Saturday, October 10, 2015

A Cautionary Tale

Let's start this off with a story about someone I'll just call John. John began working for a company in his early 20s and ended up staying with his same employer for over 30 years. During this time, John managed to work his way into a position that paid him very well. To give you an idea, his co-workers with similar tenure and title have averaged $200,000 per year or more for the past decade. John and his wife stayed in the same house in a working-class neighborhood even as his income increased to where some years' earnings would have exceeded the value of his home. While they didn't spend a lot on their home, they did spend a lot on other things, such as vacations.

Sadly, when John was in his mid-fifties, he suffered a stroke that left him unable to work. In an instant, he went from a comfortable income and lifestyle to unplanned early retirement. Although he had been earning a good income, he and his wife didn't have much to show for it in savings or investments. This didn't stop them from continuing to spend like they always had though. As their savings were depleted, an additional source of cash was discovered in the form of taking out a second mortgage.

As you can imagine, this story doesn't have a happy ending. John passed away recently, in his late 50s with next to nothing left to support his wife and family.

John happens to be the friend of a friend and this came to my attention when I saw a GoFundMe site set up for people to help donate funds to cover the cost of a funeral. John's widow was left without even enough money to cover the cost of a $7-10,000 funeral, where just a few years earlier he had been earning more than that each month. This is always sad to see, but even more so when I know that the financial outcome didn't have to be this way.

What can we learn from this story?
  1. Save money and plan for the future. I've heard people say "I'll start saving for retirement after (fill in the blank)". Except as soon as that event happens, something else urgent comes up that causes them to continue delaying. Saving needs to be a habit and be done intentionally.
  2. Have life insurance. Even a small amount would have helped in this situation. I currently carry life insurance worth ~6x my income and have a net worth of ~5x my income. If I were to die, my wife would be left with a net worth greater than 20x our current household expenses. We have a plan in place where if something were to happen to me, my wife would know what to do with the money and would not have to work again. John's widow has no plan.
  3. Repeat after me, "INCOME IS NOT THE SAME AS WEALTH". It isn't the amount of income you earn that determines your financial success, but rather the amount that you keep. I have met several millionaires who never earned an income near that of John's, yet John died with nothing to his name. Income is only here temporarily, whereas true wealth is here forever.

Sunday, October 4, 2015

Employee Perk?

A friends' employer recently announced a new program whereby the company will pay off a fixed amount of employees' student loans each year for up to five years. With so many Americans carrying student loan balances, it seems like a great perk. Or is it?

I think that this perk will, in fact, do very little to help this particular companies' employees build wealth. The company may receive some positive media attention and reduce employee turnover costs (which is probably actually their goal), but a better long-term impact on their employees' financial well-being could be achieved by teaching financial literacy.

The obvious challenge with offering something like this is that an employer alienates those employees who either never took out student loans or who have already paid them off. Contrary to what the media seems to portray, about 30% of all college students get their bachelor's degree without any student loans. I will concede that some of these students come from wealthy families, but if we define wealthy as the top 1% of the country, then how do you explain the other 29%? These are largely going to be students who either worked part-time while in school and full time in the summer and saved money to pay for an affordable in-state school, or who worked hard to earn a variety of scholarships. Either way, paying your way through school requires work and is definitely possible.
My wife was able to do so successfully, and while I did borrow for my bachelor's degree, we paid it off quickly and did not borrow anything for my much more expensive graduate degree.
That aside though, my problem is not about eligibility or fairness in who receives it. I think the greater problem is the potential attitude of apathy towards paying off student loans and the additional excuses to stay in debt. Very few graduates can expect to have their employer pay off their entire student loan balance under programs like this, yet when it is offered I expect most employees to use the program as an excuse to not pay anything more than the minimum payment.

Another company, PricewaterhouseCoopers, has been in the news lately for their program, which pays $1,200 per year for up to 6 years towards employees' student loans. What is overlooked are some of the other facts. First, Big4 accounting firms are known to have very high employee turnover (~25% per year), so the odds of anyone getting all 6 years of this perk are very slim. Second, if the average student owes $30,000 upon graduation at the average rate of 4.6%, then that $1,200 basically just covers the interest and allows you to pay off your loans in 7.5 years instead of 10 (paying just the minimum payments).

This benefit should truly be treated as a benefit, yet many will sit back, not do the math and assume that the impact of the benefit is much greater than it actually is.

I'm not saying that you shouldn't accept this type of benefit, or that employers shouldn't offer it. What I am saying is that if you are in the position to receive this, do the math, understand how much the assistance truly is, and don't use it as an excuse to not pay down your debt as aggressively as you can on your own. If you pay down all the way to the point that your employer will pick up the rest, fine. But just like you should be building a stash of cash for a rainy day fund, you should also be building a stash of cash just in case that benefit goes away (either from the company changing policy or from your switching employers).

Personally, I'm thrilled to not have any student loans. If my employer were to offer something like this, I would just miss out on it. But I would rather be debt free than be like some of my co-workers who lament only being able to deduct $2,500 in student loan interest. Let me repeat that for emphasis…they are paying more than $2,500 per year in interest on their student loans. I don't know about you, but I'd rather have that money work for my future than throw it away.

Earn interest don't pay it.

Thursday, October 1, 2015

Net Worth Update

Three months ago, our household net worth was approaching $500k. Well, it's still approaching $500k. In fact, even though we've continued to save each month, our net worth has gone down, largely due to overall declines in the stock market. During the past quarter, our Net Worth did creep above $500k, but it was only temporary as the market began to slide towards the end of August. So without further ado, here's the latest update:


Our net worth declined by about $4k in the past three months. Not too big of a swing, but in order to really see what's going on here, it's helpful to see the details.


As you can see, our cash has increased and our mortgage has decreased. According to Zillow, our home has even appreciated slightly. Although we added about $3,000 to our investments, they still are down by over $13k. The good news in all of this is that the money we've been adding has been buying in at lower prices. What's also good news is that as I've previously mentioned, I have been meaning to shift more of our investments to stocks from bonds, which I have done.

Wednesday, September 9, 2015

Financial Infidelity

As we are making plans to celebrate out 10th wedding anniversary in the not too distant future, I thought I'd share something that has been on my mind that relates to relationships and money.
At work, we are getting close to the time that annual raises are announced. A co-worker confided with me that whenever this happens, he changes his direct deposit to have the extra funds go to a separate account that his wife doesn't know anything about and doesn't tell her anything about the raise. He thought this was a clever way to be able to have some extra spending money for "guy things". I'm afraid I wasn't as excited as he was about his plan and rained on his parade when I pointed out that the proper term for this behavior is 'Financial Infidelity'.

What is Financial Infidelity? Financial Infidelity is the purposeful act of hiding money or spending from a spouse/significant other. I'm not referring here to things like buying gifts to surprise them in the near future, but making financial transactions and attempting to conceal them from a spouse. It could be that one spouse has a bank account or other assets that the other spouse doesn't know about, or perhaps one spouse opens a credit card account to run up charges without the other knowing.
Something that falls into the same category is something a friend calls spousal money laundering. This is the act of using cash to conceal transactions from a spouse who diligently tracks all debit/credit card purchases and then finding creative ways to get more cash (for example, offering to pick things up from the store for friends and get paid back in cash that could then be used for other purchases that may have been scrutinized by the other spouse).

