you’re scared to death about how you’re going to be able to ever save enough to retire let alone get your two kids through college and graduate school.
The above are just a few examples of the many burdens we weigh ourselves down with when it comes to our relationship with money. Yet I truly believe that one of the major reasons the New York Times bestseller Your Money or Your Life, became such an international bestseller is because it was one of the first books to teach us how important and vital it is to make peace with the past.
Making peace with the past, is at its core, about forgiveness. And in this case, it’s you, forgiving yourself. Many times, even when we unintentionally hurt people we love by doing something stupid or reckless with our money, our loved ones in time forgive us, but we never forgive ourselves. That’s very self-destructive behavior and that needs to change in order to change our dynamic with money.
Part of what hinders the healing and forgiving process is that underneath the anger you feel towards yourself often is shame. And again, one of the teachings from Your Money or Your Life is no-shame, no blame.
The road to financial wellness is full of obstacles whether you have very little or have enough for many lifetimes, whether you have a small carry-on of money baggage or a large trunk, it doesn’t matter. Money is a very powerful energy that can provide you much abundance as well as much scarcity.
So to feel powerful when it comes to money, I'm suggesting these five steps:
1) make peace with the past;
2) rid yourself of low energy feelings and thoughts of shame as they’ll only bring you down and keep you stuck in the past;
3) increase your financial intelligence by learning a little more each year about your money;
4) make the investment and develop a financial plan because research shows it boosts your health and finally;
5) feel powerful, because now that you took control of your money and your life and you tossed your old money baggage out the window, it’s a wide open road ahead!
Photo credit by Tax Credits - https://www.flickr.com/photos/76657755@N04/with/6881503604/
With so many books about money being published, how does one book set itself apart from another?
One way to perform that magic trick is to ask and receive permission from the Napoleon Hill Foundation to use the famous title Think and Grow Rich and add for Women to the end. Voila! You have now set yourself apart from the pack and in my opinion created a must-read for any women interested in achieving financial success.
Think and Grow Rich was originally published during the Great Depression as a self-help book. According to the Napoleon Hill Foundation, by 2011, over 70 million copies worldwide have been sold. While the title implies that this book deals with how to get ‘rich’, it’s so much more than that. If you enjoyed reading Deepak Chopra’s The Seven Spiritual Laws of Success, then you’re going to love the philosophy and spirituality illustrated in Think and Grow Rich as well as Think and Grow Rich for Women.
And although we’re in the 21st century, women still struggle with managing their personal finances as they navigate through what unfortunately still remains in many quarters an industry still not sure how to talk with women let alone empower them. That said, times, they are a changing quickly, as evidenced by the many women in our country that are finding ways to increase their financial intelligence as well as their financial security and prosperity. These women that have reached financial success are paying it forward by helping other women succeed as well.
Here are some excerpts from Think and Grow Rich for Women, written by Sharon Lechter, that I hope inspires you to want to read her book. And remember please, although it’s so easy to order this book from Amazon with one click, don’t forget that your local library will have plenty copies as well.
'In The Economy'
“These financial statistics prove, without a doubt, that women have tremendous power and influence globally. Can you imagine what would happen if women came together and used their economic power to create positive change?”
60 percent of all personal wealth in the U.S. is held by women
85% of all consumer purchases in the U.S. are made by women
Women over the age of 50 have a combined net-worth of $19 trillion
Two-thirds of consumer wealth in the U.S. will belong to women in the next decade
Globally, women stand to inherit 70 percent of the $41 trillion in intergenerational wealth transfer over the next 40 years
“The U.S. Dept. of Education estimated that in 2013 women earned:
- 61.6% of all associate degrees
- 56.7% of all bachelor’s degrees
- 59.9% of all masters degrees
- 51.6% of all doctorate degrees
“In summary, in 2013, 140 women graduated with a college degree at some level for every 100 men."
“What does success really mean? The reason more women ask is because the answer is likely more complex for them than it is for men. Gender intelligence expert Barbara Annis believes the definition of success for men is simple. It’s winning. Success might come in the form of more money or a better job or a better parking space or a hotter wife. But success is about besting the competition, in any number of contests, period."
“Women, of course, want to win, too. But Annis argues they also want to be valued. She relates that in her experience as a consultant to a range of Fortune 500 companies, the number one reason women leave their jobs is that they feel their work is undervalued and their strengths overlooked."
“This book has purposely followed the chapter outline of the original book, Think and Grow Rich, and addressed each of Napoleon Hill’s “13 proven steps to riches”, through the eyes of women for women. While I believe the specific steps to riches and success are the same for both men and women, I believe as women we fundamentally approach those principles with different beliefs, different attitudes, and different strengths and weaknesses."
