In the movies, villains are usually pretty easy to identify. Whether it’s Bane with his mask, Mr. Potter with his scowl, or Jaws with his…jaws, it’s usually simple to spot the bad guy.
The villains in your financial life aren’t quite so easy to pick out. Unless, of course, we can dress them up like some movie villains that you’d recognize. Let’s give it a try…
The Wicked Witch of the West
Where do we see the Wicked Witch of the West in the financial world? Well, if you think back to The Wizard of Oz, what was her entire motivation throughout the movie?
She was obsessed with getting her hands on the ruby slippers. And she was willing to go to any lengths to get them. She was completely prepared to kill Dorothy to get the slippers, if that’s what was needed. But her obsession led to her eventual demise when a bucket of water to the face turned her into a smoldering pile of green goo.
In the financial realm, we often see people who have a similar obsession with one particular area of their financial life.
It could be their desire to chase maximum returns on their invested dollars. Which is fine if you’re 30. But if you’re 58, your focus should be less about maximum returns and more about minimizing loss.
It could be an obsession with avoiding taxes. Not a bad goal, except when that obsession prevents you from selling an investment that you should sell because you’re too worried about trying to avoid capital gains, or when you pursue an investment strategy strictly for the tax advantages without considering the actual performance of the investment.
So there’s nothing wrong with ruby slippers, but you don’t want to get too fixated on one thing because it usually doesn’t end well for you.
Darth Vader
Lord Vader had completely mastered the Force. The only problem was that he used it for evil instead of good. So Luke Skywalker had to come along and use the Force in a good way to defeat Darth Vader. And then a lot of awkward family issues came to the forefront, but that’s another story.
So maybe this is less about Darth Vader and more about the Force itself. But the whole idea is that the Force itself isn’t good or bad—it’s all how you use it (or how it’s being used against you). And there are many Forces in the financial world.
Take for instance, rising interest rates. That’s a good force if you like keeping money in your savings account at the bank. But it’s a bad force if you like borrowing money, or if you own a lot of bond funds in your portfolio.
Dollar cost averaging is another force. It’s great if you’re putting money into a volatile place like the market because every time the market is down, you’re buying shares of stuff on sale. But when you’re retired and you’re taking money out, it’s no longer a good thing when the market is down because you now have to sell stuff on sale in order to create cash flow. That’s reverse dollar cost averaging working against you.
You want to be sure that you’re able to harness the economic forces around you and use them for good, like Luke, instead of for evil, like his dad. (Oh, spoiler alert: Darth Vader is Luke’s dad).
Ivan Drago
Drago is probably my favorite movie villain, and Rocky IV is probably my favorite of the Rocky movies. Despite the stupid ending where Rocky single-handedly ends the Cold War with a post-fight speech about nothing.
In any event, Drago was as cold and ruthless as the Soviet countryside from whence he came. He only spoke in short phrases like, “I defeat all man,” or “I must break you.” Or, when he dealt a death blow to Apollo Creed, “If he dies…he dies.” (Spoiler alert: Apollo Creed dies).
Not the most compassionate guy you’ll ever run across.
So where do we find Drago in the financial industry? Well, he’s represented by the big wire houses who are completely focused on sales and not the least bit interested in assessing your life and creating a customized plan for you. Drago was all about getting his next KO and moving on to the next opponent; the big wire houses are all about selling a product and moving on to the next person.
To illustrate how true this is, there’s a new law that’s about to be enforced as of next April that will require basically everyone in the financial industry to act as a fiduciary in dealing with their clients. That means they have to act in the client’s best interest instead of just selling them a product, collecting a commission, and disappearing. So now that they’ll be required to do what’s best for their clients, a lot of these big companies are being forced to completely change their business models. What does that tell you?
So the financial villains are there, you just have to learn how to recognize them and put them in their place. Throw a bucket of water in their faces if you have to.
Financial Tricks & Treats
In today’s society, “Trick or Treat” is a bit of an obsolete phrase.
