To Give and Not Accumulate

I resolved to stop accumulating and begin the infinitely more serious

and difficult task of wise distribution.

—Andrew Carnegie

As we move closer to year’s end, my thoughts as a financial advisor tend to drift toward taxes and how I can save clients money on their tax bills come next April. There are two significant ways to save on taxes. The first is to sell the securities that are negative in your portfolio and realize the loss. The second is to make charitable contributions for a tax deduction. There are several factors that dictate how much you can deduct in a given year, but I am not going to get into those specifics here.

What I would like to discuss is giving and charitable consciousness. Chances are if you are reading this blog, you are in a better place than many others. You have a warm place to sleep, food in your refrigerator, and clean clothes to wear. Hopefully, there are not gunshots being fired nearby, and you are free to practice your faith, politics, or sexual preference as you wish.

This presidential election will probably be the ugliest and meanest one in U.S. history. Buckle in, or tune out now! Our country is divided between those who want to protect the wealth and privilege of a few and those who believe in a fair and decent country in which everyone has the chance to be happy and successful. Let’s all take the high road here and agree that if we all succeed, we are stronger as a nation.

Money can be great. It’s fun to buy new clothes, eat a great meal, or take a fantastic vacation. Money can buy freedom, but it doesn’t buy happiness.

So, as we head into the holiday season and begin assembling lists of gifts for Christmas or Chanukah, let’s check that list twice. While giving is great and watching a smile erupt on a child’s face is priceless, why not consider checking your privilege this year and pledge to stop accumulating more stuff.

Personally, doing this won’t be easy, but I am going to try. Whatever the net savings, what we would have bought versus what we did buy, I will give to charity. Are you with me? 

401(k) for the Youth

This week I had the pleasure of doing a 401(k) educational meeting for a client. Once a year I like to meet with the company’s employees, go through the plan, discuss the funds, and answer questions about savings and retirement.

If you read my blog with any regularity, you know the idea or the concept of retirement is a pet peeve of mine.  The media markets retirement as if it were Fantasy Island. Retirement is just another word for not working and how am I going to fund my life at that point. But it’s not a game.

The company that I visited has a lot of young and enthusiastic employees. Most of them are enrolled in the 401(k) plan. Unfortunately, not everyone is deferring a portion of income into the plan; most are not deferring enough.

Here is my list of to-dos for your 401(k) plan. Parents, feel free to share it with your working children.

·         Participate, participate, and participate.

·         Try to defer at least 10% of your salary, with a goal of reaching 15%.

·         Defer enough to max out on a company match if it is available. It’s FREE money!

·         Sign up for auto-escalate so you are automatically increasing the amount you are contributing to your savings. If you get a raise, give yourself a raise in how much more you will save.

·         If your plan doesn’t offer target date funds, demand that it does.

·         If your plan doesn’t offer low-cost index funds, demand that it does.

·         Diversify between stocks and bonds. If you are young, you can defer more to stocks than bonds. If you are risk adverse, talk to the advisor for your plan about an appropriate asset allocation.

·         The world is a big place, and half of the world’s companies are outside of the United States. Have some international exposure to your portfolio.

·         If you are concerned about how your money is invested and what kind of companies you are invested in, ask your employer about socially responsible funds.

·         Your 401(k) is portable: if you leave your company, you can roll your account into your new employer’s 401(k) or into an IRA account. You can also leave it in your employers 401(k). I would discuss with an advisor the benefit or drawback of doing so.

·         If you are older than 50, you can put up to $24,000 annually into your 401(k) account.

·         It’s important to check your account balance at least twice a year. Make sure you have your log-in credentials.

·         Don’t look at your account every day; focus on the long term, not the day to day.

·         Pick a day to rebalance your account once a year; your birthday is a good reminder.

Guess Who's Back

Volatility in the stock market is back. You could hang your hat on a number of reasons why: the slowing Chinese economy, interest rates potentially rising in the United States, Volkswagen lying about its emissions testing, or an “overvalued” stock market. There will always—I repeat, always—be risk in investing in the stock market.