“Think and Grow Rich for Women shares the 13 steps to success for women through the eyes and experiences of women who have created lives of success and significance. Now it’s your turn."
Photo credit Kevin Dooley
One of the most challenging and vital relationships in your life is the relationship you have with your money. Like any relationship in life - being able to honestly assess how it’s going, making time for it, investing in it, caring about it, nurturing it - these factors and many more help determine the quality of your relationships.
So in that context, and as you read this post, please indulge me by thinking about your relationship with money as if you were thinking about and or describing a relationship with a long-time friend. Hopefully, that should not be too difficult, because after all, you and money - you go way back. And like any long-term relationship, your history plays a large role in the status of your current relationship.
Whatever word or phrase you would choose to describe your relationship with money today, should you treat it badly, whether consciously or unconsciously, this relationship will indeed find a way to express its displeasure.
If you play the dangerous and risky game of pretending you don’t see the warning signs that your relationship is in need of dire attention - eventually, and often in ways that are unimaginable, you’ll get the message, and believe me, it will not come gift wrapped.
How can you tell if your relationship with money is out of balance? Look no further than the three usual suspects: fear, guilt and shame. It’s these three negative and disempowering emotions that will indicate how healthy or unhealthy your relationship with money is currently. Let’s take each emotion one by one so you can see what I mean.
"We become what we think about all day long." ― Ralph Waldo Emerson
Of the three emotions listed above, fear is by far the most pervasive and toxic emotion to your overall financial well-being. It could be the fear of losing all your money and ending up bankrupt. It may be the fear of never having enough money saved up to retire. It might be the fear of success. Yes, many people fear success so much that even when they’re on the cusp of making it big-time, their inner money demons will find a way to sabotage that potential success.
Perhaps no aspect of your relationship with money is more important than your ability to effectively manage your own negative emotions so they don't overwhelm you and affect your judgment. In order to change the way you feel about a situation, you must first change the way you think about it.
Meditation, mindfulness training, playing the observer to your thoughts - these tools and many more are needed to counter the fear-demon around money. Secondly and probably most importantly, fear lives and grows stronger in your mind the more uncertain you are about your personal finances.
If fear is or has been shadowing your relationship with money as far back as you can remember, now’s the time to slay that demon once and for all by engaging with a fee-only, independent financial planner that can provide you with an objective and independent assessment of your current financial picture.
Even if the news isn’t great, just knowing where you stand financially and developing an action plan to get your financial house in order will ease your mind greatly and limit the ability of fear to zap your energy and sabotage your success.
“When we played softball, I'd steal second base, feel guilty and go back.” ― Woody Allen
Having grown up with a Jewish mother born in Hungary, I earned my Ph.D in the philosophy and application of guilt at an early age, so this is an emotion I’m quite familiar with. How it relates to your relationship with money is fascinating.
I’ve seen guilt manifest around money in three major ways.
1) Guilt that you have too much compared to your friends or other people in your social circle.
2) Guilt about ignoring/neglecting your personal finances.
3) Guilt about secrets you’re keeping about money from your significant other.
Regardless of what’s causing you to feel guilty, those feelings of guilt are impacting your financial decisions in many negative ways. As a result, you often do really stupid things with your money and make decisions that are not in your best interest. The guilty money-demon has an insatiable appetite and will not easily go away.
If you did something wrong, made some stupid decisions, or are still keeping secrets, accept that you cannot change the past. Forgive yourself and if you need to confess, ask for forgiveness once everything is out in the open and then move on. If you suddenly hit it rich or inherited a ton of money and you feel guilty about it, then learn ways you could put your newfound wealth to good use by dabbling in philanthropy.
And the next time you begin feeling guilty about something you did, remember this saying: guilt is like paying interest on a debt that will never come due.
“Shame corrodes the very part of us that believes we are capable of change.” ― Brene Brown
Shame needs no introduction. It’s one of the most disempowering emotions you can feel when it comes to you and your money. Shame will keep you from making progress financially and it will keep you frozen and unable to make smart decisions.
If you’re a fan of the best-seller Your Money or Your Life, then you know our mantra - no shame, no blame.
Shame is one of the most challenging emotions to overcome. It can haunt you and shadow your relationship with money for your entire life. Left untended, you may unconsciously pass this destructive emotion on to your children.