But if I don't hide money from my spouse, he/she will just spend it all! Not if you're on the same page financially. I wish there were a magic bullet for how to get to that point, but the best solution I've come across to this challenge is still to simply sit down together with your spouse and discuss long term goals you share as a couple. This is not generally something that can happen in one session, and requires true dialogue between the partners with minimal distractions and interruptions. Often the spouse attempting to do the hiding will need to ask the other spouse a lot of questions to try to understand their feelings and resist the urge to dictate what the couple's goals should be. Both spouses will often find themselves conceding certain points before coming to a set of goals that both can agree upon. Once goals are truly determined, deciding what to do with money should be a much easier decision. If financial decisions are made that are not in line with the jointly set goals, then the process needs to start over again to uncover preferences not revealed in previous discussions.

If you lie to your spouse about money what else would you lie about? The reason that this is such a big deal is not because of the purchases themselves but rather the lack of integrity with the person you are supposed to cherish above all things. I can say from experience that a relationship is strengthened when everything is out in the open and nothing, financial or otherwise, is concealed. Financial infidelity can conceal innocent spending, or more sinister vices such as gambling or pornography. Whatever it is, when someone feels the need to conceal something from their spouse, their own selfishness and lack of trust is revealed. This can be overcome, but may require having some difficult discussions that have been swept under the rug or ignored in the past.
If you find yourself engaging in any of these behaviors, or think you spouse may be doing so, the best thing to do is to talk about it, plain and simple. I don't pretend to be a relationship expert, but have found that as I have had difficult discussions with my wife, our relationship has been strengthened as we get to know each other better and make ourselves vulnerable to the other. To me, this is one of the great parts of sharing your life with someone. As with many things in a relationship, this all can be simplified to trust and communication. If you can successfully master this, you will be able to achieve great things together.

Tuesday, September 1, 2015

Your own worst enemy

Last Tuesday 8/25, the S&P 500 closed down for the 6th straight day, with losses over the 6 sessions of more than 11%.
On the same day, investors sold $19B from equity mutual funds. This was reported to be the 2nd largest day of redemptions since daily data became available in 2007. Only time will tell whether this was a good time for investors to sell, but history tells us that it was likely a poor decision. While they may have avoided some short-term losses, we have seen that most of these investors will not re-enter the market until it has recovered to a higher point than when they sold.
This level of market movement isn't new, but if you behave as many investors did last week the decision has a lasting impact. Charles Schwab recently released a report showing the portfolio growth of investors making similar decisions over time. A buy and hold investor ended up with nearly double the assets as the investor who reacted by selling in bear markets. If you find yourself selling out of the market out of fear, you are acting as your own worst enemy.

Monday, August 24, 2015

Be careful out there

The market had a rough day today, to say the least. At one point, the Dow was down more than 1,000 points and ended up down 588 points, or 3.6%. Personally, I checked our account balances and we are down over $10,000 in the past few days. It's important to remember though that we haven't lost anything because we haven't sold anything. I've recently reflected back to 2008 when we last saw these types of declines. I didn't sell back then, but remember my investment accounts getting cut in half from ~$25k to ~12k. Now that I have a considerable amount more invested I have been reflecting on how to make sure I keep the same discipline given that the dollar amount represented by the same percentage movement would be >10x what we experienced in 2008. In the back of my mind, I always know that a 6-figure loss is possible, but the dollar amount makes it feel like a lot more than saying "25%". The best answer I have for myself at this point is to remember that I am working with a long time horizon, that it is impossible to time the market, and that I shouldn't even try.

I used to tell clients that they should have the most aggressive portfolio that they were comfortable sticking with through all the ups and downs. Even if it is in an investors best interest long-term to be heavily invested in stocks, I knew that if they didn't have the fortitude to stick with the strategy they may actually be better off avoiding stocks. No matter what portion of your portfolio you have targeted to be invested in stocks, the recent selloff is likely an opportunity to rebalance and buy more. I didn't get the chance to buy more stocks today, but plan to do so shortly.

I have previously documented my intentions of allocating more of our assets to stocks, so any buying I do was already planned before recent large market movements. The most important thing to remember in this type of market is to make sure any transactions you make are not based in fear. As a co-worker used to always say: "Be careful out there". Don't be like far too many other people who make the mistake of selling stock positions AFTER big losses.

Sunday, August 23, 2015

Book Review – Simple Wealth, Inevitable Wealth

Image result for simple wealth inevitable wealth

I recently finished reading 'Simple Wealth, Inevitable Wealth' by Nick Murray and highly recommend it. This book had been highly recommended by a respected source, but it sat on my 'to read' list for a year or so. I'm glad I finally got around to reading it, because it really caused me to re-think and re-evaluate some of my investment strategies unlike many other personal finance books I've read. I won't give away all the details, but I definitely recommend you pick up a copy. It's worth adding to your library, but you'll probably have to buy a used copy since I doubt any libraries will have it.

Below, I'll highlight some of the key takeaways I got from the book and what I intend to do (or keep doing) as a result.

  1. Everyone needs a good financial advisor.

    The author believes that no matter how much you think you know about investing and the markets, you need a financial advisor. The main reason for this need is to protect you from yourself. Even the savviest of investors, without a good advisor, may fall into the trap of making THE BIG MISTAKE, which is to sell stocks based on fear. If a good advisor ever talks you out of doing this, they are worth whatever expenses you pay them (typically no more than 1% of your assets annually). I wholeheartedly agree that you should avoid THE BIG MISTAKE, and will concede that most people could use a trusted confidant to occasionally talk sense to them. Although I consider myself to be a complete DIY investor, I still do have a financial advisor. My advisor is a close friend who works for my former employer that I don't have to pay for because of the amount of assets I have invested. While I don't rely on him as much as many of his other clients, and he isn't actually managing my investments on a daily basis, it has come in handy to have a single point of contact with whom to discuss my strategies and to get recommendations for ways to implement said strategies.

    This advice is especially timely considering the recent 500+ point decline in the Dow. These types of big movements in the markets always seem to cause investors to want to sell out of stocks and sit in cash "until things get better". The problem is that once you're in cash, it's feels so good not losing any money that you won't typically get back into the market until it has recovered all the losses you potentially avoided and more, such that you buy in at a higher price than where you sold. I used to call sitting in cash the 'warm safety blanket that is secretly smothering you and killing your wealth accumulation potential'. This behavior is common enough that an annual study is published each year showing that the average mutual fund investor significantly underperforms the market, largely due to poor timing. See here for an example of the DALBAR study.

  2. Asset allocation is a poor strategy for wealth accumulation – true wealth can only come from disciplined investing in 100% equities.

