Money Clinic: Asset Coordination is a Critical Key to Financial Success

I see it all the time. Many hardworking people are saving money. They are trying to do the right thing, sometimes sacrificing instant gratification for the rewards of long-term success. They work with multiple financial salespeople (commonly called “financial advisors”) and purchase multiple products that are supposed to help them make more money.

However, in most cases, people end up with a hodgepodge of financial products that are not coordinated properly to make their overall portfolio more efficient. I have even seen clients that get sold the same product from the same financial company that is supposed to be doing a completely different job! Was it because there was a financial incentive for the advisor? Was it because his manager told him that was the hot product of the month? Did he get an email from his boss telling him to push a certain product that week?

Whatever the case, there are too many times that unsuspecting people are getting bullied by the financial system. It is hard enough to save money. It shouldn’t be so easy to get manipulated by the system..

The easiest way to free yourself from the financial monsters that are trying to steal your money is to put up a barrier to keep the bad guys out. The simplest way to do this is to follow a successful model and put rules into place so you can implement successful strategies that the wealthiest people use.

Where you are in life and where you want to be in the future ultimately dictate the money decisions you should make. In other words, the purpose of the money dictates where you should put it. 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. When building wealth, you must put every dollar towards its greatest use and optimize the performance of each financial asset that you own.

The asset allocation decision (i.e., identifying an appropriate mix between different types of investments, such as stocks, bonds, and cash) is the primary tool available to manage risk for a portfolio.

Given the importance of asset allocation, identifying a coordinated portfolio management structure that provides a disciplined mechanism for adjusting the portfolio as market and economic conditions change should be an important part of a prudent risk-managed investment program.

The financial macro-environment is tumultuous. We cannot control that. We can, however, control our own microeconomic environment. The easiest way to do this is to avoid making stupid money mistakes.
Security over-diversification, excess fees, and security overlap are common symptoms of a portfolio management structure that lacks coordination.

Most people expect the financial advisor to recommend the right products, at a fair price, to make sure you steer clear of these drawbacks. Unfortunately, that is not how the system works. Financial advisors are salespeople that usually do not look at your complete picture. The accountability in the portfolio structure for key investment decisions belongs with you. Therefore, they have no vested interest in your success or failure because they have too many clients to take care of. They don’t have time (or knowledge) to make sure all your assets are coordinated in the most efficient manner. They must keep selling or else they don’t get paid.

Most advisors hand-off your money to a portfolio manager that you don’t even know. Whether it is a mutual fund or a managed account, you have no idea what that manager is doing, and the manager has no clue what your goals and objectives are.

And it gets worse. If you have multiple money managers, you are very likely to suffer from over-diversification, overlap, and major inefficiencies in your overall asset mix. For example, while exposure to multiple funds/investment styles/asset classes is intended to improve a portfolio’s diversification, multiple mutual funds investing in similar and/or like securities may not provide meaningful additional diversification benefits. You may be subjecting yourself to risk that you had no idea you were taking, and you are the one who is accountable, not your advisor.

Even if you are lucky enough to make a ton of money but it ends up getting tax-bombed when you need to use it, you are the one that ends up losing, not your advisor. Because we all know that when it comes down to it, it’s not the money you earn — it’s what you keep. And if you are an investor who must pay taxes on your earnings, not taking tax implications into consideration can directly affect your chances of meeting your life and wealth objectives.

Certain investments generate their returns in a more tax-efficient manner than others. Certain accounts shelter investment returns from tax better than others. Therefore, choosing your investments wisely can significantly improve the after-tax value of your savings. Each asset’s after-tax return should be considered in the context of every available account. Then you can arrange and coordinate your accounts to maximize the after-tax performance of the overall portfolio.

Is this the kind of conversation you had when your financial advisor was busy pushing products down your throat?

Again, 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. Make sure you are working with someone who has your best interests in mind and will help to make sure all of your assets are coordinated efficiently.

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Money Clinic: The 2 Most Important Rules for Early Retirement

Finding relatively safe sources of retirement income has become tougher in this economy. Interest rates are hovering near historic lows, and some experts think relatively low rates may persist for decades. That means that you can’t put a lot of money into safe investments (which would more realistically be called savings instruments) and expect to live off the interest.

The most obvious solutions are to save more or live on less. For example, you might be able to catch up with bursts of savings once big expenses like college or a mortgage fall away. To get away with saving less, you have commit to living on less.

