Category Archives: Financial Planning

Bitcoin’s Bursting Bubble

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“I have to confess that I find it all exhilarating. I’m only concerned somewhat for the relatively new investors who get drawn into these things and then find out the hard way. I sympathize completely with these people out there enjoying this bubble, but they’ve always ended very badly, and I have no doubt this one will too.” Jeremy Grantham

The price of Bitcoin dropped below $40,000 for the first time in months and the cryptocurrency fell more than 40 percent off recent all time highs.

There are reasons for the recent crash in the price of Bitcoin, according to Barron’s Magazine. Recently, China banned the use of cryptocurrencies for financial institutions asserting that “virtual currencies shouldn’t be used in the market as they are not supported by real value”. Instead, China intends to create its own indigenous cryptocurrency that will allow the regime to monitor and track its citizens

Furthermore, other countries might be considering tighter regulation, particularly as cryptos become the currency of choice for ransomware hackers and money laundering. Additionally, Tesla stopped accepting Bitcoin as payment for vehicles and Elon Musk expressed climate-related concerns over Bitcoin’s mining process.

But sometimes things go down because they are going down, according to Barron’s. Investors who bought early are looking to lock in gains, while recent arrivals to the crypto game are panicking. Selling begets selling.

Image Source: Getty Images

Bubble Burst

“We’re a crazy marketplace full of irrational human beings who behave themselves 80% of the time and then 20% of the time totally freak out one way or the other.” Jeremy Grantham

Retail investors piling into Bitcoin have fueled a historic price bubble that has finally burst. When stock bubbles pop, the selling usually stops when shares drop well below intrinsic value and become attractive to a new class of value investors who didn’t partake in the market froth.

Cryptocurrencies are different. They have no intrinsic value, which means there’s no telling when the selling might stop.

Essentially, Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. Overall, the mainstream acceptance of Bitcoin is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with tech enthusiasts, speculators — and cybercriminals.

“The concerns among investors and traders is that perhaps we are about to see another crypto winter and it may take a long time for Bitcoin price to see any recovery as the bull cycle may be over,” said Naeem Aslam, chief market analyst at AvaTrade.

“The actual answer is that no one really knows about that and the only thing that we do know is that institutions are still buying Bitcoin on every dip,” said Aslam.

Maintain a long-term outlook

Stock market and assets, like cryptocurrencies, bubble bursts can be intimidating, but they’re no cause for panic. Historically, the market has always recovered from every one of its downturns — and it’s extremely likely it will bounce back again.

If you maintain a long-term outlook, it’s easier to avoid panic-selling when asset prices begin to free-fall. Remind yourself that the market will recover eventually, and you’ll be able to ride out the storm.

The key to investing for the long term is to ensure you’re investing in quality assets. And, investing during market downturns can actually be a cost-effective move.

Because asset prices are lower during market downturns, it can be a good opportunity to buy good assets, like stocks (and cryptocurrencies, if you’re so inclined), at bargain prices.

References:

  1. https://www.barrons.com/articles/china-issues-crypto-bitcoin-warning-51621416378
  2. https://www.dallasnews.com/business/technology/2021/05/19/bitcoin-falls-below-38000-whats-going-on/
  3. https://barrons.cmail20.com/t/ViewEmail/j/62CDF96507F967432540EF23F30FEDED/9E2B0856731CA0B32018F019E6F15D33
  4. https://markets.businessinsider.com/currencies/news/jeremy-grantham-gmo-stock-market-bubble-burst-before-may-2021-2-1030118339
  5. https://www.fool.com/investing/2021/04/03/3-ways-im-preparing-for-the-stock-market-bubble-to/

2021 Modern Wealth Survey | Charles Schwab

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“The past year has of course caused Americans to focus on their health, in particular their mental health, along with the health of their relationships. But the pandemic and the significant impact it had on the economy and stock market also taught us a valuable, and in many cases difficult, lesson about the importance of financial health and preparedness, including the importance of having a plan and emergency savings.”  Rob Williams, vice president of financial planning, Charles Schwab

A majority of Americans (60 percent) are feeling more optimistic about the state of the United States overall, including the economy, the stock market and their personal financial prospects, according to Schwab’s 2021 Modern Wealth Survey. And, more than half feel positive about the U.S. job market, economy and role as a global economic power.