    This part of the book was one that I had to sit and think about for a bit. I agree that over time, stocks (in the form of mutual funds) outperform bonds or cash. Therefore, adding bonds and cash to a portfolio will necessarily reduce your long term returns. That being said, it is also true that adding bonds and cash to a stock portfolio will reduce your short-term volatility, which can make it easier to continue to hold your investments and not make THE BIG MISTAKE. Stocks are a great long term investment, but I have generally advised that you would be better off avoiding stocks if you aren't able to stay invested through volatility. Asset allocation, to me, has been a way to get some of the benefit of stock growth in a long-term portfolio, while minimizing the short-term volatility that causes investors to want to abandon ship.

    I clearly remember the last major downturn in the markets of 2008-09. I did not sell out of my portfolio, but I have held bonds in my portfolio for a long time. I have never been the type of investor to panic or sell, and my wife has been a strong voice of reason if I ever lament about short-term losses. Since I know that I am unlikely to sell stocks at inopportune times, and given that I have a good relationship with a trusted advisor and level-headed spouse, why then do I continue to hold bonds in my portfolio that is designated as 'long-term'? The only difference between now and then is the magnitude of the potential losses, a 40% decline for me now would be 10x the dollar amount as it would have been just 7 years ago.

    Just as important as it is to not sell stocks, it is also important to have a disciplined approach to investing. The simplest example of a strategy to avoid is to change your investments every year to be whatever funds did the best in the previous year. This strategy is generally a poor one because there is no individual sector or investing style that is consistently the best to invest in, and chasing the latest hot fund will cause you to get in to an investment after the gains have already been made (and not by you).

    Since reading this book, I have begun the process of shifting some assets from bonds to stocks, with the intention of permanently and significantly reducing my bond holdings. I don't know that I'll go 100% to stocks, but definitely will be increasing my stock exposure. Because of this, I welcome the recent sell-off in stocks. I generally would be indifferent with short-term market sell-offs, but it pleases me to see things getting cheaper as I have begun to re-allocate some of my bonds to stocks.

  3. Investors should stick with stock mutual funds and not individual stocks.

    No convincing was needed for me to agree with this thought. The odds of an individual building a diversified portfolio with individual stocks that could outperform even a poorly managed stock mutual fund are extremely low. The few instances where I've see client accounts with good historical performance that were all in individual stocks, the portfolios tended to be not very diversified and heavily concentrated in just 2-3 stocks, which means it was luck that it had done well and there was a high risk of a future devastating blow to the portfolio. The majority of the time when I would see a lot of individual stocks, the performance of the overall portfolio was generally unimpressive.

In summary, I recommend this book to anyone looking to learn more about the philosophies and long-term strategies of investing. I'd also recommend it to financial advisors looking to hone their craft since the author was once a financial advisor himself, but now has made a career coaching financial advisors. Don't read this book if you are expecting specific details on how or what to invest in. He gets into some basics, but the book primarily discusses financial missteps to avoid and some of the emotion and fear based decisions that could negatively impact your wealth building ability.

Wednesday, August 19, 2015

New Toy

I've been wanting a new laptop for a while now, but have continued to tell myself that it is just a want and not a need. Since we are saving and investing for other things, most 'wants', especially those with hefty price tags, are put on hold. But you know how sometimes a want just won't go away? Yeah, that's what happened to me with this desire. I seemed to find myself dreaming up reasons that I could justify the purchase as a need. I also began to try to justify the purchase since we could easily buy it without having to dip into savings. Even with all the justification going on, the practical side of me continued to win out.

After some handwringing and thought, I brought the idea up to my wife, who again helped me realize that this was definitely a want and not a need. We continued to talk about it over the next few days though and came to the conclusion that we would buy a new laptop if I found a way to pay for it other than just reducing the amount we planned to save this month. Enter Craigslist.

As time goes on I've gotten more and more apprehensive about using Craigslist (there's a lot of crazy people out there), but I figured this would be a good use of it. Like many people out there, I have several things lying around the house that I rarely, if ever, use. Curious to see how much I could potentially sell them for, I went over to eBay and searched for 'completed listings' of the items to see what other people have been able to successfully sell things for. Imagine my surprise when I found that by selling 4 things that I never use, I could bring in about the same amount of cash I needed for the new laptop!

Thankfully, the rest of the story is pretty boring and I don't have any stories to share of crazy people I met up with from Craigslist who tried to rip me off, rob me, or worse. To help keep things safe, I always make sure that I meet people in public areas (this morning I met someone inside a CVS where our entire interaction would be witnessed by a cashier and security cameras), and never give out my home address.

So far, I've only sold two of the four items I originally identified, which together brought in around 60% of the funds needed. I still have a few things outstanding, but have now begun to think of other things I have that I could be selling to get all the way there. For now, it's close enough that I did go ahead and make the purchase. I view it as a win-win-win situation. I got a new laptop (win!), de-cluttered the house a bit (win!), and paid for the laptop mostly with Craigslist cash (win!).

Monday, August 10, 2015

This is news somehow?

I've come across a few articles recently that I really hope aren't actually news to anyone reading them.
The basic theme of the articles is that you may find it harder to qualify for a mortgage if you have a lot of student loans. Really? That's supposed to be news? Just because your debt is a student loan doesn't mean it all of the sudden isn't debt. Just like you'd have a hard time buying a house if you already spent half your income on car payments, if a large portion of your income is used to cover payments on student loans, banks will be hesitant to loan you even more money for a house.
One of the authors went so far as to say you may be better off not even going to college since you can still make a decent income without a college degree and you wouldn't be saddled with mountains of student loans.

Taking a step back, I decided I wanted to look at this problem through a finance lens. In finance, when evaluating between two decisions, an easy analysis can be done called NPV, or Net Present Value. The purpose of the analysis is to compare two alternatives, and to account for the fact that having some money today is better than having the same amount of money in the future. In this case though, the question is whether going to college is worth the extra time and energy required versus just finding a job right out of high school and skipping college.

U.S. News reported that, on average, a 25-32 year old with a college degree earns about $17,500 per year more than their peers who only have a high school diploma and the average starting salary for a college graduate is around $45,500. Assuming that each person's income grows at 3%, you would actually expect that gap to widen over time. Looking at those numbers, it's no wonder that most people agree that getting a college education is worth the investment. Even foregoing four years of income in order to study you can expect to earn upwards of one million dollars more over the course of your lifetime just for having a college degree. But what about those four years of school where you aren't earning any income? That's where this handy little NPV analysis comes in. This allows us to judge between two decisions by discounting the income from future periods to a 'present value'. Here's what I came up with:

A few things stood out to me from this chart. First, how crazy is it that a college graduate could earn about $1.5M more over the course of their lifetime?

Now, when comparing alternatives with NPV analysis, a higher NPV is better. As you can see, going to college without incurring any debt is your best long term strategy. The way I think about it though, whether to go to college is not a $1.5M decision, but rather a $80,000 decision (the difference between NPVs, not the difference between lifetime incomes). This is because even though (on average), you can make more income, a lot of the extra income is later in life and so not as valuable as income today.

