Money Clinic: No Need to Keep Up with the Jones’s

U.S. stocks traded higher on Friday after the release of stronger-than-expected employment
data. The Nasdaq closed at new highs. Everything is back to normal, right?

Unfortunately for most American households, the stock indexes measure an economy far
removed from their own daily reality. For many American families, who collectively own a very small percentage of the stock market (even when you factor in their retirement accounts) the Dow and the S&P 500 are little more than numeric refractions.

Maybe this is the new normal?

While the U.S. economy added 313,000 jobs in February, wages grew less than expected, rising 2.6 percent on an annualized basis. So, jobs are growing – wages are not. This isn’t the kind of news that exemplifies a thriving economy.

A new Rural King just opened in our neighborhood. I’m sure they are creating at least 25 new jobs…at or slightly above minimum wage.

New jobs. Low wages.

Is this the sign of a thriving economy? Really?

While the recent tax cuts provided hope to create an economic boom as corporations increase wages, hire and produce more so that consumers can have extra money in their pockets to spend, the increase in take-home pay has already been offset by surging health care cost, rent, energy and higher debt service payments.

Low-paying jobs are plentiful but too many jobs are also being lost due to cut-backs and business closings. Even Toys-R-Us can’t keep the doors open.

In this “thriving economy”, many people are working two jobs to keep the economy above water.

On the other hand, numerous companies are using tax breaks to buy back their own stock. One of the primary tools used by businesses to increase profitability has been through the heavy use of stock buybacks. This will help many glossy-eyed investment pundits proclaim that earnings per share numbers are looking solid. On top of that, I’ve heard TV charlatans proclaim that a solid jobs number with lower wage numbers has muted inflation concerns, which is good for the markets.

Unfortunately, what is good for the markets is not necessarily good for the economy.

While tax cuts can be pro-growth, they must be focused on the high percentage of American’s that make up most of the consumption in the economy, not hoarded by the wealthy, which already consume at capacity,

The reality is that most U.S. companies are NOT increasing wages because higher wages increase tax liability, benefit costs, etc. Higher payroll costs erode bottom line profitability. In an economy with very weak top-line revenue growth, companies are extremely protective of profitability to meet Wall Street estimates and support their share price which directly impacts executive compensation.

Case in point: since March 2009, the S&P 500 is up around 300 percent.

How much of that return have you garnered?

Just look around, most Americans are unhappy, over-worked, contemplating divorce, plagued with enormous debt, and still trying to keep up with the Jones’s. Many Americans, no matter where they live and how much they make, maintain their finances precariously close to the edge of break-even. Those working multiple jobs are feeling even more pain. Furthermore, stress about retirement preparations and worry over personal finances at work are causing employees to be less productive while at work.

Wages are failing to keep up with even historically low rates of “reported” inflation. It is very likely that your inflation, if you spend money on food, rent, education and health care – let alone any discretionary spending, is higher than “reported” inflation. Is it any wonder that almost half the population has less than $10,000 saved for retirement? A lot of people just don’t make enough money to save for retirement let alone to cover financial emergencies.

We are living in a time where there is a glaring economic anomaly. It is crucial that you adhere to strong financial fundamentals and put rigid savings and investment rules in place that have stood the test of time.

It all begins with doing everything in your power to make yourself more valuable. Follow this with a commitment to developing strong financial literacy skills.

Finally, forget about keeping up with the Jones’s – they aren’t doing that great.

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Money Clinic: No Excuses

Diversification is a fundamental principle of investing, but it isn’t the only one. In fact, there is one major principle that precedes it: make sure you own financial products that have a reasonable expectation of providing a useful return and serve the purpose of your goals.

Sometimes, the best financial task is not to “just” own a diversified portfolio; it’s to avoid owning bad investments. Don’t sacrifice your portfolio at the altar of blind diversification. Every investment should stand on its own merits, as well as work with your other assets to make them function better.

Many times, “diversification” becomes an excuse for financial institutions to sell you crap and get paid for underperformance. For example, your advisor may have sold you a “well diversified” portfolio holding U.S. stocks, emerging markets, commodities, and corporate bonds, which means that you are invested into multiple asset classes that would all be expected to go up in a growth environment. The fundamental problem with such a portfolio is that while it’s spread out across several different asset classes, it is very poorly diversified, because the portfolio just owns multiple asset classes all aligned towards the same risk – benefitting if the economy grows, and at risk if a recession occurs.