Since 1970, the S&P 500 has returned about 10% a year on an annualized basis. This doesn’t happen every day—if it did, everyone would put their money in the S&P 500 index fund and go to the beach. Some years the market is up 20% or 7%, and some years it’s down 10% or even worse, 30%. That is the nature of the stock market. It goes up, and it goes down. Fortunately, it has gone up in more years than it has gone down. We have had some very bad markets over the last 15 years; there was the tech bubble in 2000, the financial crisis in 2008, the “flash crash” in 2010, and a war of words that almost shut down the U.S. government in 2013.

Despite all of these events, the Russell 1000 index (the index of the 1000 largest market cap stocks in the United States) as of September 23, 2015, is up 12.62% over the past 3 years, 14.07% over the last 5 years, and 7.22% over the last 10 years.*

There is no guarantee that these results will continue in the future, but if you believe in capitalism and that companies will grow their earnings and develop new products and that there is the next Google, Apple, Facebook, GE, or even Chipotle out there, stocks may offer you, over time, some of the best investment returns to help grow your money.

Remember, we invest to fund certain goals—retirement, college, a wedding, or a trip to a place we have dreamed of visiting. Keep all of this in perspective and, as I like to say all of the time, control what you can control. You cannot control the stock market. You can control how much you allocate to stocks, how much you need to save, how to cut down your expenses, and even how often you look at your account balances.

This volatility will pass. It may be next month or next year or in two years, but it will pass. Keep your eye and emotions on your goals and, most importantly, on the things that matter most in your life.

I am attaching an article on long-term investing that was written by David Goetsch for Dimensional Funds, a fund company that I use in many of the portfolios we manage.

I hope you enjoy the article. And remember: control what you can control, and enjoy this beautiful fall weekend.

*Source: Russell Investments 2015. Return and value data utilized in this calculation tool comes from sources believed to be reliable but is neither guaranteed nor warranted and is subject to revision without notice. This tool is being provided for analysis purpose only and should not be used to make investment decisions. Tool and data is to be used at your own risk

The Art Of Budgeting And Back To School

Around the Cohen household one of our favorite movies is Billy Madison—not exactly heady stuff but good for a few really good deep belly laughs. I bring this up only because one of the many great songs in the movie is “Back to School,” which I sing over in my head as Labor Day approaches, the days get shorter, and the new school year is right around the corner.

As we get closer to school starting, parents who are sending their children off to college for the first time ask, “Do you put your kid on a budget at school?” The quick answer is yes. If you happen to be asking this question for the first time as your child heads off to school, it could be a tough transition for both of you. Setting up guidelines about spending or establishing a weekly or monthly allowance early in a child’s life is an excellent practice.

As I often tell new parents when saving for college, save as much as you can and then save some more. Start early teaching your child about money, specifically how much things cost specific to how much income you or you and your spouse make. If you don’t establish a context for the value of money, it will be hard for a child to understand.

When establishing a college budget with your child, I would suggest the following.

·         Let them know what costs you are covering: tuition, books, rent, meal plan, health care costs, cell phone, etc. . . .

·         Outside of those fixed costs, you will (or will not) give an allowance on a weekly or monthly basis. It is easy to transfer money from your personal account to your child’s personal account online. You can, for example, set up automatic transfers with most banks, moving $100 from your account to his or her account on the 1^st of each month.

·         Don’t dump and run! Do not dump a lump sum of money in your child’s account at the beginning of the semester. This will lead to frivolous spending during the first month(s) of college. A good idea might be to ask your child to keep a journal of his or her spending habits for the first month and then review it together in order to get a better understanding of finances going forward.

·         WORK is a four-letter word, but it’s not a bad word. Yes, your child is in school to learn, but having a job teaches many valuable lessons, including the value of financial freedom. It also teaches real-life skills that will be important after graduation, like showing up on time, working hard, and the value of earning a paycheck. This income can supplement expenses you are covering, providing money to for a few good meals out during the month, going to a concert, or buying a new pair of jeans.