Lastly, it is worth noting that this analysis shows that a getting a degree with some debt is still better than not going to college at all. The average student that graduates with debt has about $28,000 in debt. What these numbers show us is that, while still a higher NPV, by taking on debt to fund education, you effectively give up 20% of the benefit of the increased income.

I'll be honest, when I first read that the average loan balance of college graduates was $28,000, I was surprised that it was so low. Financial news sites seem to only highlight cases where people borrow $100k+ and get a degree in a low paying field and then use these extreme examples to show that college isn't worth the investment. What's sad is that this same analysis shows that they are probably right. If you do happen to borrow $100k to get a degree that can only help you get an average paying job, this analysis would show that the act of borrowing heavily to finance an education negates the majority of the additional earning potential.

Thursday, July 2, 2015

Net Worth Update – approaching $500k!

It's about time I update my net worth again (last update). A lot has happened so far this year to help boost my net worth. It's interesting how when you watch something like this frequently it may seem like little progress is being made, so I was pleasantly surprised to notice that since the start of the year, my net worth has increased by $47k, or about 10% to $492k in a period where my take-home pay has been about $45k.
Going forward, in addition to providing my net worth, I wanted to provide some additional context about what exactly makes up my net worth. As you can see below, a good portion is tied up in the value of my home. For the past several years we have been paying extra on our mortgage and have built up a good amount of equity on top of the large down payment we made. At our current pace, we will have the mortgage paid off in just under ten years, but are working on ways to make that happen much sooner.
You'll probably also notice that we are getting really close to hitting the $500,000 net worth mark. I've certainly noticed too. Not that it will change anything (have you ever heard of a "half-millionaire"?), but it certainly is a threshold that will feel good psychologically to pass.

As you can see, determining net worth is pretty straightforward, especially when our mortgage is our only debt. What makes it even easier for me is using free tools like For my vehicles, I use the Kelly Blue Book value for private party sale and for my home I use the estimate from Zillow. I know some real estate professionals don't care for Zillow, but the value seems very accurate given comparable sales I have seen happen in our neighborhood. When we first bought our house, it needed a lot of work, so Zillow may have been overestimating the value of our home for a bit. But with all the work that we've put into the house to get it up to par it now seems reasonable to assume that the Zillow price estimate is an accurate value (and a real estate agent friend of ours who knows our house and neighborhood well agrees).

Monday, June 22, 2015

DIY Within a month

 within a month

I recently came across this gem of a quote and had to share.

“There is nothing in ordinary gardening, carpentering, or work about a house that any intelligent man cannot learn in a month by giving his mind to it.” William J. Dawson, The Quest of the Simple Life

Personal finance isn’t all that different from home improvement projects in this sense. This is not to say that you can master something in one month, but if you truly dedicated every spare moment to it, it’s amazing what you can learn in a relatively short amount of time.

Thursday, June 18, 2015

Mutual Funds vs Index Funds

I've mentioned before how I largely recommend index funds, especially in 401k accounts. To explain why, let's start with Mutual funds.

Mutual funds allow you to invest small amounts of money in diversified portfolios. Each mutual fund has a pre-specified way that the money will be invested and the fund manager is responsible to pick the investments they believe will grow the most. In exchange for managing the funds, a percentage of the invested assets is paid to the fund manager each year.

If you want to evaluate the manager of your mutual fund, the easiest way to do so is to compare the performance of the fund to an index, like the S&P 500. The S&P 500 has been around longer than mutual funds and is used to gauge how well the economy in general is doing. At the most basic level, if the S&P 500 is up 10% and over the same time period your mutual fund is up 12%, the fund manager is outperforming. Naturally, then, you would always want to invest only in mutual funds that are outperforming the index, right? Therein lies the challenge. How do you know beforehand whether a fund manager will outperform the index over the next year? Mutual fund companies and brokers are quick to point out that "past performance is not an indicator of future results", but if we're being honest, everyone looks at past performance and gives it a lot of weight in their decision of whether to invest in a fund.

The true challenge is the fact that there are no mutual funds that have ALWAYS outperformed the index. It isn't hard to find a fund that beat the index last year, or even for the past few years, but there has never been a mutual fund that has beat their benchmark every single year.
Enter the index fund. Unlike actively managed mutual funds, Index funds are passively managed mutual fund that attempt to mimic an index rather than outperform the index. One of the largest and most well-known index funds is the Vangaurd 500 fund, which has been around since 1976. The theory behind an index fund is that if you can't predict what actively managed funds will outperform the market, you should just invest in something that will do what the index does. Additionally, because management of an index fund is simpler, the expenses to manage the fund are much lower than an actively managed fund, so investors are able to keep more of the return. A typical expense ratio for an actively managed fund could be around 1% per year, whereas an index fund is generally 0.10% or lower.

There are a few other reasons that I prefer index funds. First, time savings. As a DIY investor, I don't have the time or resources to do research on every available mutual fund out there to find the needle in the haystack fund that might outperform the index, then constantly be researching to make sure the funds I have selected are still the best ones to have. By owning index funds, I can focus my time on making sure I have the right percentage of my portfolio allocated to stocks vs bonds and not run the risk of having bad funds. In a 401k this is especially true since your company will generally only make a few funds available for you to invest in from the thousands of available funds and the criteria for selecting what funds to make available differs greatly between companies and is unlikely to match your own criteria. Most of the time, the mutual fund options I see in 401k lineups have higher than average fees and lower than average performance (the two go hand in hand).

The next reason I prefer index funds is for the cost savings. The expense ratio for most of my index funds is around 0.07% per year, compared to around 1% for a typical actively managed fund. If an actively managed fund were to invest the same as an index fund, because of their fees, the index fund would end up nearly 1% better each year. While it is certainly possible to have an actively managed fund that charges more fees and still outperforms the market, I would hate to have an actively managed fund that charged higher fees and still did worse than if I had just been in an index fund (which is actually what happens most of the time).

Lastly, I believe that most markets are efficient, especially those for large US company stocks.
What this basically means is that everyone has the same information about a stock and whenever new information becomes available, the stock price adjusts almost immediately to reflect the impact of that new information. This means that it is not possible to make outsized gains on stock based on research, since anything you could discover from publicly available information is available to everyone and has already been priced into the stock. I believe that exceptions to this rule exist in other markets where there are less market participants or less public information available, but for purposes of investing in the US stock market, I don't believe anyone can have a significant information advantage without breaking the law.