Schwab’s 2021 Modern Wealth Survey is an annual examination of how 1,000 Americans think about saving, spending, investing and wealth. The online survey was conducted from February 1 to February 16, 2021, among a national sample of 1,000 Americans aged 21 to 75.

Recalibrating Priorities and Redefining Wealth

“More than half of Americans were financially impacted by COVID-19 in 2020”

According to Schwab’s survey, more than half of survey participants were financially impacted over the past year, whether the economic environment strained their finances (31 percent), they faced a salary cut or reduced hours (26 percent), or they were laid off or furloughed (20 percent).

In lieu of this recent reality, more than two-thirds (68 percent) of Americans have reprioritized what matters most to them, with 69 percent saying mental health is more important than it was before, followed closely by relationships (57 percent), financial health (54 percent) and physical health (39 percent).

Being financially comfortable

“Americans lowered the bar for what it takes to achieve “financial happiness” and to be “financially comfortable” in 2021”

When it comes to achieving financial peace of mind, Americans say you only need a net worth of $624,000 to be considered “financially comfortable.” That’s down significantly from the $934,000 net worth that Americans cited as the minimum needed for financial comfort last year, according to the Survey.

Additionally, the survey finds that Americans have also revised their perspective on what it takes to be wealthy. It takes $1.9M to be viewed as wealthy, more than double the national average, but down from 2020.

U.S. households had an average net worth of $748,800 prior to the pandemic, according to The Federal Reserve’s 2019 Survey of Consumer Finances. However, the median, or midpoint, net worth of all families was much lower, just $121,700 in 2019.

Some lessons learned or relearned from the pandemic include the importance of being financially prepared and being mindful (and more aware) of your financial, physical, mental and emotional health.

References:

  1. https://www.aboutschwab.com/modern-wealth-survey-2021
  2. https://www.cnbc.com/2021/05/17/net-worth-americans-say-you-need-to-be-financially-comfortable.html
  3. https://content.schwab.com/web/retail/public/about-schwab/schwab_modern_wealth_survey_2021_findings.pdf

Long-Term Investing

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“Finding success as a long-term investor requires navigating a psychological minefield.”. Ben Carson, Director of Institutional Asset Management at Ritholtz Wealth Management.

Everyone would agree that the stock market has been highly volatile since the turn of the 21st century, experiencing crashes of 50%, 57% and 34% since 2000. It’s possible this level of heightened volatility is going to remain for the foreseeable future with an assist from the internet, rising sovereign debt and inflation.

Investing for the long-term implies that you set aside money today so you can have more money in the future. But getting to whatever the “long-term” means to you requires seeing the present value of your holdings fall, sometimes in soul-crushing fashion.

In the coming 40-50 years, you should expect to experience at least 10 or more bear markets, including 5 or 6 that constitute a market crash in stocks. There will also probably be at least 7-8 recessions in that time as well, maybe more.

However, you can never be sure of anything when it comes to the equity markets or the U.S. economy, but let’s use history as a rough guide on this. Over the 50 years from 1970-2019, there were 7 recessions, 10 bear markets and 4 legitimate market crashes with losses in excess of 30% for the U.S. stock market. Over the previous 50 years from 1920-1969, there were 11 recessions, 15 bear markets, and 8 legitimate market crashes with losses in excess of 30% for the U.S. stock market.

Bear markets, brutal market crashes and recessions are a fact of life as an investor. They are a common and expected feature of the financial system.

If you’re investing in the stock market that means you should plan on losing at least 10% of your money once every 1-2 years, on average. You should also plan on losing 20% of your capital once every 3 or 4 years, 30% once every 6 or 7 years and 40% or worse every 10-12 years.

These time frames aren’t set in stone since actual stock market returns are anything but average but you get the point. If your money is invested in the stock market for the long-term, expect it to grow over time but also evaporate without warning on occasion.

The same applies to pretty much any risk asset.

References:

  1. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/
  2. https://awealthofcommonsense.com/2021/02/a-short-history-of-u-s-stock-market-corrections-bear-markets/

Greater Fool Theory | Motley Fool

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“Greater fool theory states that investors can achieve positive returns by buying an asset without concern for valuation fundamentals and other important factors because someone else will buy it at a higher price.”