Like most guidelines, these are really suggestions, and in the real world life doesn’t happen as well as in a written blog post. I try to adhere to these guidelines, but I’m human, and we humans stray. So, for the true reveal, here is how things go in my life.

I do establish with my children up front what costs I am covering and what I am not covering. I do cover all of the basics mentioned, plus airfare when they fly home, social dues for a sorority, and groceries for their apartments. They pay out of their own pockets when they go out to a restaurant, bar, or convenience store. My children do not have cars and are responsible for their Uber fares (modern world problem). My children do have credit cards for which I cover the bill, but when they purchase items that are out of the terms of our agreement, I debit their checking accounts.

I have begun to share with my children how much their parents earn mostly because we have had to cosign on their leases. Anytime I can share with my children how much something costs relative to what we earn, it is a good lesson in curbing frivolous spending.

Another lesson I try to implement with my children, as well as with myself, is the concept of wants versus needs. When you are in a store, pause before you buy something; ask yourself, “Is this a want or a need? Do I really need another pair of running shoes? Do I need to buy 8 pieces of chicken when we probably only need 4?”

We never did the dump-and-run thing, and I never asked my children to write down and record their spending habits. Truthfully, my children are pretty good about watching their spending, so it has not been an issue.

My son worked his junior and senior year in college at one of the museums on campus, giving tours and working in the gift shop. My daughters do a fair amount of babysitting and have worked during the summers to earn money for the school year. A quick shout out to my daughter Laura, who had a fantastic paid internship this summer and brought her lunch to work every day, saving herself at least $50 a week. Best part is she banked a few thousand dollars this summer, learned some great saving habits, and will be paying for all of her spin classes herself.

As I write this, I have to admit we sound very privileged. My kids have it really easy compared to most. Their sacrifices and what they are paying for are minimal. Budgeting is hard work for grown-ups. It is harder for young adults. If they are going to be successful in life, learning to live within their means, understanding what things cost, having a realistic sense of expenses versus income, and appreciating the value of working are life lessons they probably won’t get in school but will serve them forever.

Learning To Let Go

When you are a young parent, meaning a parent with young children, there is no shortage of books with tips on parenting. How to Breastfeed, How to Get Your Child to Sleep, What to Feed Your Picky Eater, etc. Friends, colleagues, and parents are chock full of advice on what to do when your child won’t nap, what doctor is best, or which homeroom teacher is the nicest. Why is it, though, no one gives advice to parents as their children grow up and get older?

I can tell you this: when you drop off your child at college for the first time and, as it was for us, leave him alone in his dorm room, that is a really tough day. You have raised him under your roof, and now he’s on his own. You leave him like a deer in the headlights, and you’re supposed to suck it up and walk away. 

Today my oldest left for Chicago, seeking his fame and fortune in the Windy City. As you know from a previous post, he graduated a few months ago and spent a good part of the summer living at home. It was like old times—weekends together, watching a movie or baseball game on television or just enjoying a beer by the barbeque. It felt awkward at times leading up to today, knowing that this chapter was about to end.

As I walked out of our apartment this morning, I put on a happy face, gave my son a big hug, and told him to text me when he landed. As I closed the front door and started to walk down the stairs, tears were rolling down my face. I was uncontrollably sobbing.

No one told me there would be days like this. Be warned, they happen, and it’s hard. What is getting me through it is the excitement I feel for him as he starts a new chapter of his life. Your twenties are an amazing time—difficult but also exciting. You’re figuring out who you are, what you stand for, what you want to do, and how and where you want to plant your flag.

Letting go is the most difficult thing for a parent—letting children go and figure stuff out on their own, experience both the pain and joy of life without you. I am a control freak; I like to help map out plans, create ideas and businesses, but in this instance I can’t. I have to let go and hope that whatever advice or influence I’ve given (good or bad) will resonate and help shape a strong and confident child, ready to take on the world on his own two (immeasurably capable) feet.