Wednesday, June 3, 2015

Living up to the “DIY” name

These past few weeks have been incredibly busy and are just now calming down. I've mentioned before that I tend to be a big do-it-yourselfer, and this past month has been packed morning, noon, and night with wrapping up several projects around the house. Some of the projects we have done (DIY or hired out) around the house this past year include:

  • Renovating two bathrooms (including new tile, sinks, faucets, and toilets)
  • Replacing our roof
  • Getting new carpet and fixing squeaky sub-floors
  • Installing trim throughout the house
  • Installing new insulation
  • Sanding and re-staining hardwood floors and replacing carpet with hardwood floors in one room
  • Painting nearly the entire house interior
  • Removing wallpaper in two bathrooms (this was such a pain, but was soooo necessary. My bathroom glowed red into the bedroom when the bathroom lights were on)
  • Seemingly never-ending yard work on our near two acre lot, including taking down trees, pruning, mowing, and lots of pressure washing

I enjoy projects and can't remember very many times since I became a homeowner that I haven't had some type of project going on. Since we rarely hire work out, doing projects sometimes takes a while, so we've all become accustomed to living in a construction zone, but the projects are usually contained to just one or two rooms of the house at a time. This time, however, we found ourselves simultaneously involved in some type of project in most rooms of the house, and gave ourselves a deadline to finish everything that we just barely met. In some ways it feels nice to not have any projects currently going on, but of course, I look around the house and see things I'd like to do. Thankfully my wife seems to have the same strain of remodeling addiction (if not worse), but for now we've made a joint decision that we're done with major home projects for a while. I'll post more later on the line of thinking that caused us to make this decision but suffice it to say, it's all related to the theme of this blog.

Sunday, April 26, 2015

Investing in a 401k

I recently met with someone who has decided to begin investing in his work 401k but didn't know how to get started. He had all of the plan literature from when he got hired, but had ignored it because he didn't really understand it and it seemed like so much information that he didn't know where to start. Unfortunately, I've found this response to be common. In an effort to remove some of the roadblocks to getting started, Congress now allows employers to automatically enroll new employees into their company 401k into default investments (usually 'target date funds'). While this is a good start, it certainly isn't enough. Below I will walk through the decisions you need to make when investing in your 401k.

How much should I put in to my 401k?
  • Your 401k through your employer can be a great place to invest. My rule of thumb is to invest whatever you need to in order to get the full employer match. Every 401k is different so you'll need to look up your plan specifics. My employer matches up to 5%, so I make sure that I always contribute at least 5%. The person I helped the other day was eligible for a 50% match up to 6% contributions (so if he put in 6%, the employer matched with 3%). If you are able to save more than what your employer will match, you should set up a Roth IRA on your own. Why not just max out your 401k? Generally speaking, your 401k is going to have limited investment options. If you wanted to invest in something that wasn't in the lineup, you wouldn't be able to do so. Maybe the fund choices are great, maybe they're not. I would only recommend adding non-matched money to your 401k after you have already maxed out your Roth IRA for the year (current maximum is $5,500 for IRAs).
Pre-tax or after tax?

  • Whenever possible, and with few exceptions, I recommend making your 401k contributions AFTER-TAX. This means that the money you are adding to your retirement is invested after you have already paid income taxes on it, but also means that when you withdraw it, you can do so TAX FREE. Money that your employer contributes to your 401k, or that you put in PRE-TAX, is considered taxable income when you withdraw it in retirement.
  • To illustrate the true power of TAX FREE growth, consider this example. If you invested $5,000 per year over the course of a 30 year career and earned an average return of 10%, you would have over $800,000 at the end of 30 years. How much is actually yours (as opposed to the tax man) depends on whether you put the money in before or after taxes.
  • Make sense now? I've talked about the power of compound interest, but here again you can see that of the if you invest for a long period of time the majority of your account ends up being earnings. The first column shows how much you'd have if you simply put $5k/year under a mattress and the second column is if you put it into a savings account (assuming a 3% return, which is currently very high but average over a long period of time).
  • The advantage of a 401k is shown in the last three columns. Under each of the three scenarios, I am assuming that you earn an average return of 10%, the only difference is how and when you pay taxes. If you invest $5k/year outside of a 401k, you'll have to pay taxes on earnings as they happen and end up with the middle column, or about $500k. Not bad. However, if you invest in a 401k, you don't have to worry about taxes each year, so you're able to keep the entire amount invested and growing. You actually end up with the same amount in your account whether you are contributing PRE-TAX or AFTER-TAX, but the difference is if your account is PRE-TAX, then only about 75% of that money is actually yours, the rest you'll have to pay to the IRS as you withdraw. If you withdrew the entire amount all at once, your tax rate goes up and you get to keep even less than that.
  • The takeaway here is that if you make annual contributions of $5k PRE-TAX, you end up getting an annual tax benefit of ~$1,250, but end up paying about $200,000 in taxes down the road, whereas if your contributions are made AFTER-TAX, you don't get the tax benefit now, but end up paying a lot less in taxes over time.
How to invest the money once it is in the 401k
  • The most important part of saving for retirement is to actually put money in your account. The second most important thing is to minimize taxes. Once you've done this, the next most important part about saving for retirement is how you actually invest. This topic is often the part that is considered the most confusing or intimidating part of investing, but it doesn't have to be. Unless your 401k plan has hundreds of investments to choose from, I generally recommend one of two different options, and it is dependent upon how much time and effort YOU want to put into managing your account.
    • Age Based Strategy: The aged based strategy is what I would recommend for someone who prefers to be hands off, doesn't want to pay additional fees for customized professional management, and who has not yet done significant research into the various investment options that exist. Nearly all 401k plans will offer this type of strategy and you can often identify it by the funds including the target year (2020, 2030, 2040, etc). These tend to be very diversified and are invested with the assumption that you plan to retire in or near the 'target year' mentioned in the name of the fund. While I do NOT have any of my own money invested in these types of funds, I don't lose sleep knowing that I have friends and family invested in them when they are bought for the right reasons.
      • A thought about Age Based Funds: I have frequently seen investors buy multiple different age based funds in their 401ks. I met someone recently who was wanting to retire in 20 years and had invested his 401k across several different age based funds (He had 2020, 2030, and 2040 funds). These funds are generally structured so that you only should be buying one, and investing the majority of your assets in that one fund. If you were to look at what the funds are invested in, you'll see that you don't get any additional diversification by having a different target year fund (they will generally invest in the same things, just in different percentage allocations). If, for example, you were to invest half in a 2040 fund and half in a 2030 fund, you've essentially just created a 2035 fund, which is probably a separate fund you can choose. If you feel that you need something more customized than this and want to do the leg work, you should build your own portfolio using other funds.
    • DIY Asset Allocation: This is the method that I invest in my personal 401k, and the method I recommend for anyone looking to manage their own 401k. Because the majority of 401k's only have limited investment options, I almost always recommend looking for the index fund options. Index funds are invested to match the performance of an index, like the S&P 500, whereas other funds are invested to try and beat the market. There is a lot of debate out there as to whether mutual funds even can beat the market, but the data clearly shows that many funds do not do as well as the index they are trying to beat. Because you generally only have a few choices for funds in your 401k of the thousands of funds that exist, the odds of your employer selecting the best of the best actively managed funds in all categories in all times, is virtually zero. Once you eliminate the actively managed funds from your selection, you will probably be left with only 3-6 funds to choose from.
    • The next question you need to ask yourself is: How much risk can you handle? For these purposes, risk can be measured by the portion of your account invested in stocks vs bonds.
      It has been said that the younger you are the more aggressive an investor you should be. While I agree with this in theory, it isn't a perfect one-size fits all approach. I would add two additional considerations. 1) If you are invested so aggressively that you lose sleep worrying about losing money, or if you find yourself frequently wanting to sell everything, you may want to invest with slightly lower exposure to stocks than your age would dictate. If you do this, you should understand that you'll need to be saving and investing more to compensate for the lower returns you should expect. 2) If you are reasonably confident that you will NOT need to use a portion of your assets in your lifetime, and plan to leave an inheritance to your heirs, you should invest that portion with THEIR timeline in mind and not yours. This means you may have a more aggressive portfolio than your age alone would indicate.
    • The way I have invested my 401k is to put 50% in the S&P 500, 10% in International stocks, 10% in Small/Midcap stocks, and 30% in bonds. Roughly once per quarter, I will look at my account balances and see how this has shifted and rebalance back to the same mix. Over time, one would expect stocks to outperform bonds, so naturally the 30% in bonds may shrink. Gone unchecked for long-enough, the bond allocation could shrink so much that my whole account is more aggressive than I intended. Periodically rebalancing is a process to naturally 'take earnings off the table', by reducing exposure to whatever has had the best relative performance.