If shame is your money-demon, I urge you to read or re-read Your Money or Your Life and see if the action steps and exercises help you deal with and overcome these feelings. If not, you owe it to yourself, your significant other and your family to seek counseling. In that regard, I highly recommend Spiritus Financial's favorite financial coach Pat Chambers, Ph.D. Liberating yourself from shame and blame will be the greatest gift to you and your relationship with money that you could ever give to yourself. The benefits of that are as they say, priceless!
Photo credit https://www.flickr.com/photos/seven_resist/
I just finished reading Flash Boys, A Wall Street Revolt, written by bestselling author Michael Lewis. The revelations in the book about how the stock market is being manipulated and rigged by high-frequency traders that have the advantage of speed, measured in milliseconds (a millisecond is a thousandth of a second) reads like one of your favorite mystery novels, only in this case, it’s not fiction but reality.
Like any good mystery novel, you become captivated by the story as well as the leading characters almost instantly. You may be hesitant to read the book because you think it’s just another book about numbers, investing and Wall Street corruption and although that’s part of the story, the larger narrative is about how speed and proximity to servers that run the exchanges came about and how this was and is legal and allowed to continue. And that's the part of the book that will keep you very intrigued right until the last page.
“Rigged Stock Market is “Bigger than A Scam”
“How Ordinary Investors Are Getting Screwed”
“Investors, Big and Small, Are Prey”
The provocative titles above are short video segments from Lewis’s recent appearance on 60 Minutes as he explains his new book Flash Boys. What he reveals is that investors, large and small, are in essence paying a tariff to high-speed trading firms like IEX that are ‘front-running’ trade orders and in essence making hundreds of millions of dollars annually simply by seeing ahead of time what trades, buy or sell, were in the pipeline. Call it the mother of all skimming operations, and it’s all perfectly legal, at least for now.
High-frequency traders do this by placing their data centers as close as possible to the electronic exchanges in New Jersey, sometimes in the same building the exchange is located in, as well as utilizing the speed that comes from their strategically placed fiber optic lines.
So is the stock market rigged? I guess it all depends on your definition of rigged, but after reading Flash Boys, I subscribe to Lewis’s contention, that yes, it is rigged, no doubt in my mind one bit. So with that said, what’s an investor to do?
First, step back and take a big picture view of investing overall and the options and choices you have available. Next, understand that the vision you may still hold near and dear of “Wall Street” as this loud and raucous place where traders scream orders to market makers, and where the bulk of trades are made - those days are long gone.
The New York Stock exchange, Nasdaq, Bats, private dark pools as well as many other electronic stock exchanges are now actually huge secretive and very well secured data centers. The outdated concept of Wall Street has been replaced by super powerful servers that match buy and sell orders in the suburbs of New Jersey.
The S.E.C vs. M.I.P
Money + Influence = Power. This formula has been around since the days of the Roman Empire. It’s as much in vogue in the 21st century as it was back in the day. Yes, we have the Securities and Exchange Commission that ought to be the fair referee in a tug of war between regular investors and the rich, influential and powerful Wall Street interests that will until the end of time attempt to rig the markets to their advantage. But let’s face it, the S.E.C is as political an organization as there is, and thus influenced heavily in their decisions on what to regulate and investigate by M.I.P.
As a result of the huge publicity and attention Flash Boys is garnering, the S.E.C chairwoman, Mary Jo White “unveiled on Thursday a sweeping package of recommendations for new rules and other changes aimed at strengthening the structure of the market and improving disclosure for investors. The proposed changes would touch virtually every corner of the market, including exchanges, private trading venues, brokerage firms and high-frequency traders”, this according to the recent article in the New York Times titled S.E.C Chief Offers Rules to Govern Fast Trading.
That all sounds good, right? Until you get to the end of the article: “Critics of high-speed trading found fuel in “Flash Boys”, a recent book by Michael Lewis, who contended on a book tour that the stock market was “rigged” against slower investors. Ms. White appeared to dismiss that claim in her speech. “The current market structure is not fundamentally broken, let alone rigged”, she said, with a sardonic chuckle”.
Next came the NYT’s editorial board speaking up in a recent op-ed piece titled ‘The Hidden Cost of Trading Stocks’.
Reading this op-ed you’ll discover how some brokerage firms, like TD Ameritrade, made $80 million last year from maker-taker rebates. “A study from 2012 estimated that rebates cost individual investors, mutual funds and pension funds as much as $5 billion a year.”
Before there were high-frequency traders gaming the financial system, there was and continues to be rampant insider trading. Before that there were other clever people discovering new ways to rig the markets to their advantage.