Simply stated, investors expect to make a profit on the stocks they purchase because another investor (the “greater fool”) will be willing to pay even more for the stock, regardless if the stock’s price is overvalued based on fundamentals analysis or long-term performance outlooks.

According to The Motley Fool, this philosophy relies on the expectation that someone else will get caught up in market momentum (frenzy) or have their own reasons for why the asset is worth more than the price you paid. 

In the short term, popular sentiment plays the biggest role in shaping stock market pricing action, but fundamental factors including revenue, earnings, cash flow, and debt determine how a company’s stock performs over longer periods.

In short, it is possible to achieve strong returns by using the greater fool theory, but it’s risky and far from the best path to achieving strong long-term performance. 

Specifically with regard to the stock market, the Greater Fool Theory becomes relevant when the price of a stock goes up so much that it is being driven by the expectation that buyers for the stock can always be found, not by the intrinsic value (cash flows) of the company.

The Greater Fool Theory is a very risky, speculative strategy that is not recommended especially for long-term investors.

References:

  1. https://www.fool.com/investing/how-to-invest/greater-fool-theory/
  2. https://www.hartfordfunds.com/investor-insight/the-greater-fool-theory-what-is-it.html

Investing – How to Get Started

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“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”  Robert Kiyosaki, Rich Dad Poor Dad

Investing, which involves putting your money to work, is a great first step toward building wealth for yourself and your family. If you think investing is gambling, you’re doing it wrong. The world of investing requires discipline, planning and patience. And, the gains you see over decades can be exciting. The three most common categories of investments, referred to as asset classes, include:

  1. Stocks – which are a share in a company. These tend to be riskier investments, but also typically offer more potential for profit over time.
  2. Bonds – which are a share of debt issued by a business or the government. These are safer investments, typically returning a lower profit than stocks over time.
  3. Cash and cash equivalents – which are readily available cash and short-term investments like certificates of deposit (CDs). These are the safest investments, but typically return little profit over time.

 

Before you start investing, it is important for you to understand a few basic concepts and definitions, such as:

Risk Tolerance

Risk tolerance is basically your emotional ability to deal with losing money. If you invested $1,000 today, could you deal with it being worth $500 for a period of time? That’s possible if you invest heavily in stocks, which tend to increase in value over time but can be volatile from one day to the next. If you answered yes to being okay losing a great deal of money for a period of time, then you have a high risk tolerance.

Time Horizon

Time horizon is the amount of time before you want to use your money. If you’re planning to use the money to make a down payment on a home within the next three years, you have a short time horizon and would likely have less risk tolerance. If you’re not planning to use the money until you retire in 30 years, then you have a long time horizon and can afford to take on more risk.

Asset Allocation

Asset allocation is the percentage of stocks, bonds or cash you own. If you have a high risk tolerance and long time horizon, you’re likely to want a larger percentage of stocks because you’ll be able to weather ups and downs and make more money over the long term. On the other hand, if you have a low risk tolerance and short time horizon, you probably want more cash and bonds so that you don’t lose money right before you need it.

Stocks, bonds and cash tend to respond differently to market conditions (one may go up when the others go down). Asset allocation helps you spread your money so that when one asset class unexpectedly zigs, your whole portfolio doesn’t zig along with it. In this way, asset allocation can help ensure your portfolio is correctly positioned to help you reach your financial goals, no matter what is happening in the market.

Diversification

Diversification splits your investments among different groupings or sectors in order to reduce risk. That includes your asset allocation. But it also includes where you invest within asset classes. For instance, you might diversify between stocks in companies located within the United States and stocks in companies located in Asia.

Different sectors of the economy do better at different times. It’s tough to predict which one will do well in any given year. So when you diversify and own stocks across different sectors, you are positioned to make money on whatever sector is performing well at the time. A well-diversified portfolio can help lessen the impact of market ups and downs on your portfolio.

Rebalancing

If you’ve done a good job with asset allocation and diversifying, then the balance of your portfolio is likely going to get out of whack over time as one sector does better than another. For instance, let’s say you wanted 10 percent of your stocks to be companies in Asia. If companies in Asia have a great year, those companies may now make up 15 percent of your stocks. In that case you’ll want to sell some of those stocks and use that money to buy more stocks (or even bonds) in parts of your portfolio that didn’t do as well.