TAKEAWAY: The most important part about investing in a 401k is ACTUALLY PUTTING MONEY IN YOUR ACCOUNT. The next step is to make sure you're doing so in the most tax efficient manner. Lastly, you'll want to make sure that whatever you're investing in is right for you.
Do you have any questions about your 401k?

Saturday, April 11, 2015

Broker No More

As of today, I am officially no longer a licensed stockbroker or financial advisor. I knew this day would come, and it is a relief to formally have that chapter in life behind me. This isn't exactly a surprise, since I formally left the industry two years ago, but since then, my licenses have been dormant. Until now, I could have taken another financial services job and simply picked up where I left off from a licensing perspective. Now that my licenses have officially lapsed, I have to retake all of the licensing exams if I want to work as a broker again. Thankfully, I don't want to do that.

What that means for this site is that I now feel some additional freedom to discuss topics that I wouldn't have felt comfortable discussing while I still held licenses. My opinions and advice have not changed, but when I worked as an advisor there was always the fear of being vocal about opinions that differed from those of the company. For example, I personally prefer index funds to actively managed mutual funds. I'll write more about this preference later, but as you might expect this contradicted the investment philosophy of my former employer. Even though I recommended index funds all of the time to clients, it was clear that they would have preferred clients to invest in actively managed funds or managed accounts.

This matters to this site because I feel more at ease sharing my opinions now that I won't be representing anyone besides myself.

Wednesday, April 1, 2015

Debt Reduction

Remember my friend who I helped with a debt reduction plan? As it turns out, he didn't share the full picture of his debt at the time. In addition to the student loans, he also had about $2,000 in credit card debt to pay off in addition to the $11,000 in student loans. He has also had some large expenses come up that he hadn't been expecting that slowed down his progress. This also presented a moment for us to discuss the importance of budgeting. When you have a budget where you plan out your income and expenses, large expenses like semi-annual car insurance should NOT come as a surprise.

Thankfully my friend has had the opportunity to work a lot of overtime for the past few weeks and has been able to significantly increase his take-home pay to help kick-start his debt payoff. He is continuing to work a lot of overtime and has also reduced his discretionary expenses. I'm pleased to say that he is getting very focused on beating this debt as quickly as possible.

With his permission, I am going to provide periodic updates of his debt and outlook.
Debt update

As you can see, over the past 6 weeks, he has been able to pay off nearly $800 in student loans, and $1,900 in total debt! Looking forward, that pace will likely be slowing down as he may not have as much opportunity to work overtime. His current plan is to be paying at least $1,000 per month towards debt, which would have him out of debt in just under 1 year.

Debt payoff

Friday, March 27, 2015

Beware of Brokers at the end of the month/quarter

For a lot of brokers, today was the last day of the quarter for sales to count in the first quarter. I'm sure there were lots of brokers pounding the phones today trying to get that one last sale to count towards first quarter goals. Hopefully you haven't had any interactions with brokers this week like one I heard about from today.

I talked to a friend today who had an interaction with a broker who was adamant that a particular transaction be funded TODAY! The broker had recommended the client sell certain investments to purchase new investments. Because of the settlement of the sales, the cash wouldn't be available to make the buys until next week. The client was indifferent as to whether the new investments were purchased today or next week, but the broker tried everything he could think of to make sure the purchases were made today. Ultimately, the broker was unsuccessful, so he won't get credit for the sales until next week, which is likely all included in 2Q even though April doesn't start until Wednesday.

If you ever find yourself on the client side of this type of interaction, you should probably ask yourself "Why is it so important that this happen TODAY?" I would always be wary of acting on a recommendation of a broker, especially towards the end of the year/quarter. The broker is going to get paid commission on a purchase no matter what quarter it happens in. Because there are often quarterly bonuses based on total sales, this sale could have been the difference between getting an additional bonus or not.

Sorry for not warning you earlier. Stay safe out there.

Monday, March 23, 2015

Don’t invest in anything you don’t understand

When I would meet with prospective new clients, the main reason they said they were looking for a new financial advisor was poor performance. What I often found in these cases was that their former advisor had not done a good job of helping the client understand what they were invested in and why. As a result, I would find portfolios that didn't make sense, had high fees built in, and the client had no idea what they were invested in.

The most common example I would see would be when someone had bought a variable annuity and had no idea how it worked, why they owned it, or what benefit it provided to their overall financial plan. In these scenarios, the penalty for ending the contract early often outweighed the savings they could realize by doing so, so they were effectively stuck with a poor decision for several years. In many cases, had they understood what they were investing in and why, it is unlikely that they would have actually made the investment.

Only investing in things you understand sounds obvious, but the fact that some of the worst financial products continue to be sold is proof that it isn't. Individual investors aren't the only ones guilty of this. In the run up to the financial crisis of 2008, the city of Narvik, Norway, lost $64 million investing in synthetic CDO's, a complex product that essentially was tied to sub-prime US mortgages. A good book that talks about this in greater detail is David Fabers "And Then the Roof Caved In".
Investing in things you don't understand doesn't always end poorly, but should be avoided nonetheless. Back in early 2008, I bought shares of Visa (V) right when they first began trading. I paid around $59 per share and held them for about 6 ½ years, selling for around $260 per share, earning an average annual return of 24%. Sounds good right? The problem with this investment was that when I bought the shares, I didn't know how Visa made money! I figured it would be a good investment just because of the ubiquity of the brand name, but didn't really know what would have made the stock go up or down. Did you know that credit card companies make money every time you use your card, but aren't actually loaning you any money? This has become more common knowledge now that products like Square are allowing anyone to accept credit cards and pay swipe fees, but back in 2008, it was something I didn't yet know. This investment worked out well for me that time, but I attribute all of that to luck and not to my own understanding of the investment.

One thing I'd like to make clear though, is that although you should never invest in something you don't understand, not investing in things you don't understand is not an excuse to avoid learning about investments. Just like starting to save early will have compounding benefits in the values of your investments, the sooner and more you can learn about ways you can invest your money the better. The benefits will compound as many different investment types are interrelated and you can understand how several work by learning the basics.