Let’s say that the S.E.C, does everything needed to somewhat level the playing field. As will inevitably happen, another loophole will be discovered and exploited, then that loophole will eventually get closed only to have yet another loophole found and exploited, and on and on it goes. It’s whack-a-mole Wall Street style.
So does this mean you stop investing in the stock market? No, not a chance. At the end of the day, say you invest $1,000 in the stock market and receive a 7% annual return-$70. Out of your $70 annual return, you’re getting whacked possibly with a HFT “tax” of say $1, so pre-tax I’m netting say $69. Do I like paying the unfair yet perfectly legal $1 HFT tax? No way. But does that mean I do not invest in the stock market for the-long-term? Again, no way.
The good news is that by being a smart long-term investor, using low-cost, high quality and well diversified index funds from high integrity firms like Vanguard, you can win the investing game handily. And if you’re not sure about the benefits of using index funds for your investment strategy then check out Vanguards 5 Myths and Misconceptions about Indexing, from there, follow the golden rules of investing by maintaining a well-diversified, low-cost, long-term investment strategy, make sure your investment strategy aligns with your financial plan and that your plan is in alignment with your core values. Keep your eye on the prize and after that, like the song goes, don’t worry, be happy!
the belief that pleasure or happiness is the most important goal in life. noun-Merriam-Webster
If you live in the San Francisco Bay area and you’re into cars, and spending $80-100K on a new car is not in the budget, than there’s a real good chance you might be suffering from Tesla envy. Yes, Tesla, that sexy new electric sports car that captures the imagination as well as the heart. For yours truly, it was love at first sight.
But I digress. Last week, I spoke with a potential new client who sells Tesla's in Silicon Valley. She was on the hunt for an independent fee-only financial planner and found me through a client referral.
Selling Tesla’s in the Valley is a very good place to be right now, especially if you’re someone that’s money motivated. So that said, before we ended our call, we spoke briefly about her experience and observations selling Tesla’s as I was curious as could be.
Here’s what I discovered. While the vast majority of her Tesla sales last year were made to buyers paying cash, what surprised her most were how many cars she sold to folks in the middle to upper-middle income brackets that put 20% down and borrowed the rest.
Assume the final price tag on your new Model S Tesla comes out to $90K, you put $18K down (money you had stashed away in your emergency fund) and borrow $72K over 5 years. Assuming a 3% interest rate on your loan, you’re looking at a payment of nearly $1,300/month. How do you make this work cash flow wise if you’re in the middle or upper-middle income range? Simple. You stop making your 401k/403b and IRA retirement contributions. So there you have it - cash flow problem solved, future retirement problem created.
With that example in mind, below are 3 tips for taming your inner hedonist on the road to retirement.
Avoid Playing the Comparison Game
It’s human nature to compare what we have with in terms of material possessions with what other people have. And if you’re the highly competitive type, this long-time habit of comparing yours to mine can, and often does. become very self-destructive.
The next time you find yourself comparing your car, home, clothes, electronic gadgets, furniture, etc. with someone else's, step back and observe your thoughts. Say to yourself, there I go again, playing the comparison game. From there, shift your focus of attention to what you do have and what you’re grateful for in your life instead of what’s missing in your life.
Playing the comparing game is your ego’s best friend. It keeps you in a perpetual state of striving yet never quite arriving. Just when you think you’ve ‘won’, your best friend goes and buys a Tesla for his wife in addition to the one he just purchased for himself, so now you’re one Tesla short.
The remedy for this condition is gratitude, full stop. Nothing cures this ailment like being grateful you’re alive and going from there. If you need a gratitude refresher, please check out this superb video produced by Louie Schwartzberg during a TED talk he gave:
Know Your Enough Point
Have you ever reflected on how much money is enough? Do you have an 'enough' number in your head that’s been well thought out or are you operating from a more hedonistic frame of reference where you could never have enough money just like you could never have enough pleasure?
If you feel like your life up until this point has been an endless pursuit of more, more and more of everything, and as a result you’re putting your health, financial security and perhaps your marriage at risk, now is a good time to call a time out and check in with yourself. I’ve witnessed more people crash and burn on their endless pursuit of more, way past the point they had enough money for two lifetimes, than you can imagine.
To tame this burning desire for more, start with discovering what’s causing you to feel this never ending need for more stuff. Are you chasing your father’s or mother’s dream? Are you seeking status? Have you linked your self-worth to your net-worth?