Rebalancing on a regular basis (once or twice a year, for example) can help ensure your portfolio remains aligned with your goals. And because it provides a disciplined approach to investing, portfolio rebalancing also may prevent you from buying or selling investments based on emotion.

Dollar Cost Averaging 

Dollar cost averaging (DCA) involves putting your investment plan on autopilot.  With DCA, you invest a set amount at set intervals (for example, $200 every month) in the market. By investing systematically, you’ll buy more shares of an investment when the market is lower, fewer when the market is higher, and some when the market is in between. Over time, this may help you to pay a lower average price for the total shares you purchase.

DCA takes the emotion out of investing, helping you to start on your investment plan sooner, rather than later. And once you begin, DCA can also help you remain focused on your goals, no matter what’s happening in the market. It helps make investing a habit.

Capital Gains

Capital gains is an increase in the value of an asset or investment over time. Capital gains is measured by the difference between the current value, or market value, of an asset or investment and its purchase price, or the value of the asset or investment at the time it was acquired {cost basis}.

Realized capital gains and losses occur when an asset is sold, which triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but are not considered a capital gain that should be treated as a taxable event.

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Fiscal Fact: The average white household had $402,000 in unrealized capital gains in 2019, compared with $94,000 for Black households and $130,000 for Hispanic or Latino households. These disparities have generally widened over time.  Source:  Tax Policy Center https://www.taxpolicycenter.org/fiscal-fact/unrealized-capital-gains-ff-05102021

Capital gains are classified as either short-term or long-term. Short-term capital gains, defined as gains realized in securities held for one year or less, are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term capital gains, defined as gains realized in securities held for more than one year, are usually taxed at a lower rate than regular income.

“If you want to become really wealthy, you must have your money work for you. The amount you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money.” John D. Rockefeller

Before you start investing or putting your money to work for your, do your homework and research. Once you’ve made a decision, make sure to re-evaluate the assets in your portfolio on a regular basis. A good asset today may not necessarily be a good asset in the future.

And, don’t panic during the inevitable setbacks and don’t be fearful during the inevitable stock market corrections that all long-term investors face. If the reasoning behind the investment decision was sound when purchased, stick with the assets, and they should eventually recover and grow.

References:

  1. https://www.investopedia.com/financial-edge/0511/the-top-17-investing-quotes-of-all-time.aspx
  2. https://www.northwesternmutual.com/life-and-money/how-to-invest-a-beginners-guide/
  3. https://www.northwesternmutual.com/life-and-money/4-investment-terms-you-should-know/
  4. https://www.investopedia.com/terms/c/capitalgain.asp

Volatility and Market of Stocks

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If you pay any attention to the stock market, you probably know that volatility is actually a normal part of investing.

Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a relatively stable price has low volatility. according to Investopedia.

Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.

Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, and other big downward moves. However, volatility doesn’t measure direction. It’s simply a measure of how big the price swings are. You can think of volatility as a measure of short-term uncertainty.

“Keep it simple and avoid complications in the markets.”

  • Sooner or later, most investors realize that the stock market is actually a ‘market of stocks’ that is chaotic, dictated by investors’ emotions of fear and greed, and influenced by interest rates and macro economic conditions. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by financial analysts and strategists.

What is certain is that a quasi-invisible force known as volatility is always always present, threatening to disrupt the market’s delicate equilibrium and sanity.

“One of the hardest parts about being a long-term investor is the fact that sometimes your money is going to get incinerated and there’s nothing you can do about it.” Barry Ritholtz

Investors have a few primary ways to respond.

  • They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.
  • Most investors never hold stocks long enough to benefit from the fact that the market rises over time. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating a portfolio over decades, which means most investors behave like salmon swimming upstream. They struggle against the stock market’s natural rhythms.
  • Rotations is when smart and retail money runs after gains in certain sectors until a rally there becomes exhausted, and then their money runs to other sectors.
  • Investors can use options to more effectively navigate the stock market. A well-placed put or call can make all the difference in an uncertain market. A well-placed options contract can turn the unpredictably of investing into a defined outcome.
  • There are two types of options. A call option gives investors the right to buy a stock at a certain price and time. A put option gives investors the right to sell a stock at a certain price and time. An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.
  • Investors buy puts when they want to protect stock that they own from losing value.
  • Investors buy calls when they want to own a stock they believe will increase in value.
  • Many investors sell puts and calls to generate income.
  • Many people pick options that expire in three months or less. When you buy an options contract that expires in a year or more, you spend more money because time equals risk.
  • Simplicity is everything. It’s important to keep your trading strategy simple and avoid complications in the markets. Since everything could change tomorrow, or not, and thus we fall back on something we learned during the dark days of the 2008-09 financial crisis: Focus on the facts that have held up over time

Consider keeping a list of stocks or exchange-traded funds you would like to buy during market sell offs or crashes.