Financial Planning versus Financial Preparedness

This past year I began incorporating financial planning into my practice. For years I had been more of an investment manager and financial advisor but never a planner. To clear up the jargon, an investment manager evaluates and selects securities to construct a portfolio for clients. A financial advisor gives advice on an array of investments and coaches clients through good and bad markets. A financial planner helps individuals set objectives and create a plan to achieve their goals.

In day-to-day life I am not much of a planner. I kind of like to fly by the seat of my pants. When my family travels to a new city, I never map out where we are going or what we are going to visit. I prefer to wander and see where we end up, which usually leads to a fight and the five of us lost in some obscure part of town. Don’t believe me—ask my wife about our trip to Montreal a few years ago.

When it comes to college or “retirement” planning, you can’t really afford to fly by the seat of your pants. You have to save, and you need a plan to manage your assets accordingly. Hoping that you’ll have the funds to pay for Junior’s first year at Michigan is not a good plan. Maybe your daughter surprises you with news that she’s getting married. It can be extremely challenging to fly blind.

My problem with financial planning is the assumptions it makes. We run numbers and scenarios through computer models, and they spit out a plan. Fortunately or unfortunately, life is not like this. Markets don’t go up 5% a year, interest rates go down, you lose your job, Junior decides he wants to go to medical school after he gets his MBA, and the inheritance you think you may receive doesn’t pan out. Mike Tyson said it best, “Everyone has a plan until they get punched in the face.”

Another wise person once said, “He who fails to plan, plans to fail.” The statement easily applies to financial planning, but instead of calling it that, can we call it “financial preparedness”? Planning assumes static inputs with a predictable outcome, but things are never that neat and tidy. I like my new phrase, financial preparedness. Being prepared is being ready for what might occur down the road, nimble enough to turn on a dime, but also honest enough to admit we never know what’s around the corner.

Golden Road

Away from the hamster wheel of noise about Greece and the falling Chinese stock market, I find myself thinking about the Grateful Dead. In case you were away or checked out, the Grateful Dead performed 3 shows last weekend in Chicago commemorating the 50^th anniversary of the band. I was never a Dead Head and never even appreciated their music growing up. I probably was anti-Dead, favoring the music of Rod Stewart, Elton John, and Kiss. Dead Heads were “hippies,” and for some reason that had a bad connotation for me.

As I have grown older and wiser, I have a newfound appreciation for hippies and what they stand for. Believe it or not, having the hippie aura has actually made me a better advisor, and here are some of the reasons why:

• If you think the news and papers were overloaded with stories about Greece, you should have been in my seat. The amount of whitepapers and webinars that hit my inbox was staggering, every money manager espousing the same analysis. Every firm had the same reaction to the action. My inner hippie advised me to tune out and turn on to continuing to live my life the way I have been doing. A pebble on the road is not going to derail me from my own personal financial goals
• When thinking about your financial goals, be a free thinker. Don’t worry about what your neighbor or office mate is doing. Live your life, reject the mainstream, and stay focused on what is important to you and your family.
• Don’t trust the man, the man being conventional Wall Street “wisdom.” Wall Street is not interested in your well-being; Wall Street is interested in its own well-being and how much it can extract from your pocket. Proprietary products, hedge funds, and structured notes are chocked full of hidden costs and fees you would never know about even if you read the myriad of disclosure pages. Keep it organic and simple.
• Caring about investing with companies that make a difference in the environment and workplace is a good thing. Being kind and generous always help. In your financial plan, think about philanthropy. There are great benefits not just in the feeling that giving produces but also possibly tax wise.
• When it comes to financial planning, and I have written about this numerous times, the easiest way to ensure more successful outcomes in the future is to keep your overhead down. Of course it makes sense to save and invest, but if you spend less, be less of a consumer, the better your chances of achieving financial freedom.

I’ll finish by quoting the poet Robert Frost, who I don’t think was a hippie or financial advisor but thought independently:

Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.