Once you’ve uncovered what’s behind this insatiable appetite for more, especially when you already have more than enough, it’s at that point you become aware/conscious of the choices you are making and how you are spending your life energy. For many clients I’ve worked with over the years, this is a break through moment. The light bulb goes off. And before you know it, you’ve discovered the true secret to money harmony, which is finally knowing your enough point. What follows is what we all seek in life, peace of mind.
Keep Your Eye on the Prize
The vast majority of my clients are laser focused on one thing - reaching their FI (financial independence) number. Sure, some are tempted to divert from their financial plan when a shiny new and very expensive object grabs their attention. But keeping your eye on the prize, on the big picture, is one of the best ways to tame your inner hedonist and shut down the noise from your ego demanding more.
As you save your way to eventual retirement, there will be numerous opportunities to take detours from your well designed game plan. These detours could come in the form of Tesla’s, second homes, super risky investments, you name it.
The key is knowing where you’re headed and how you’re going to get there while having the self-discipline to stay on track and follow your financial plan. Keeping your eye on the prize is not easy to do. But reaching retirement with much less than you needed to save is a painful reality you have the power to prevent.
Photo credit https://www.flickr.com/photos/jurvetson/
How much of a boost in net returns can financial advisors add to client portfolios? Well according to Vanguard, maybe as much as 3%.
In a recent research paper published last month, Vanguard, the largest mutual fund company in the world and in my opinion, the highest integrity firm out there, believes advisors can generate returns through a framework focused on five wealth management principles.
Below are the five principles Vanguard outlines:
1) Being an effective behavioral coach. Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice. (Potential value add: up to 1.50%.)
2) Applying an asset location strategy. The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value add: from 0% to 0.75%.)
3) Employing cost-effective investments. This critical component of every advisor’s tool kit is based on simple math: Gross return less costs equals net return. (Potential value add: up to 0.45%.)
4) Maintaining the proper allocation through rebalancing. Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value add: up to 0.35%.)
5) Implementing a spending strategy. As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value add: up to 0.70%.)
More from Vanguard:
How an investment advisor approaches two additional principles, asset allocation and total return versus income investing, can also add value, but are too unique to each investor to quantify.
Vanguard’s Advisor’s Alpha framework incorporates all of these principles, making it possible for advisors to add up to about 3% in net returns for their clients. This figure should not be viewed as an annual add, however. Vanguard’s research emphasizes that it is more likely to be intermittent, as some of the most significant opportunities to add value occur during periods of market duress or euphoria that tempt clients to abandon their well-thought-out investment plans.
In such circumstances, the advisor may have the opportunity to add tens of percentage points, rather than merely basis points. Although this wealth creation will not show up on any client statement, it is real and represents the difference in clients’ performance if they stay invested according to their plan as opposed to abandoning it.
As a self-described frugal person and a do-it-yourselfer, I’m aware it’s not always easy to justify paying a financial advisor to manage your investments. Why should I pay someone for this when I can do it myself?
So to have Vanguard, one of the most highly respected mutual fund firms in the world, and a definite hub for the do-it-yourself kind of investor, research and quantify the potential value a client could receive when a financial advisor follows their five step framework (which we do) while managing their investments, all I can say is thank you and as usual - job well done.
Photo credit https://www.flickr.com/photos/tadsonbussey/
To index or not to index - that is the question many investors ask themselves when building a durable investment strategy.
If you’re a savvy Vanguard type of investor, undoubtedly you’re a huge fan of legendary Vanguard founder John Bogle, who pioneered the concept and use of index funds decades ago. Since then, the indexing revolution has taken Wall Street by storm and is now a very common and core strategy deployed by retail as well as institutional investors worldwide. Yet even today, the active vs. passive management debate continues unabated.
For those of us making the strong case for index investing (passive), we rely on what’s known as the ‘efficient market hypothesis’, which essentially says that all known information about investment securities, such as stocks, is already factored into the prices of those securities. Therefore, no amount of analysis can give an investor an edge over other investors. This is one of the primary reasons why investors choose to invest in index funds. It is the “if you can’t beat them join them philosophy”.
But what if some information is not as widely known for some areas of the market as in other areas? Wouldn’t this mean that some areas of the market are less ‘efficient’ than others? If so, wouldn’t it make sense to use an index fund for the efficient areas and actively managed funds for the less efficient?
You don’t need to be a stock analyst or mutual fund manager to know that information about some publicly traded companies is more readily available, and therefore more widely known, than others. A majority of large-cap stock mutual fund managers fail to beat the best S&P 500 Index funds over long periods of time because there is much more information available on the larger companies than the smaller ones.