To do it right, you must take a closer look at the returns of each fund that you own to make sure it is performing better than its peers. You also need to make sure that there isn’t a lot of overlap in the fund that would contradict investments in the other classes.

Furthermore, you have to consider the weighting and risk category of each class that you have in your portfolio. In any given year, each asset class is going to produce different returns. Basically, you want to have the right fund in the right class at the right time to garner the greatest returns for your level of risk.

You see, there is a lot more to “diversification” than you might think. You can’t allow yourself to get sold a poor financial product just so that you can say that you are diversified!

The purpose of the money ALWAYS dictates where you should put it. That means that you might earn a lower rate of return on a certain asset class but that is okay because its role may dictate it.

Some of your investments may serve as a hedge against a declining market. Their performance may lag in a strong bull market but that doesn’t mean you shouldn’t include them in your portfolio. Savings accounts hardly pay any interest, but you must have liquid money for emergencies and to make asset purchases when they go on sale.

The problem with buying investments that do not meet your objectives is that there is no meaningful way to track how their performance helps meet your objectives. For example, purchasing an annuity with a great income rider doesn’t help you if you don’t really need extra income or specifically need “tax-free” income. On the other hand, it might be the perfect choice if you want a guaranteed income source in the future.

So, make sure to purchase financial products that provide reasonable returns that serve a purpose in your portfolio, as well as potentially make your overall situation better.

There are no excuses to own bad investments just for the sake of diversification.

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Money Clinic: Pass/Fail

The stock market is bouncing back nicely after a slight correction a few weeks ago. I pounded the table and told you that you could test the quality of your “financial advisor” during this last downdraft in the markets because he was supposed to put some money to work for you.

Did he pass? Or, fail?

Unfortunately, the financial services industry is wrought with financial service professionals who just gather assets, collect fees and do nothing to earn their keep. It is a sham that the industry has taught its salespeople and it not only costs you money in fees, but also in performance.

For example, if you have a $500,000 managed money account or an account filled with mutual funds, your advisor should have moved about $50k that you should have had available from taking profits at the end of 2017 and put that money to work when the market fell 10%. With a market rebound, you could then take profits and pocket around $5,000.

Oh, did he call and just tell you that everything will be ok and to just hang on while markets plummeted?

Of course!

Unfortunately for you, he left $5 grand on the table that could have went toward paying his fees!!!

A financial advisor’s number ONE job is to MAKE YOU MONEY! It isn’t to hoard your assets, charge a fee and just let your money ripple in the markets without taking actions that can make you money.

I can’t believe the disinterest that “financial advisors” have in helping you to reach your financial objectives. They really have you fooled into thinking that they are paying attention to your money while they sit around and collect your fees and plan the next “client appreciation” function.

How about doing your job Mr. Advisor and act on my account! That would show me that you REALLY appreciate all the fees I’m paying you!!!!

The buy-and-hold investor has only averaged around 3% since 2000. This is a far cry from the 6-8% annualized return assumptions promised to “buy and hold” investors. Back out your fees and you’re barely keeping up with inflation!

In addition, annualized rates of return and real rates of return are VASTLY different things. The destruction of capital during market downturns destroys years of previous capital appreciation. Therefore, the SECOND job of a financial advisor is to PROTECT YOUR MONEY!

One way to help protect your money is by generating extra returns for you during corrections through hedging. Another way is to always have some powder dry so that you can take advantage of buying opportunities when they arise. You can’t buy low when you don’t have money available to purchase good investments when they go on sale.

Most financial advisors invest your money in the markets with no real personal consideration. There just isn’t enough time in the day to give everyone equal attention. They have hundreds of clients and have to split their time between servicing their best clients and attending posh sales award trips. I’m not saying that you shouldn’t pay someone to help you. However, the best way to win is when everybody wins, and your money is his top top priority. Work out a fair fee structure that makes both you and your advisor money when you do well, and he protects your downside.