When in doubt, always remember: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

To keep from panicking when stock market volatility ticks up, it’s important to realize that volatility comes with the territory when you decide to invest. The stock market will always have its ups and downs, and there’s no use trying to predict what’s going to happen. So if you’re investing for the long term, consider basing your decisions on your goals. timeline and tolerance for risk, rather than on what’s happening in the markets from one day to the next.

Also, remember that being diversified is one way to help manage your exposure to volatility. By spreading your money out over various asset classes you’re also spreading out your market risk, and ensuring your portfolio’s results aren’t based on the performance of one type of investment.

References:

  1. https://www.fool.com/investing/how-to-invest/stocks/stock-market-volatility/
  2. https://www.barrons.com/articles/how-to-buy-and-sell-options-without-making-a-fool-of-yourself-51600336811
  3. http://www.barrons.com/articles/how-to-use-options-to-beat-the-market-1477415121
  4. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/

Financial Mindset

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“It’s difficult to master the psychology and emotions behind earning, spending, debt, saving, investing, and building wealth.”

Personal finance is simple. Fundamentally, you only need to know one thing: To build wealth and achieve financial freedom, you must spend less than you earn. Yet, it seems challenging for most people to get ahead financially.

Financial success is more about mindset and behavior than it is about math, according to J.D. Roth, author of Get Rich Slowly. Financial success isn’t determined by how smart you are with numbers, but how well you’re able to control your emotions and behaviors regarding savings and spending.

Financial Mindset

“Change your mindset and attitude, and you can change your life.”

You sometimes have to make sacrifices in order to improve your financial situation. For instance, if you are in debt, you need to sacrifice some expenses so you can pay more towards managing and eliminating your debt. It is these financial sacrifices that will require you to have the right financial mindsets so you can overcome the obstacles that derail people from managing and eliminating their debt.

According to an article published in USAToday.com, Americans do not have a financial literacy problem. Instead, Americans simply make the wrong financial decisions and have bad final habits which does not necessarily translate that they are unaware of the best practices of financial management. We know how to make the right choices about our personal finances. The problem, according to the article’s author Peter Dunn, is that Americans have a financial behavioral problem. It is bad financial behavior, decisions and habits that usually get them into money trouble. It is what put them in a financially untenable position.

A perfect example is that you should never spend more than what you are earning. It is logical after all. But does that mean you follow it. Some people still end up in debt because they spend more than what they are earning.

Other examples of beliefs about money and personal finance include:

  • Taking personal responsibility regarding your finances is everything.
  • You shouldn’t buy things you can’t afford.
  • You don’t have to make a ton of money to be financially successful.
  • You can give yourself and your family an amazing life, if you’re able to remain disciplined and think long term.
  • Borrowing money from or lending money to your family isn’t recommended.
  • Education can get you a better job, if you get the right education.
  • You should buy life insurance.
  • You have much more to do with being a financial success than you think.

Financial literacy gems such as “spend less than you make,” “you need to budget” and “save for the future” are impotent attempts to help. However, lacking the correct financial mindset can make following the simple financial gems quite challenging.

There are 5 destructive financial mindsets that are the norm in our society today but you should actually get rid of starting today, according to NationalDebtRelief.com.

1. Using debt to reach your dreams.

This can actually be quite confusing. A lot of people say that it is okay to be in debt as long as it will help you reach your dreams. There is some truth to that but you should probably put everything into the right perspective. Buying your own home and getting a higher education are some of the supposedly “good debts.” It is okay to borrow for these if you can reach your dreams because of that debt. Not so fast. It may be logical to use debt to reach these but here’s the key to really make it work – you should not abuse it. If you get a home loan, buy a house that will help pay for itself. That way, the debt will not be a burden for you. When it comes to student loans, make sure that you work while studying to help pay for your loans while in school. Do what you can to keep debt from being a burden so it will not hinder you from reaching your dreams.

