Can you grow your income and wealth?
October 2nd, 2009
Off course you can! Most people underestimate their ability to grow both their income and their wealth. Most people do not create a written plan to increase their income and wealth. Do you believe you can double your net worth in five years?
The four primary areas of increase where average people build their net worth are:
- Savings
- Portfolio return
- Real estate (home) appreciation
- Debt reduction/amortization
There are five major inputs or “levers” by which you can control the four sources of increase. These include:
- The growth rate of your income
- Your savings rate
- The rate of return on your investment portfolio
- The rate of appreciation on your home
- The rate at which you pay off debt
You have the most control over your income, your savings rate and your debt reduction rate. You influence your portfolio rate of return with your asset allocation. You have the least influence over the rate of your real estate appreciation. However you influence the return on your investment or equity in real estate through leverage or the size of your mortgage debt and the rate at which you pay it off.
Start now! For the next 30 days, when you get up in the morning and before going to bed at night, ask yourself the question: “How can we increase our income?”
It is extremely important that you believe your plan is achievable. 90% of achieving financial goals is mental, not financial. “Whether you think you can or can’t, you’re right.”(Henry Ford). Belief determines behavior.
For example, you can reject your Financial Plan because it does not fit your belief systems. Or you can change the Financial Plan until it fits your belief systems. Or you can work on changing your belief systems. Helping people change their belief systems is the work of therapists, psychologists, ministers, educators and financial planners. The purpose of all human communication is to change belief systems.
There are many ways to change your belief systems which are beyond the scope of the work of a Financial Advisor. I believe the primary way to influence your belief system is through education.
Selecting a trustworthy advisor
July 26th, 2009
If I were a prospective client, here are the steps I would take to reduce the possibility of hiring a financial advisor or being defrauded by him if he is tempted to take money from my accounts. Each step increases my Peace Of Mind, but also reduces the number of potential advisors.
Step I: Choose Fiduciary standard of care OVER Suitability standard of care. Why? It provides you with highest legal standard of care under federal law, converts personal trust into a legal right, places advisor under growing body of fiduciary law & principles governing money management, increases risk of criminal prosecution for advisor and severity of penalties, including prison. It also increases the probability of restitution for investor losses.
Step II: Choose a FEE-ONLY advisor with a preference to flat fee compensation OVER Commissions and fees from sale of products, fee-based combination. Why? It reduces conflicts of interest between investor and advisor. It also creates greater alignment between investor and advisor interests.
Step III: Choose Passive management investment philosophy OVER Active management investment philosophy. Why? It removes expectation for advisor to “beat” the market by speculating with investor money in an economic “zero-sum game”. Frees advisor to focus on areas where he has much higher probability of delivering value, such as goal setting, tax planning, retirement planning, wealth building, risk management, values clarification, conflict resolution, estate planning, asset protection, etc. An advisor who simply helps client harvest market returns with index funds or passively managed portfolios is MUCH less likely to lose money in speculative investment activities.
Step IV: Run a background check OVER using gut feeling, “we like him”. Why? It removes advisors with criminal backgrounds, previous securities violations and history of compliance problems
Step V: Give a Limited Power Of Attorney (POA) for trading or View/Read only POA only OVER Custody of your account. Why? Advisor does not have power to execute trades. You can execute trades recommended by the advisor.
Mistake #2 – Strategy is to “Beat the Market”
July 10th, 2009
One of the biggest reasons investors underperform the market is that they try to beat it. Since the early 1970s there have been two competing theories on how to get better investment returns. Active Management is the oldest and still most widely held. The goal of active management is to “beat the market”. The last time I checked about 93% ($6.5 trillion) of all mutual fund dollars were actively managed.
Passive Management is the relatively new theory which is gaining acceptance among a growing number of academics and institutional money managers. The goal of passive management is to “capture market returns” by simply investing in a statistical sampling of the whole market and eliminate all the costs of trying to beat the market. About 7% ($500 billion) of all mutual fund dollars were passively managed.