However, early on in retirement, many people tend to spend more freely, since they can finally do all the things they were too busy to do when they worked. So, you have to be careful to not burn through all of your savings too fast or you might need to scale-down your dream vacation a little.

However, after you hit your mid-70s, your outlays usually start to drop, even when you take health care spending into account. Therefore, if you can get through your sixties with a fair amount of savings, you should be ok.

That’s why it is so important to build up a large savings account before you retire. This enables you to have money available to spend on things that you enjoy. It also takes time for retirement benefits to kick-in, so you want to have money available in the transition to retirement.

Having a goal to build a nice savings account before retirement also gives you a nice goal to work on. It is also psychologically aesthetic to start planning out those exotic vacations you intend to go on!

Just like any new shiny object eventually fades, so does the euphoria over retirement. That is why it takes meticulous planning to be prepared for the type of retirement that you desire.

As always, it makes sense to prepare yourself with multiple income options so that you can withdraw money no matter what lies ahead in the economy. Study your options well in advance of retirement so that you can make the right choices.

Very simply put, if you can build up a nice chunk of money in your savings account by the time you retire, and you balance that out with a plan to have multiple income sources, you should be more than adequately prepared for retirement.

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Money Clinic: The Psychology of Wealth

Would you believe it if I told you that 80% of financial success is understanding psychology and 20% is financial mechanics?

The wealthiest 5% of the population understands that psychology either makes you or breaks you, so it’s imperative to have a robust system that enables you to stay on target. Motivating ourselves to take the steps we need to make to get in control of our money becomes possible only when we see that it is indeed possible for us to be financially successful.

How we think about money determines what we do about money. We are what we are today because of the choices we made yesterday. Our choices all grow out of our inner beliefs and thought processes. This is as true with money as it is with any other aspect of life.

Each of us had a story about how we’d done dumb things with money. In every instance, these dumb things were the product of some psychological or emotional impulse. Too many people make investment decisions based on psychological reactions to the economy and the stock market. It’s these emotional reactions that often cause people to buy high and sell low.

We can never completely remove the emotional and psychological aspects of money management. However, I do think it’s important for us to reduce the negative emotional financial decisions as much as possible. Better yet, we can learn from our mistakes (and the mistakes of others) and try to not repeat them.

Since the game of life is a long journey, it pays to have small victories along the way. While we are certain to stumble at times, it feels good to win a short-term battle. Feeling good equals positive psychology. Feeling better about money is over half of the battle to achieving long-term financial success.

For example, most experts agree that it’s better to pay down debt by starting with the obligation that has the highest interest rate. However, paying off an account with the lowest balance first often makes more sense. It allows a quick win, which provides positive reinforcement and motivation to continue.

Hardly any personal finance gurus talk about the psychology of money. Unfortunately, financial advisors work in a system that’s beyond their control—a system that has tremendously powerful financial incentives to focus on maximizing profits above all else. This is a system that richly rewards employees who put their employer’s interests first, their own interests second, and their clients’ interests a distant third. In other words, financial advisors get paid to sell financial products to customers in return for a fee or commission, not to make sure all your assets are coordinated to work efficiently. They also don’t get paid to help you get your mind right.

One way to keep these greedy salespeople away is to measure your results by how much your overall net worth increases each year. If they don’t want to address your aggregate position, hire someone who will! Remember, the purpose of the money dictates where you should put it, not what some slick salesperson is shoving down your throat.

The truth is that people can become prosperous in America today (and in most other places in the world), even on a modest income. Nonetheless, money success only comes once we learn how to think correctly about our potential for becoming successful with money.

The basics of money management aren’t complicated, and we are all capable of mastering them, no matter who we are, or our level of wealth. When we learn from our financial experiences, challenge our distorted money beliefs, and practice healthy financial behaviors, we don’t just become materially richer-we become emotionally wealthier as well.

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Money Clinic: Too Much 401k Can Be Bad for You

There’s a saying that too much of anything isn’t good for you. That also applies to your money decisions. While no one would ever argue that having too much money is a bad thing, having the wrong kind of money can certainly be bad.

While the clear majority of us struggle to stash away some savings amid the daily grind of life, most employers offer a retirement plan that allows you to save money on a pre-tax basis through payroll deductions. This is a great way to save money because we typically do not notice that we are actually doing it!

However, by saving too much in a traditional 401k plan (or even in a traditional IRA), you could be setting yourself up for a higher tax bill in retirement. You certainly don’t want to work hard to save money and have a big chunk taken away in taxes!