2. Thinking you do not need an emergency fund.

The phrase, “you only live once (YOLO)”, should no longer be your mindset – especially when it comes to your finances. You always have to think about the immediate future. If you really want to enjoy this life, you need to be smart about it. Do not splurge everything on present things that you think will make you happy. It is okay to postpone your enjoyment so you can build up your emergency fund. You are not as invincible as you think even if you are still young.

3. Settling for a stressful job to pay off debt.

“The most important thing when paying off your debts is to pay off your debts.”

Among the financial mindsets that you need to erase is forcing yourself to stay in a stressful job just so you can pay off your debt. You are justifying the miserable experience that you are going through in your job because you need it to meet your financial obligations. This is the wrong mindset. You need to put yourself in a financial position where you will never be forced to stay in a job that you do not like. Live a more frugal life that does not require you to spend a lot so you can pursue a low paying job and still afford to pay your debts.

4. Delaying your retirement savings.

Some young adults think that their retirement savings can wait. Some of them think that they need to pay off their debts first before they can start thinking about the future. This is not the right mindset if you want to improve your finances. You have to save for retirement even when you are drowning in debt.

5. Failing to have a backup plan.

The last of the financial mindsets that you need to forget is not having a backup plan. Do not leave things to chance if it involves your finances. You have to make a plan and not just that, you need to have a backup plan. If you have an emergency savings fund, do not rely on that alone. What if one emergency happens after another? Where will you get the funds to pay for everything? Think about that before you act.

Takeaway

Remember, personal finance is simple…it’s your emotion, behavior and habits that are challenging. Bottom-line, it comes down to your financial mindset.  Smart money management is more about your mindset than it is about personal financial math of net worth, cash flow, saving and investing. The math of personal finance is simple and easy. It’s the psychology that’s tough and challenging. Essentially, the concepts to improving your finances and achieving financial freedom are simple but it is not easy to follow through with them.

References:

  1. https://business.time.com/2013/03/11/why-financial-literacy-fails/
  2. https://www.usatoday.com/story/money/personalfinance/2015/09/27/americans-financial-literacy-behavior/72260844/
  3. https://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/
  4. https://www.nationaldebtrelief.com/5-financial-mindsets-you-need-to-get-rid-of/
  5. https://www.getrichslowly.org
  6. https://obliviousinvestor.com
  7. https://petetheplanner.com/yes-you-are-an-investor-think-like-one/

Financial Planning

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A financial plan includes everything from defining your goals to executing on them with a budget and an investment plan…and, it’s really never too early to get started!

Financial planning is the process of setting and creating a strategy to achieve your financial goals. Whether you’re planning for short-, medium- or long-term desires, having a financial plan in place makes money decisions easier every step of the way.

The keys to financial security and success are simple to achieve by every American.  The keys involve preparing a simple financial game plan, developing the correct financial mindset and implementing positive financial habits and behaviors…period.

“A ship without a rudder can certainly make its way across the water, but it has no control of where the water will take it–so grab your rudder and take initiative of your financial destiny.” Nancy LaPointe

Creating a game plan is a critical initial step in taking control of your financial future.  A simple financial plan allows you to get control of your financial future.

Financial Planning

Creating a financial plan is about developing a realistic guideline on how you can put all of your financial resources to their best use. The process starts by examining and articulating your short, intermediate and long-term goals and then sorting out your priorities.

A successful financial plan looks at all the interrelated parts of your financial life—income, expenses, discretionary spending, investments, debt, retirement planning, the role of insurance in risk management, income-tax liability, estate planning needs and desires—to make sure they’re all working in sync. This is essential, because if you don’t have a handle on how much money is coming in and going out every month, it’s next to impossible to know how much you can save.

If you don’t have a financial plan, you won’t be able to manage your most important goals like buying that bigger home, paying for your children’s education or funding a comfortable retirement. And if you don’t have adequate insurance, you may not be able to protect these savings in the face of an unexpected event, like an illness or a job loss.