Therefore, it takes more effort in the form of research and relative market risk to outperform the broad market indexes. This also increases expenses, which makes it even more difficult to compete with the low-cost index funds.
Choosing Between Index Funds or Active Funds
When asked recently in a Money Management Executive article about using Vanguard’s index or active funds when constructing a long-term portfolio, John Bogle said the following: “If you want to feel good; I tell people to put 95% in a serious money account (big index funds in one form or another) and 5% in your “funny money” account.
My preference when building and managing a client’s investment portfolio is to combine the wisdom of indexing with the advantages of actively managed funds for less efficient markets. For example, a good strategic model for a long term investor would be to have index funds form the core of the strategy at around 60-80% allocation and a combination of small-cap, international, some international bond funds and some sector funds to round out the portfolio.
Each quarter, I monitor the performance of all Vanguard funds we regularly use. Some years the variance between say a small cap index fund vs. an actively managed small cap fund is so minor as to not be worth noting. Other years, the difference is striking.
Below are some results to share with you based on Vanguard funds performance as of Friday, March 28th, 2014, comparing an index fund’s performance to an actively managed fund’s performance for the same asset class.
Vanguard Fund Performance as of 3-28-2014
Notice how small the variance is between the S&P index fund vs. the comparative large-cap fund at Vanguard. Also, keep in mind, actively managed funds have higher expenses than index funds. For example, the Value Index fund listed above has an annual expense ratio of 0.10% for Admiral shares vs. a 0.30% expense for the U.S. Value actively managed fund. Although that seems like a small difference, over 10, 20 or 30 years, that small difference really adds up down the road.
Bottom line: If you’re drawn to the many advantages of utilizing index funds for your long-term investment strategy, you’re in good company. Now the question remains, do you go all in and use 100% indexing, or 95% as Bogle recommends OR a combination of the two?
Disclaimer: The information in this blog is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. All investing is subject to risk, including possible loss of principal.
I would argue that in this fast changing world we find ourselves living in, with high frequency traders (HFT’s) looking to gain trading advantages in milliseconds (see article on ‘Flash Boys: A Wall Street Revolt’ by Michael Lewis- that the answer not be simply either/or.
Photo credit http://www.flickr.com/photos/uncut/
Imagine you’ve just met a person that not only has a black belt in karate, but a third degree black belt to boot and is a well respected and nationally acclaimed sensei (teacher). You’re in awe of the practice and discipline required to achieve this level of martial arts mastery.
Meet Jay, a soft spoken, warm, gentle person who radiates a calming energy that you feel the second you make eye contact with him. His appearance gives no clue that underneath the hood, so to speak, is a person with immense personal power.
I met Jay for a retirement planning consultation recently and after a few minutes of getting to know each other, we got right into it. He just turned 50, is married and has a son and daughter both currently in college. Jay and his wife Julie have done a fairly decent job of saving for retirement.
About 20 minutes into our conversation, Jay becomes quiet and as I begin wondering what he's thinking, he takes a deep breath and shares the following with me.
“Dealing with money is the one area of my life that I have not mastered. In fact, it’s my biggest challenge in life and I’ve kept that fact a secret from my wife, my friends and my kids up until just this minute. I’m a scaredy cat when it comes to this stuff. I’m sure this money secret is negatively affecting our marriage, but I’m not sure how to tell her, when to tell her or what to do about it and it’s tearing me up inside”.
At that moment, you could have blown me over with a feather. Here, in my Petaluma office, was a third degree black belt saying he was a ‘scaredy cat’, (his words and the inspiration for this blog post) when it comes to dealing with money. He made himself vulnerable and exposed his true fears. I knew that meant Jay felt safe and trusted me. He confessed a secret that’s been eating at him for years and soon after, we were on our way to exploring his money history.
Jay remembers vividly watching his father and uncle lose their business to bankruptcy when he was a teenager and the suffering that caused his mother and his siblings. His father tragically ended up committing suicide soon after the bankruptcy.
He thought he worked through all the sadness and pain this tragedy caused him in counseling and didn’t think the trauma he suffered as a teenager was affecting his current relationship with money.
Step 1- Know Your Money History
Your money history has a profound effect on the decisions you make about money. Until and unless you shine a light on all the assumptions and beliefs you’ve been carrying around since you were a kid about money and consciously eliminate outdated or self-defeating money patterns, having a peaceful relationship with money will elude you. You will strive but never arrive.
And lurking in the shadow will be the ever present money demon of self-sabotage. This unconscious and self-destructive behavior poses the greatest threat to your financial wellness. It will also be the most challenging to eradicate because it’s deeply embedded in your ego. And if your self-worth is inextricably linked to your net-worth, the hold it will have on you will be even stronger.