In a few days, when we take Lilly out to prance around the neighborhood—either wearing an Ariel costume or dressed as a ghost (she wavers between the two from day to day, so I guess it will be a game time decision)—she’ll say “Trick or Treat” when someone answers the door. But my guess is that if somebody doesn’t give her a treat, it’s not likely that she’ll be rounding up her three-year-old compatriots to egg their house later that evening.
So in her case it’s really “Treat or…just move along to the next house.” Not many tricks happening in 2016. (Insert obligatory statement about kids these days not being able to stop looking at their phones long enough to toilet paper somebody’s yard).
If only things could be so wholesome in the financial world. Alas, there are many things in the financial world that seem to be treats, but they’re actually tricks. Let’s assess whether some of these things are tricks or treats:
1) Free financial advice from your 401k administrator
Trick or Treat?
Analysis: Trick
I see this one a lot. You’ve been at your company for a long time and you’re now in your prime earning years. One day, you get a call from someone at your 401k custodian (Fidelity, Prudential, etc.) who says something like, “As a valued and highly compensated employee, you have access to one of our financial advisors at no cost to you. Would you like to set up a time to talk with one of our coaches?”
“Terrific!” you exclaim. “My hard work over the years has been recognized by my employer and they’re including this little perk as part of my compensation.”
Well, not so fast. Your employer actually doesn’t care about this deal. In fact, they probably have no idea about this “benefit” you’re receiving.
Here’s the trick. The folks at Fidelity (or wherever) see that you have a lot of money in your 401k. They also see that you’re earning a decent salary. So they assume that you probably have some other money invested in some other accounts besides your 401k.
So they offer to give you some free advice. And what does that free advice consist of? It usually entails you transferring some (or all) of your non-401k assets over to some mutual funds that they recommend for you. Which just happen to be their own proprietary funds. Which just happen to be the funds that make them a lot of money when you invest in them.
It’s possible that those funds are good options for you. But it’s more likely that there are better ways for you to invest. Either way, the bottom line is that you didn’t get advice. You got a sales pitch disguised as an opportunity to get free advice.
2) Life insurance with an accelerated death benefit
Trick or Treat?
Analysis: Treat
It seems that a lot of people don’t know about this treat, but it’s often a pretty good fit for folks.
This is a strategy that’s designed to combat the “use it or lose it” component of long term care insurance. If you buy a long term care insurance policy and pay premiums for 20-25 years, but you never go into the nursing home, then you never get a return on all of those premiums (except the peace of mind of knowing that you had coverage for a nursing home stay).
Here’s how the life insurance strategy works. Let’s suppose you have a $200,000 policy with an accelerated death benefit. If you die, your beneficiary gets the $200,000, just like any life insurance. But now let’s suppose you go into the nursing home. The life insurance company says, “Well, he/she is probably going to die soon anyway, so we’ll have to pay out this death benefit soon. Might as well let them use it to pay for the nursing home.”
So you can accelerate the payment of that death benefit to get your hands on the money before you actually die. If you spend it all on nursing home care, then there won’t be any death benefit left. But now you’ve eliminated the use-it-or-lose-it problem. That money is either a death benefit that passes on to your beneficiaries, or you use it to pay for your care. Either way, you get your money eventually.
3) Reverse Mortgage
Trick or Treat?
Analysis: Trick (usually)
If you spend any amount of time watching cable news, you’ve probably run across The Fonz telling you about reverse mortgages. It used to be Fred Thompson making the pitch. Ten years from now, it will probably be Marco Rubio.
The idea is that you can easily turn the equity in your home into liquid cash. Usually you can get payouts in the form of a monthly check, a one-time lump sum, or an account where you can take money as needed at irregular intervals.
If your parents are in their 80s, with no assets, living off Social Security, then this could be a good strategy for them. It’s a last resort that allows them to stay in their home and pay the bills.