To help avoid investing in something you don't fully understand, here are few questions you can ask yourself before taking the plunge.
  1. What factors will contribute to your investment going up or down in value?
  2. Are there any risks unique to this investment that wouldn't affect the overall economy?
  3. What are some comparable alternatives and how have they done? Why is this investment better than the alternatives?
  4. Who is recommending the investment and what are their incentives?
  5. What are the costs, upfront and/or recurring?
  6. How do you get money out and how long does it need to be kept in?
  7. Are there any guarantees? If so, who provides the guarantee and what exactly is guaranteed?
  8. If there is a guarantee, how often in the past XX (100?) years would I have needed the guarantee? (hint – the answer is likely close to 0, and if so, you probably don't need to pay for that guarantee).
If you can comfortably answer these questions, you're in a good spot and should have a decent grasp on what you are investing in. The idea here is not to be so knowledgeable that you can run your own mutual fund, but rather have enough of an understanding of what you're putting your money into that you are making a conscious decision of how to invest your money rather than simply doing something because someone told you to do so.

If you'd like to get a good handle of the basics, one of my favorite books for that purpose is Learn to 
Earn, by Peter Lynch. It's a book I've given to recent high school graduates or college graduates and it explains very simply how mutual funds work.

Friday, March 20, 2015

Types of Financial Advisors

Remember when I spent a short stint working as a financial advisor getting paid 100% commission? This experience helped me learn how important it is to know the different types of financial advisors. Even if you don't want to BE a financial advisor, you will likely interact with a financial advisor at some point, so it's a good idea to know which type of advisor is best for you. The easiest way to differentiate between advisors is the way that they are paid. How an advisor is paid will determine what they are able to offer you, and can also be a sign of potential conflicts of interest. For simplicity, I'll combine these into three groups, commission based, fee-only, and salary based advisors.

  1. Commission based – This is perhaps the most common way that an advisor is paid. This is also known as a broker. Whenever you make an investment through a broker, you are charged a commission (whether or not you realize it), which goes to pay the broker. Seems pretty straightforward, right? Unfortunately, it's a lot more complicated than it sounds. You may or may not be aware of how much you are paying in commissions, and even if you think you do know, there are likely other behind the scenes payments that occur that you aren't aware of. Another problem is that different investment products pay different rates of commission, with those that pay the highest commission often being the investments that are the worst things an investor could buy. When I worked under this pay structure, I saw this conflict of interest daily and usually saw co-workers leading with the highest commission paying products first. For example, if a broker sells a variable annuity or a private placement, they could earn as much as a 10% commission, quite a bit higher than if they were to sell you loaded mutual funds that pay a 5% commission up front. I don't care who you are, earn twice the money for recommending one thing over another and you're going to see the higher commission investment recommended more often.


    Unlike other critics of the commission model, I'm not 100% opposed to working with an advisor that earns a commission, where I do have a problem is when commission represents the vast majority of pay.


  2. Fee Only – A fee only advisor is just like it sounds, they only are paid in fees, and those fees can only come from you and there are no behind the scenes financial arrangements. A fee based advisor works for you, and when you enter into a relationship with one, you should have a clear picture of what to expect from them and how they are paid. Currently, a fee-only advisor is held to the fiduciary standard, meaning their recommendations must be in your best interest. This type of advisor could charge you in the $150-300 per hour range for things like financial planning, but the most common way a fee-based advisor is paid is on a percentage of assets. This means that they are actively managing your investments and charging you a set percentage based on how much they are managing. As your account balance goes up or down, so does the amount they can collect in fees. This is typically as high as 1%, but generally decreases the more you have invested.

    The challenge with this model is that most of these advisors will have high minimum account balances, usually requiring at least $500,000 to $1,000,000, making it nearly impossible for the average investor to work with a fee-only advisor until they are well on their way towards wealth accumulation. Lately there have been 'robo-advisors' popping up that attempt to offer the same service in a web-based, automated solution with minimal contact with an actual person, but I believe that these are still untested. The true test of the robo-advisors will be how they perform in a market downturn. I spent a lot of time in down markets trying to convince clients not to sell everything, and a lot of time in up markets trying to convince (in some cases the same) clients to not invest too aggressively. I'm not sure how well an automated system can reason with a human.

  3. Salary based –A salary based advisor generally can act as a broker or as a fee based advisor. Because they are licensed as both types of advisors, they can earn commissions when acting as a broker, but if they are acting as a fee-based advisor, cannot earn commissions. This can be confusing, so keep in mind that if you aren't clear how you are being charged, the advisor is acting as a broker. To my knowledge, it is mainly large discount brokers (E*Trade, Fidelity, Schwab, TD Ameritrade, etc.) who will have this structure, and my belief is that it is done this way not to be schizophrenic in their business model, but rather to be able to offer as many different services as possible. These companies are generally in the business of having as many assets under administration (AUA) as possible, whether managed on a fee-only basis or on a commission model. An advantage of this is also that you can typically meet with a representative from this type of company when you are just getting started and don't have to wait until you have accumulated the large minimums most fee based advisors require. They will also often have much lower minimums for fee-based relationships (between $50,000 and $200,000).


    When I worked under this model, my pay was roughly 25% salary, 25% commission and 50% bonuses that were based on customer retention, referrals, and customer satisfaction survey results. Yes, I was earning commissions, and yes, the commission rates were different depending on the product sold, but the difference in commission between products was very small. If a client invested $1,000,000, the difference between the highest and lowest commission I could earn was only $400. My real incentive was not to sell the highest commission generating product, but rather to develop strong relationships with my clients and to retain their business, whether that be fee based business or commission based business.

Should you find yourself needing a financial advisor, my recommendation would be to steer clear of the 100% commission based broker. Not only will you be paying fees and commissions, but they will likely be much higher than you are aware, and much higher than if you were to work with one of the other types of advisors.

If you're curious how a financial advisor is paid, it should be as simple as asking the person you are meeting with. If you'd rather research on your own or before going in for a meeting, dig around on the company website and you'll likely find what you're looking for. Fidelity and Schwab have actually published their compensation details on their websites.

Monday, March 16, 2015

My Work History (part 2)

I quit working at the 100% commission based financial advisor job just a few months after I started and began to look for another job. I was still in school, but the prime period for on-campus job recruiting had passed, so I had to do a lot of work researching companies in the area and apply for jobs without the assistance of any type of on-campus interviews or job postings.

I had enjoyed working with clients in my former job, and would have stayed at the job if there was a way that I could have made a decent living while also offering only investment products that I was comfortable with ethically. This would have also been easier if I had clients with a lot of money to invest, but generally speaking, anyone with a lot of money is going to want a financial advisor who has experience and isn't just a recent college graduate with little to no real experience. I had seen something that I liked doing, but needed experience to be able to do it well. How then, was I to get the experience?