Even if you are lucky enough to drop to a lower bracket in retirement (I can’t believe I’m saying that!), you will be forced to take required minimum distributions (RMD’s) once you reach age 70 ½ which is Uncle Sam’s way of finally getting a piece of your money that has grown tax-deferred all those years.

There is no question that you should ALWAYS contribute an amount that your employer will match. For example, if your employer matches contributions up to 3%, you would be foolish to contribute less than 3% of your pay.

If you contribute more than that, you have to start looking at the opportunity cost of saving in other alternatives like Roth IRA’s or Permanent Life Insurance. These savings vehicles offer the important benefit of potential tax-free withdrawals and there are no mandatory withdrawals.

Since higher taxable dollars can also trigger higher income tax on Social Security benefits, you have to think about ways to keep taxable income lower. At the very least, you want to be able to control your distributions so that you can take more when you need extra money and less when you don’t.

One over-looked savings issue is the importance of having an adequate short-term saving account. If you are putting too much money in retirement account but forcing yourself into high interest debt because you don’t have enough money in your savings account to pay for short-term expenses, you are potentially wiping out any tax savings you get by contributing to a retirement plan.

Furthermore, as you approach retirement, it is ideal to have about a year’s worth of income on top of your emergency fund stashed away in your savings account. This allows you to have a withdrawal source in case the markets are down, and you want to avoid taking investment losses.

So, while you should save money in your retirement plan, you must also make sure you have money available in other accounts that offer more benefits and flexibility. When building wealth, you must put every dollar towards its greatest use and optimize the performance of each financial asset that you own.

Bottom line: The purpose of money management is to manage the environment that you CAN control and give yourself options to make money in any economic environment as well as to have money available whenever you need it.

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Money Clinic: Why You Need Holistic Planning

Holistic financial planning is the process of pursuing your life goals through the proper management of your resources. Holistic financial planning provides direction and meaning to your life. It allows you to focus on what is important.

I say it all the time: “At retirement, your investment portfolio must produce income that rises in proportion to the rate at which living costs rise, thereby sustaining lifestyle and enabling the ability to maintain your dignity and independence – the two most important things in life as we grow older.”

The reason I say this is because I’ve been around the block long enough to know what I’m talking about and I’m not wired-in to any particular financial institution’s sales jargon.

I see advertisements from financial salespeople saying that they do “holistic” planning while formulating a way to get you to pay them upwards of 2% to manage your investment account. It’s just a sales gimmick.

They do not use a proven wealth model to structure your complete financial situation so that all your assets work together in harmony. They just say they do “holistic” planning and then proceed to sell you their money management platform.

You see, it doesn’t matter how much money you have – what matters is that you are efficient. You can use the same tactics that the wealthiest 5% of the population use with your money.

Holistic financial planning allows you to understand how a financial decision you make affects other areas of your life. Holistic Planning needs to incorporate all aspects of a person’s “Life Assets”.

By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

I see it all the time. Consumers buy financial products with no regard to how the products interact with their other assets. They end up with a hodgepodge of financial assets that do not correlate with each other.

Remember, the purpose of the money dictates where you should put it. You always must work on building assets in three components: Protection – Savings – Investments.

The charlatans that are using “Holistic Planning” to sell you something are purely salespeople pushing financial products on you that have nothing to do with improving your complete financial picture. If “holistic” means that the whole is greater than the sum of its parts, why do financial advisors push ONE product so hard? Because financial institutions make money by making steady fee income!

There is no denying that you need financial products to be successful. The issue is HOW they are presented to you. By using a successful model, you can avoid the temptation to buy products that don’t fit your overall best interests. The best financial advisors help clients answer big questions like, “where am I going?” or “what am I doing?” rather than simply calculating optimal portfolio allocations.

A true holistic approach that focuses on real-life plans and then leverages financial models to make decisions. If you simply follow a model that incorporates the ideal characteristics of a financial plan, it becomes self-evident which products you need to purchase in order to reach your objectives.

A real-life holistic financial plan is never constant. It involves continual monitoring and adjustments.

Why? Because your life is constantly changing! What was important 10 years ago may not be so important right now. No computer-driven financial plan is ever going to give you the right answers. You need a warm-bodied financial advisor to be your advocate – someone to help you along your journey through life to help you make the right decisions.

Avoiding stupid mistakes – mistakes that have already been made by thousands of other people – is crucial to being more successful. Find someone that really cares about you, not someone that pushes products down your throat.

Remember, holistic financial planning is the continual process of pursuing your life goals through the proper management of your resources, not the process of selling you a financial product.

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