But in most cases, the reverse mortgage isn’t a very efficient option. If it’s not an emergency or last resort, it’s usually just a really expensive way to turn your equity into cash.
So when the trick-or-treaters come to your door this year, seize the opportunity to teach them about some of the tricks and treats of the financial world. Or if you’re hoping to not get your house egged, maybe just keep this newfound knowledge to yourself.
Presidential Financial Planning
As if you needed another reason to be more disconsolate about the options available to you on your presidential ballot this fall.
But since we’re all in a presidential mood right now, let’s take a look back at some presidents of the past and a few of their well-known quotations. Our mission here is to simply take those quotes and weave them into some sort of retirement planning wisdom.
And where should we start, but at the very beginning…
“When only one side of a story is heard and often repeated, the human mind becomes impressed with it.” – George Washington
What’s our financial connection here? Well, how often do we see the Wall Street machine create a narrative that becomes the accepted storyline? When the talking points have been repeated often enough, they eventually become the conventional wisdom.
One of the most the common Wall Street talking points is, “It’s only a loss on paper. You haven’t lost anything unless you sell.”
Well, that’s true if you’re 35 years old and you don’t have to sell anything. But what if you’re 67 and you’re retiring next year and you need to sell those shares of Proctor & Gamble to generate income? Suddenly that loss is a little more than a paper loss.
“Trust but verify.” – Ronald Reagan
This can be a delicate balance to strike for a lot of people. Most people have one element mastered, but they struggle with the other one.
With some folks, trust is very difficult to earn. And in a couple of cases, I’ve actually told people that we shouldn’t proceed with any planning because I can tell that they have trust issues and it’s unlikely that we’ll be able to accomplish anything.
For instance, I remember a lady who came to visit a couple of years ago. She wasn’t very inclined to share much about her goals or dreams for retirement because she was too busy giving me the side-eye while she tried to discern how I was going to distract her with my left hand while stealing her wallet with my right. Needless to say, if there’s not at least a reasonable expectation of trust from the very beginning, we’re not going to get very far.
On the other hand, some people trust everything they’re told way too readily and don’t do a good job with the “verify” portion. A gentleman comes to mind from a few weeks ago who was ready to implement several different strategies before I’d even had a chance to describe any of them. I could tell he was way too eager, so I floated this test balloon:
“I think we should put half of your IRA into a variety of Middle Eastern currencies. The other half will be split between biopharma penny stocks and Guatemalan real estate.”
I really thought he’d know I was joking. But he was not aware.
So I had to disabuse him of the notion that we’d be adding a Central American volcano to his portfolio. And then we had to have a little talk about the importance of understanding what he’s doing before he does it.
“Ask not what your country can do for you, ask what you can do for your country.” – JFK
What if all financial advisors said, “Ask not what this potential client can do for me, but what I can do for this potential client?”
If you’re not already familiar the concept of a fiduciary, it’s something that you’ll want to get acquainted with. A fiduciary is someone who’s legally required to act in your best interest. That means an advisor who’s a fiduciary would have to be able to prove in court that the advice they gave you was for your benefit, not to help them make a commission.
Here’s a few types of people who are fiduciaries:
Attorneys
CPAs
Registered Investment Advisors
Realtors
And a few people who aren’t:
Stockbrokers
Life insurance salesmen
Toyota dealers
Lou the butcher
Does that mean that all attorneys and investment advisors are perfect fits for you? No. Nor does it mean that the guy trying to sell you a life insurance policy is a charlatan. But if you’ll take a moment to understand how people are compensated, you’ll have a better understanding of how to filter the advice they give you.
Packing Your Financial Suitcase
It’s funny how your luggage evolves over the years.
I remember when I was in college, I’d go somewhere for the weekend and wouldn’t even bother with luggage. Just throw a couple of pairs of underwear in the backseat, along with an extra shirt and pair of jeans, and all is well. If I really wanted to get fancy, I might use a grocery bag.