A financial plan will include a series of concrete recommendations to help you achieve the goals that you have identified and prioritized. Without a plan, your financial future remains an undisciplined and low probability of success. The goal of a financial plan, after all, is to make your goals a reality. A financial plan is necessary for money management and financial security because:

  • 78 percent of people with a financial plan pay their bills on time and save each month vs. only 38 percent of people who don’t have a plan
  • 68 percent of planners have an emergency fund while only 26 percent of non-planners are financially prepared to cover an unexpected cost.

Benefits of Having a Financial Plan

Understanding where you stand financially and creating a plan for your financial goals is critical to your financial success. While it’s possible to achieve some financial goals without a financial plan, it’s a lot easier when you have a clear path forward. Having a plan in place serves as helpful guidance when questions of how much to spend and how much to save come up.

Some benefits of personal financial planning are:

  • You’ll better understand your current situation. If you don’t budget or keep track of where your money goes, it’s hard to know what kind of financial shape you’re in. With a financial plan, you’ll always have a pulse on your financial health and know what you’re capable of doing.
  • You’ll have a handle on risk management. Having an emergency fund is essential because you never know when you’ll need it. What’s more, knowing which types of insurance you need—such as health, life and disability—and how much can provide some protection when things go seriously wrong. With a good strategy, you’ll be able to plan for these risk management tools and fit them in your budget.
  • You can eliminate debt faster. If paying off debt is important to you, part of your financial plan can include specific actions you can take to accomplish that goal as fast as possible.
  • You can boost other savings goals. Depending on your goals, you may want to set aside cash for a home down payment, house renovations, a vacation and more. A financial plan can help you map out how you’ll meet each of your savings goals, and give you the motivation to do it.
  • You’ll be ahead on long-term goals. Whether you’re saving for retirement, a vacation or a child’s college education, financial planning can help you understand exactly how much you need to accomplish your goal and what you need to be doing now to get there. The sooner you start this process, the easier it will be to get ahead.

If you’d prefer to build your financial plan on your own, follow these tips:

10 Step Financial Plan

  1. Write down your goals—One of the first things to ask yourself is what you want your money to accomplish. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your goals will act as a motivator as you dig into your financial details.
    Write down your long-, medium- and short-term goals. Your long-term list might include things like retirement and a child’s education. Medium-term could be the down payment on a house or a new car. A vacation or new computer might fall into the short-term category. Whatever your goals, make them concrete. Then determine a dollar amount for each and the timeframe for reaching it.
  2. Create a net worth statement—Achieving your goals requires understanding where you stand financially today. So start with what you have. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. If you’re in the plus, great. If you’re in the minus, you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  4. Create a budget and Build an emergency fund—Budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? This will help you determine if what you’re spending money on lines up with what is most important to you. Additionally, build an emergency fund to keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency savings fund that can cover at least three to six months of essential living expenses such as rent or mortgage, utilities, food, and transportation.
  5. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down.
  6. Get your retirement savings on track—Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
  7. Check in with your portfolio—If you’re an investor, you should take a close look at your portfolio? (And if you’re not an investor, think carefully about becoming one!) Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  8. Make sure you have the right insurance—Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.
  9. Know your tax situation—The Tax Jobs and Cuts Act of 2017 changed a number of deductions, credits and tax rates beginning in 2018. For instance, standard deductions were increased significantly, eliminating the need to itemize for a lot of people. To make sure you’re prepared for the 2019 tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your accountant for specific tax advice.
  10. Create or update your estate plan—At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

Financial planning can improve your chances of achieving your financial goals and financial freedom. While financial freedom can mean different things to different people, it generally means having a feeling of security and empowerment with your money and life.

References:

  1. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  2. https://www.westernsouthern.com/learn/financial-education/financial-planning-checklist
  3. https://www.schwab.com/resource-center/insights/content/case-financial-planning
  4. https://www.experian.com/blogs/ask-experian/what-is-financial-planning/

Road to Wealth | American Association of Individual Investors (AAII)

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You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Star Wars Day — May the Fourth (Force) Be With You

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“A long time ago in a galaxy far, far away…”

May 4th was adopted by Star Wars fans as a day to celebrate the movies. It was chosen for its pun on “May the Force be with you,” i.e. “May the Fourth be with you.”

The original Star Wars movie, written and directed by George Lucas, was released in theaters in the U.S. on May 25, 1977, Memorial Day Weekend.