Furthermore, most of the stock mutual funds advisors use are just sheep because they are almost fully invested all the time. They run money until they face distributions and then it is first-come-first served on who gets their money. It’s always the buy-and-hold gang that ends up holding the bag and taking losses when they sell their investments because they can no longer take the pain.

Remember, the goal is to stay in the game. People who get wiped out by serious downfalls tend to be those who never take anything off the table, sell in a panic and buy again when they feel better (which is usually at much higher levels). Then it becomes “catch-up” time and desperation sets in. They find themselves in the slaughterhouse hoping to get out. Most just get slaughtered.

Think about it, what are you going to do when the next prolonged correction wipes out most of the gains accrued from the current market cycle? Can you really say that your advisor took swift actions when necessary to make you extra profits? Does he have a plan in place to protect you from getting slammed when the market tilts the other way? Or, is he just going to chant “buy and hold, everything will be ok”?

It isn’t enough anymore to know, like and trust someone to be your financial advisor. They must help you put every dollar towards its greatest use and optimize the performance of each financial asset that you own. They must ensure that all of your assets are working together to meet your financial objectives. If you are fortunate enough to get invited to investment house functions like dinners, golf outings and other events but you weren’t important enough to put money to work during a fire-sale in the markets, then you are being cheated. You are the one paying for those lush dinners with the management fees you pay. However, you are paying for incompetence. You’re paying for lackluster interest in your valuable assets.

Your “financial advisor” must also be graded on how well they manage your account – not by having it rise an average 3% over the last eighteen years but by comparing YOUR results against some benchmark that measures an unmanaged index. For example, have YOUR returns matched the returns of the S&P 500 index since 2009? If you are paying a money manager to invest part of your money, it is vitally important to understand that any financial decision you make must be considered thoroughly because of the impact that it has on your whole financial picture and how it may affect other assets you own. Don’t deal with any advisor who wants to sell you a financial product (that usually makes him fees or commissions) that doesn’t make your WHOLE financial situation better.

When it comes to money, there is ONLY ONE way to grade your financial advisor. Does he PASS, or does he FAIL? The market provides plenty of tests that help you rate your financial advisor. You are not going to meet your financial objectives if you are paying someone that fails. Find someone that PASSES all the tests to help you GROW and PROTECT your money.

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Money Clinic: Complacency is the Silent Killer

While many people are enjoying the benefits of this long bull market run, history proves that life-long savings can be wiped-out in a heartbeat if you get careless with your investments. Severe losses can destroy a portfolio that is in distribution phase, even if they are matched by robust gains in other years.

People are living longer than ever before and need higher returns on their assets to get through an average 3-decade-long retirement. Unfortunately, the low interest rate environment has made it difficult to use some of the more traditional financial products to build your nest egg.

The stock market has been fueled – in part – by the Federal Reserve’s loose monetary policy. However, it hasn’t been a clean ride. Investor sentiment has not been the forerunner of this bull market. Consider all the Trump-haters that sold their investments thinking that he would derail the economy. Add that on top of all the people who lost fortunes in two major corrections who seriously mistrust the financial markets. There are people who moved out of equities into fixed accounts and missed huge gains in the market last year.

Unfortunately, most people have not captured the full rise in the S&P 500 over the last 8 years. They were late to get in or they were spooked into conservative models that allowed them just enough action to keep them invested.

Every up year was a vote of confidence to stay invested and remain content with a buy-and-hold investment strategy. A rising market allows investors to become overconfident in their abilities to manage their money. It is easy to become complacent. Even a swift one-week correction in the markets has recovered almost all of it ground in short order.

The market can’t do anything but go up, right?


While, compensation for the top 20% of income earners are seeing wages rise and corporations have doubled their planned stock “buybacks” to boost earnings per share, the take-home pay for the bottom 80% of the population that drives much of the economic growth long-term is microscopic.

The memories of wealth destruction a decade ago are fading. Too many people are getting complacent with their money. Complacency is a silent killer of your money. Complacency will get you wiped-out and will force you to make desperate money decisions.

Get a 5-year plan together that positions you for growth, protection and reliable income sources in multiple, efficient asset classes. Then, incorporate that into a longer-term plan to make sure you have money whenever you need it.