Then, as I came to accept the fact that I was considered an adult by most objective standards, I actually started using a bag of some sort. Still nothing fancy, but it technically qualified as luggage.
When we got married, my parents bought us one of those luggage sets with the three matching bags of various sizes that all fit inside of each other like Russian nesting dolls.
Now when we travel, it looks like the Ringling Brothers have started using Southwest Airlines to move the circus from town to town.
Lilly ends up with a few bags, half of them filled with books, toys and stuffed animals. Amos usually gets a couple of bags to accommodate the diapers and piles of inevitable changes of clothes. Molly and I sometimes try to get all of our stuff in one bag, but that can be a challenge.
And then we each get a carry-on. Or as Jeff Foxworthy says, “Momma gets two carry-ons and I get to take whatever I can fit in my pockets.”
But our current luggage situation is a helpful illustration for how I like to construct a retirement plan.
1) Each bag has a job.
I don’t put my socks in the same bag as Lilly’s stuffed animals. (She might move them there by the end of the trip, but that’s never the original plan). I also don’t stick Molly’s curling iron in the same bag with my laptop.
There’s a bag for adult clothes, another bag for kids’ clothes. One bag for toiletries, another bag for laptop, iPad, chargers, etc.
The same thing needs to happen with your portfolio. Different accounts or different suitcases of money should have investments that are designed to accomplish a well-defined job for you.
2) Your most vital items should go in your carry-on in case your luggage gets temporarily lost.
Think about the things that you put in your carry-on bag. It’s usually limited to the stuff you want to have with you on the plane, and the stuff that you absolutely have to have for your first day of the trip. That way if your luggage gets lost, you at least have 24 hours to get it back before your week is ruined.
In the financial world, everybody has some money that they can’t afford to lose. And if you can’t afford to temporarily lose it, you should have it in your financial carry-on, or accounts with protection of principal. But just like you can’t pack for an entire trip in your carry-on bag, you can’t overfund these accounts. Sure, it’s nice that the principal is protected, but there are other jobs that those accounts can’t accomplish for us.
3) When your luggage does get lost, they’ll get it back to you. Eventually.
It could take just a few hours, or it could take several days. But you’ll eventually get your luggage back. And if you fly often enough, you’re going to eventually experience lost luggage at some point.
Same thing with the market. If you invest in the market long enough, even if you’re invested conservatively, you’re going to take some hits. You’ll sometimes lose your financial luggage. But that’s ok, because you’ll get it back. Eventually. So if you packed your financial carry-on well enough, you don’t have to panic.
4) Neatly and strategically folded clothes allow you to fit a lot more in your suitcase.
If you just ball up your clothes and toss them in the suitcase, you won’t be able to get it zipped. But if they’re neatly folded (or tightly rolled up, as Molly prefers to do it) you should be able to fit in everything you need without much trouble.
I still don’t completely understand the physics of this. It’s all the same amount of fabric, right? But a haphazardly collected pile of clothes simply takes up more space than a strategically folded stack.
The problem I see with a lot of financial suitcases is that they haven’t been efficiently packed.
For instance, you might look over the mutual fund options in your 401k for 45 seconds before you go cross-eyed and then rashly pick a few funds that don’t seem to sound too bad. Then you have the account that you inherited from your parents and it’s still invested in the same things they invested in 16 years ago. And then there’s the 401k from your old job that you haven’t even looked at since you left that company.
This is the financial equivalent of taking a pile of clothes out of your dresser, dropping that pile in your suitcase, and hoping you have everything you need for your trip. The reality is that you’ll end up without a lot of financial tools that you do need, you will have packed a bunch of things that you don’t need, and, to add insult to injury, your financial clothes will be really wrinkled when you arrive at your destination.
So what’s the lesson here? First of all, don’t use a grocery bag in lieu of a suitcase. You’re better than that. Second, pay attention to the process next time you’re packing for a trip. You might learn a little bit about retirement planning.