You could have $1 million, $5 million or $100 million - the amount of wealth you have accumulated makes no difference at all. Fear and anxiety around money is an equal opportunity offender. It takes its toll on the rich and famous as much as it does on the average person.
From Scaredy Cat to Fearless Retirement Planner
Jay's story is real, only their names have been changed. Upon my suggestion, he set up a weekend get away with Julie at their favorite vacation spot up in Lake Tahoe and gave her the true scoop about his fears and challenges around money and retirement planning.
When I saw his name pop up on my caller ID the Monday morning after their weekend away, I was eager yet a tad nervous to hear how things went. To my surprise, Julie was also on the call.
They said in the 22 years they’ve been married, this was one of the best weekends of their relationship. Everything was out in the open, and now, together and working as a team, they would move forward with a common vision of their future.
So the moral of this blog is that if a third degree black belt in karate can admit he’s a ‘scaredy cat’ when it comes to dealing with money, so can you. And then you can deal with it and move forward with your life. The truth will set you free.
“To know yourself as the Being underneath the thinker, the stillness underneath the mental noise, the love and joy underneath the pain, is freedom, salvation, enlightenment.”
Photo credit http://www.flickr.com/photos/wackyvorlon/
Think about the last time you wanted to do x and your spouse or life partner wanted to do y. How did you resolve your conflict? Did you both play fair when negotiating a compromise or does one of you always ‘win’? And if one of you usually gets your way most of the time, is it because he/she is the one that makes more or perhaps all the money in your relationship?
What happens if you’ve been the breadwinner throughout your relationship, but now your spouse/partner has inherited a significant inheritance? Suddenly you find yourself on a more level playing field, financially speaking. Instead of getting your way, as usual, in terms of money decisions, you now need to learn or relearn the art of negotiating with your life partner.
Couples and how they earn, spend and invest their money come in all shapes and sizes. Beyond that, you have to recognize that each person in a long-term relationship has their own money story, core beliefs and many times ‘baggage’ they bring into the relationship.
I Married for Better or Worse But Not for Lunch Every Day
Fast forward through life and now you’re both in your first year of retirement. It’s been a little clunky the first couple of months as you get adjusted to seeing each other every day. There were quite a few loose ends to sort out, but now all that has been taken care of and on to the next phase of your life. Or so you hope….
And then, it happens. You have your first conflict around money since you both retired. Having already developed a retirement income plan prior to launching into retirement, you know precisely the amount of discretionary funds you can use for travel and entertainment. You call this your fun money and you’re eager to spend it albeit, wisely.
Next, imagine you’re the one that earned less, perhaps much less than your spouse during your working years. When you reached financial flashpoints in the past, you quickly learned when to ‘hold-em’ and ‘when to fold-em’. Because he/she earned much more than you, had a far more stressful job than you, and although many times you wanted x and he/she wanted y, as the peacemaker in the family, you went along to get along and keep the peace.
But now, your time has come. No longer are you content being the one that usually lets your spouse get their way. Years and years of not saying yes to yourself, of doing what you knew in your heart was the right thing to do and for all the right reasons; well today’s a new day, it’s your turn, and you’re ready to say yes to yourself, full stop, end of story.
Yes + Yes Wins the Day
As ready as you are to become more assertive, to stand up for yourself and express your desires clearly and passionately, you realize that making up for all the times you didn’t get your way when it came to a money decision by now getting your way all the time is a losing strategy, bound to end in conflict and sore feelings.
I’m not suggesting negotiating with your spouse or life partner is going to be an easy conversation, because it’s not. Often times you’re out of practice and fall into your pre-retirement roles by default. But just like early on in your relationship, there are always differences to adjust to and compromises to be made as you plan for retirement.
But isn’t that the exciting part of growing old together? It’s an opportunity for a fresh start, exciting new changes and opportunities to grow and expand together. It’s a chance to reinvent one’s self as individuals and as a couple as well.
I recently came across an excellent book on retirement called The Couple’s Retirement Puzzle: 10 Must-Have Conversations for Transitioning to the Second Half of Life, by Roberta Taylor and Dorian Mintzer.
The authors are relationship therapists and retirement coaches, which is an excellent combination for the millions of baby boomers getting ready to, or have already retired. This book can help you in mapping out how to live your retirement years in money harmony, some would call it ‘money heaven’, with your partner.