Don’t be complacent. Don’t get wiped-out.

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Money Clinic: Money on Sale!

The last week of stock market drops has taken the S&P 500 into correction territory for the first time in two years. While still in an upward, bullish trend, the S&P 500 fell officially into correction territory on Thursday, down more than 10 percent from its record reached in January.

One theory about why the market may be correcting now is because of a fear that the economy is too strong and complacent. The fear is that this can lead to inflation, which may cause the fed to raise interest rates too high too quickly and cool down growth.

Another concern is that the yield chase over the last 8-years and the low interest rate environment have created an extremely risky situation for retirement income planning. The threat of higher interest rates creates uncertainty in the stock market as it can potentially make stock dividends less attractive. Remember, uncertainty causes volatility which can lead to sudden corrections in the markets.

An obvious lesson for investors during this bout of volatility is that periods of uninterrupted returns don’t last. A correction is a normal part of investing. When markets correct, you can’t control their length or severity, but you CAN control how you respond.

The recent dramatic pullback in stocks has created a buying opportunity if you follow the stock-buying theory of “buy-low, sell-high”. I have no idea where the market goes next. It may continue into a longer-term correction or it might go back to its January highs. One thing is for sure, you had to put some money to work if you were smart enough to take some profits off the table at the end of 2017.

This brings me to an important point of enlightenment: if your Financial Advisor didn’t put at least some money to work in this correction – you need to FIRE HIM!!!!

The job of a good “Financial Advisor”, no matter what they call themselves: CFP, CHFC, etc., is to make sure that you are allocated properly and have money available to buy stocks when they go on sale. You are paying him to keep you calm and help prevent you from panicking and selling your investments at the wrong time. Furthermore, he should have made sure you didn’t get greedy in this bull market and took steps to help you take some profits so that you had money to deploy when stocks got cheaper.

Understand that I do not endorse “market timing” which is specifically being “all in” or “all out” of the market at any given time. However, it is extremely important to have a methodology for buying and selling investments.

Also, if you are getting close to retirement or already in retirement, it is critically important to understand that avoiding major drawdowns in the market is the key to long-term investment success. The long-term results of avoiding periods of severe capital loss will outweigh missed short-term gains. Small adjustments can have a significant impact over the long run. The best money managers I know have always been adept at working around their positions by using a set of rules to help keep emotions out of the trading arena.

By the way, remember that risk questionnaire your advisor made you fill-out when you opened an account? How do you feel about that right now? How are you going to feel if we are in a declining market for several months?

Risk questionnaires are never going to give you the right answers you need to succeed in the financial markets. Your portfolio should always be constructed (and monitored closely) to deliver a rate of return sufficient to meet your long-term goals with as little risk as possible. Your appetite for risk will constantly change so you need to construct a set of rules to follow in any market environment to help you with that objective.

Unfortunately, most “Financial Advisors” only real job is gather assets to earn a residual fee. You would think that his services include “buying on the dips” but it doesn’t unless you are one of his top clients. You see, he doesn’t have time to gather assets and watch your account. There isn’t enough time in the day (or he might be on one of his sales award trips he earned from capturing more of your money). The Financial Advisor’s mantra is “buy and hold”. This way, he can continue to make money from your account whether it is up or down.

If you are fortunate enough to get invited to investment house functions like dinners, golf outings and other events but you weren’t important enough to put money to work during a fire-sale in the markets, then you are being cheated. You are the one paying for those lush dinners with the management fees you pay. However, you are paying for incompetence. You’re paying for lackluster interest in your valuable assets.

Not only are you not getting attention to your WHOLE financial situation, you’re not even getting the courtesy of going the extra mile with your portfolio that they manage. The very least you should expect is some attention to your account and some action to put money to work at opportune times. That is what you are paying them for, right? You can pay for plenty of your own dinners if your advisor is buying money on sale for you!

This week was a true test to determine the real value of your Financial Advisor. He should have prepared you to have money available to buy on the dips. He should have put some money to work during this correction. He should also make sure you keep some powder dry in case the market continues to drop.

The dips came, and you had the opportunity to buy stocks on sale. Did he do that for you?

If he did, then make sure you hang on to that advisor! If not, there are only two words that make any sense at this point:


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