The solution I found was to get a job at a large financial services company working in one of their call centers. It wasn't what I initially had thought I would be doing, but it ended up being ideal for what I needed to learn. Starting out servicing accounts and talking to clients without initially having any ownership stake in their financial plans, I was able to see firsthand the consequences of many different decisions, both good and bad. This experience proved invaluable a couple of years later when I was placed in a position where I was again a financial advisor and had a responsibility for the financial success of my various clients. One of the main things I was able to take away from this experience was the understanding that even though a portfolio may look ideal on paper, the plan is useless if an investor isn't going to stick with it. Keeping this in mind, I was able to build more customized solutions for clients, which resulted in happier clients, more referrals, as well as more income for me.

Over the course of seven years with that employer, I had a total of 6 different job titles (one for only 2 months), and was able to see my pay increase from a $35,000 to over $150,000 just a few years later.

While I truly enjoyed many aspects of my work in financial services, I chose to leave the industry for a career in corporate finance to further develop additional skills. Below, I have detailed my annual income over the years to further illustrate this point.

You'll notice that my total income has come down a bit in recent years. One of the things I was looking for in a career move was more stable income. Although my income in 2012 was over $160,000, only $45,000 of that was guaranteed base salary with the rest being highly variable, whereas now my salary is over $100,000 with a much smaller portion of my income coming in the form of variable bonuses. I also have higher growth potential with my current job whereas I was nearly at my peak earning potential in my previous role. Also, because the majority of my pay in 2011-2013 was paid in semi-annual bonuses, I had to live on a much smaller income during the year until those paychecks arrived. I knew that I wasn't going to spend the rest of my career in that job and chose to save and invest the majority of those bonuses while living on little more than the base salary.

One other thing worth pointing out is that my income didn't decrease from 2008 to 2009, rather my 2008 income included a relocation bonus for when I moved across the country. My income was relatively flat from 2008 to 2009 because overtime and bonuses were slashed amidst the financial crisis.

Saturday, March 14, 2015

My Work History (part 1)

While thinking about the importance of growing your income, I wanted to take some time to outline my work and career history. In a later post, I may do a more comprehensive work history like J Money over at, but for the next couple of posts I wanted to focus on the income and jobs I consider to part of my career, and not all the different jobs I have done before. The hope is that this will illustrate not only how I have grown my income, but when income is managed properly instead of living beyond your means or succumbing to lifestyle inflation you can truly begin to build wealth (see evidence in my recent post on net worth).

My first foray into the financial services industry was during my senior year of college, and was where I learned an important lesson that has helped me significantly since then. I was hired as a financial advisor by a company that resonated with me in the way they talked about doing the right thing for the customer and helping people reach their dreams, and was told that once I was licensed, I would be given clients to work with that the office didn't have the bandwidth to properly support. I would be working 100% on commission, but the average rep made $40,000 in the first year, and to not let the 100% commission part worry me. Over the course of a month or two, I got all of my study materials and studied my brains out and passed all the necessary exams. The next day I went to the office, excited to get started helping people reach their goals. I still remember my heart sink when my boss said something like "All right! Now that you're licensed and ready to sell, let's make a list of all your friends and family and start calling them and selling them crap you wouldn't buy if you actually had any money of your own!" At least, that's what I heard. Wait a second, what about all the clients they had told me about who simply needed a rep assigned to their account that I could call to set up an annual review? Anything besides trying to pitch a variable annuity to my grandma! Sadly, my experience isn't all that uncommon but could have been avoided had I done better research on the industry or had someone I trusted teach me what to look for.

The next carrot that was dangled in front of me was that I would be given some existing clients to work with once I had generated $3,000 in gross commissions, and I was given 90 days to do so or be let go. On the surface this didn't sound very difficult since I had been told that 'average' new hires made $40,000 in their first year. When I started to dig into what I would have to do to get to that number, I wasn't quite as optimistic. The products that paid the most commission were the ones that I didn't want to be selling to ANYONE (whole life insurance, variable annuities, etc). In the end, I did meet with several people that I was able to help get started investing for retirement, and I didn't sell any investments that I felt betrayed what was right. I ended up working for about a month and had a mutual parting of the ways with the company.

I learned a lot of things while working for this company, but the main takeaway for me was that I will never feel comfortable with anyone I know investing through a company where the reps are paid solely on a commission basis. I have yet to hear an argument for the commission model that makes any sense and isn't from someone who has some type of vested interest in the model. The vast majority of people who join this type of company don't make it through their first year, and because of this, these companies will often have low entry requirements to be hired (which perpetuates the turnover problem).

This may not be the best example of 'growing your income', but was a very helpful step in getting me to my next job that I'll be talking about in my next post. It also was useful down the road when I actively helped people to avoid investing in companies like the one I was with for a short time.

Monday, March 9, 2015

Step 5 – Grow Your Income – Financial Offense vs Defense

It's been said that "Offense wins games, Defense wins championships". Similar to sports, you need good offense and defense to be successful financially.

I like to refer to things like budgeting and frugal living as financial defense. Spending money can be very easy, and have good financial defense ensures that you aren't spending everything you earn and are saving and investing for the future.

Financial offense is your income. Growing your income and career are some of the best investments you can make to enable financial success.

Financial success is NOT guaranteed with a higher income, but it certainly helps.

To illustrate this point, let me share an interaction with a prospective client several years ago that I will never forget. He called my office and asked to set up an appointment with a financial advisor. Our office had 8-10 different financial advisors, and like many financial service companies, we generally determined what advisor a client was paired with based on the amount of money they had to invest. This segmentation of clients is common since different strategies and complexities exist for larger portfolios than smaller portfolios that may not have as many alternatives. The prospect wasn't very forthcoming about his investments, but assured the scheduler that he probably should meet with the most experienced advisor in the office. When he came in, it wasn't long before we realized that he was the poster child for the phrase "all hat, no cattle".

This prospect bragged that for the preceding 8 years, his income had been between $500,000 and $800,000 per year as an attorney, and felt he had reasonable expectations for that income level to continue. Clearly he had done well growing his income and playing financial offense. The problem though was that he was not very good at financial defense. His total investable assets (checking/savings accounts, investment accounts, retirement accounts) were only about $100,000. Where did it all go? Well, he had a beautiful house and an equally beautiful vacation home, both of which were worth considerably less than he owed on them. He also had multiple very expensive luxury vehicles with very large car payments. If that wasn't enough, he also felt that his income justified picking up aviation as a hobby, so he had bought a small airplane for $300,000 or so. In total, his debts were approaching $2 million and he had a negative net worth. It was hard to believe that someone with that high of income could be living paycheck to paycheck.

Sadly (or maybe not so sadly), this person never ended up becoming a client of ours. He didn't have enough investable assets to meet my minimums, and our philosophies differed so much that it wasn't worth making an exception.

On the flip side, I have met several people who have become millionaires while earning average $40-50,000 incomes, but mastering financial defense.

The point of this is that YES, growing your income is useful in building wealth, but doing so can be meaningless if financial defense isn't also practiced.

In the next post I'll continue discussing financial offense, including my income history and what I've done to grow my income.