Don’t expect to read the book and have all the answers immediately. The real work is in talking with your partner and having real discussions – arguments and all. Don’t expect to see eye-to-eye on everything, but look at these discussions as series of steps in designing the next chapter in the life you’ve dreamed of.
And remember, the goal when deciding how to spend your money in retirement is to seek and find common ground at all times. If a financial decision, whether large or small, results in a yes and no, back to the negotiating table you must go, because retirement happiness and success is all about a yes and a yes.
Photo credit http://www.flickr.com/photos/adulau/
Think about how many years of your adult life you spend accumulating enough money in order to have financial security and the lifestyle you desire when you stop working for money. You do your best, save as much as possible, live within or below your means, fund your retirement accounts, maintain a low cost, well diversified investment portfolio, and then the big day arrives, and you say adios to your job, career or business.
Suddenly, all those years of saving and accumulating come to a screeching halt and instead of being in the accumulation phase, you now move into the distribution phase with your money. On paper, theoretically, this all makes sense, right? Your nest egg now needs to last your entire lifetime. No worries, right?
In the nearly 11 years of specializing in retirement planning, I’ve yet to see an individual client or couple not initially have a minor freak out session once this reality sets in. And these sessions are equal opportunity offenders regardless of net worth.
I’ve observed clients with many millions in the bank initially get just as stressed and worried about running out of money down the road as clients with much less saved up. It’s why I pay particular attention to the emotional aspects of this life transition. When you go from working full-time and collecting your paycheck regularly to suddenly being labeled as “retired”, the emotional impact is often striking.
For better or worse, we tend to derive much of our self-worth from not only what we do and what we have, but even more importantly from our net-worth. For men especially, this loss of career identity along with no longer receiving employment income to validate our self-worth and self-esteem creates a double whammy.
In talking with many of my now retired clients that made the transition successfully to the ‘other side’ they recall feeling lost and out of sorts the first few months of making the transition. For many, second guessing whether they retired too soon seems to be the most prevalent feeling. Usually, by month four, the majority of my newly retired clients have got their mojo back and most seem to adapt and move forward pretty successfully.
Meet the “Joneses”
For 35 years, Cindi and Emily 'Jones' watched their spending and pinched their pennies, all to be able to retire one day with few financial concerns. They read the seminal book on money, Your Money or Your Life, back in 1992, and were determined to be smart with their money. The mortgage on their Berkeley home was paid off in full two years ago, they have zero debt and drive cars that are five and seven years old respectively. They are frugal meisters without a doubt. And as with a few of my other clients, we compete annually to see who has found the most money during the past year.
Last August they were married and the following month they both stopped working for money. Although technically ‘retired’, they prefer not to use the ‘R’ word. The retirement income plan we developed has them withdrawing approx. 6% from their joint savings for the first 5 years, then it begins to gradually taper off but remain dynamic. Although many financial advisors suggest a maximum withdrawal rate of 4% annually, Laura and Emily wanted a more customized and dynamic spending plan that meshed closer with their lifestyle. That was music to my ears.
These Joneses do not worry about running out of money and here’s why.
- They have owned investments during periods of bad economies and bad markets. They have made good decisions and bad decisions and learned why their choices were either good or bad. This gives them confidence in their investment plan and should allow them to maintain a balanced portfolio indefinitely.
- They have the ability to reduce their expenses without having to limit their lifestyle. Most of their spending is truly discretionary and because they have strong money management systems in place, they can feel comfortable employing the dynamic spending plan we developed rather than a rigid one-for example, a 4% annual withdrawal model.
- Because they have flexibility in their spending, they do not believe they need a high level of certainty to proceed with the spending they currently enjoy.
- Perhaps most importantly, we have done real comprehensive financial planning together. This helps them better understand the range of possibilities and the trade-offs that apply to their decisions. Financial planning is a collaborative ongoing process, not a onetime event. They know we will revisit our assumptions and incorporate whatever changes may come.
Lastly, what has garnered the most confidence is that we have identified the trigger points that would warrant a scaling back of their withdrawals. This will be important if we hit a down stock market again, if they underestimate their spending or if future returns are as low as some believe they will be. We have also identified trigger points to resume higher spending levels should the couple experience better-than-expected results.
The planning work we have done together doesn’t offer any of our analytics as a crystal ball. It simply identifies what can get off track and exactly what we should do about it. The Joneses in other words are prepared.
There is an adage in life, “Pressure is something you feel when you are not prepared”. Well prepared Spiritus clients embarking on retirement can enter the unknowable future with confidence that they can adapt to whatever may come their way.
Photo credit Martin Abegglen