Active management begins with the assumption that stock and bond prices do not always reflect their “true” or “intrinsic” value. Active managers spend billions of dollars on research to find the “mispriced” securities. Using fundamental analysis, technical analysis and market timing, professional money managers actively trade (buy & sell) securities in search of higher investment returns.
Passive management begins with the assumption that free markets, while not perfect, are a very effective mechanism for setting prices for anything, including publicly traded companies and bonds. In other words, the the capital markets are just as efficient as the free markets for automobiles and toothpaste. Proponents of passive management like to say that the only people who don’t believe free markets work are the Cubans, North Koreans and believers in active money management.
The “market” is all investors together, functioning like a super computer processing all the information about a company and calculating the best estimate of the intrinsic value of a company at any particular moment. This estimate is called the “fair market price”. Investors who try to beat the market, believe they know something the supercomputer does not. I like to compare passive management with the game of golf. Instead of trying to beat the golf course by scoring birdies and eagles, investors who adopt passive management are satisfied with par. Instead of trying to beat the golf course, they are satisfied with beating 99% of all other golfers (active managers) who spend billions of dollars and make a lot of mistakes trying to overcome almost insurmountable odds.
Rebuilding Trust in Financial Markets and Advisors
June 7th, 2009
While on a New York media tour for our new company, Peoples Financial Advisor, I heard one question more frequently than any other: “What are you doing to rebuild people’s trust?” At the time, financial reporters were losing their jobs because trust was in very short supply.
Trust is the foundation of all business, including the advertising dollars that support media. Without human trust, a modern economy cannot exist and capital markets cannot function. Money itself is an invention of human trust. Whether it’s in the form of clay tablets, coins or plastic credit cards, money is nothing more than a “promise to pay” and belief in the promise. So I don’t think the problem is public trust. The economy is still functioning and as far as I can tell everyone is still using money. We are by nature an optimistic people. We want to trust our government, financial institutions and advisors.
But we’ve just learned that we’re never more vulnerable than when we trust. Misplaced trust created the economic bubble. The loss of almost twenty trillion dollars or 40% of personal wealth is a measure of our financial vulnerability when we, the public, misplace our trust. I personally think the new found skepticism is healthy. I believe the personal losses in our real estate and financial portfolios were the “price” of a valuable lesson for all of us.
So what am I doing to rebuild trust? From 16 years of counselling and building non-profit organizations I learned that the way to win trust from others is to focus on being trustworthy. I want Wall Street to spend fifty billion dollars a year on becoming trustworthy instead of advertising to win trust. I want the media to acknowledge it has the same conflict as the cigarette industry. I want the financial media to post warnings that it cannot survive if it doesn’t arouse emotions and sell copy and “this advice may be hazardous to your financial health.” I want regulatory reform to require an authentic fiduciary standard of care for anyone offering financial or investment advice to the public.
As for individual investors, what were our expectations before the collapse? Were they reasonable? Did I expect for-profit financial institutions and advisors who sell products to put my interests ahead of profits and compensation? Did I believe that I or my advisor could beat the market by looking into the future to pick winners and avoid losses? What lesson will we learn from our losses? Will we blame advisors, the media, politicians, financial institutions or capital markets? Will we learn not to trust anyone or anything? Will we return to the days of putting our money in the mattress and not asking anyone for advice or help? If so, we may be setting ourselves up for more disappointment.
It’s true, we are never more vulnerable than when we trust, especially when it comes to money and love. But it’s also true that if we never trust we will never experience financial freedom or rewarding relationships. Perhaps some of us just need to rebuild our trust in ourselves. Everyone has the ability to learn. Everyone has the ability to make better financial decisions. Trust me on this.
Someone once said broken trust is like a glass vase. You can glue it back together, but it will never be the same. I agree to a point. If people learn from their losses, their trust will be reinforced with wisdom.
