Kim Snider
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Kimmunications Blog

June 11, 2009

Do we need the government to make us save?

It may seem hard to remember now, as we sit here mid-way through 2009, but back in 2002, the scandal of the day was Wall Street analysts issuing buy and sell recommendations based on the opportunity for investment banking business with the company, rather than their true opinion of the stock.

Eliot Spitzer to the rescue.

"This has been about one thing," he said before a flock of television cameras at the New York Stock Exchange. "It has been about ensuring that retail investors get a fair shake."

Ultimately, a settlement was reached with ten of Wall Street’s biggest firms. Regulators would oversee a 5-year, $450 million program, funded by investment banks, to support so-called "independent research" on stocks, plus an additional $85 million for "investor education."

It was all about taking care of the little guy who couldn’t take care of himself. With 20/20 hindsight, it turns out that many investors couldn't have cared less.

The Wall Street Journal reports:

“Since Mr. Spitzer's landmark settlement in 2003, annual reports show that few individual, or "retail," investors took advantage of the offering. During one recent year at Credit Suisse Group, for instance, just 16 retail clients had retrieved reports from the bank's Web site.”

In a recent interview, Mr. Spitzer maintained the settlement achieved its aims. "The system was broken," said Mr. Spitzer, who resigned from office amid a sex scandal in 2008. "Our first task was to reveal to the public that the system was fundamentally flawed, that the research was tainted and the public was being misled."

The second task, he said, was to come up with a better product. "It's better to have what we have than have fraudulent research," he said.

It's not that what the investment banks were doing wasn’t wrong or that they didn’t deserve to be punished for it. I agree government’s role is to make sure the investing public isn’t misled. But it is not to come up with a better mousetrap. Their record at that is pretty dismal.

In a bit of déjà vu, the latest bear market has brought out all manner of people, politicians and otherwise, determined to make sure we take care of the little guy who is so obviously incapable of fending for himself.

A May 18, 2009, editorial in Investment News, which bills itself as “the leading news source for financial advisors”, calls for mandatory enrollment of workers in 401(k) plans and a mandatory minimum contribution to the plan by employees:

Robert Reynolds, president and chief executive of Boston-based Putnam Investments, is on the right track in proposing changes to 401(k) plans to reduce the risks for participants and in urging other financial industry leaders to join him in pushing Congress for action, as reported in InvestmentNews last week.

He has identified the two most critical changes that are needed. First, all employers should be required to enroll all employees in a 401(k) or similar plan, and all employees should be required to contribute a minimum percentage of their pay to the plan.

This would address the greatest weakness of the U.S. retirement system — the significant number of private-sector workers who aren't participating in any retirement plan.

Just 66% of full-time workers participate in such plans at large and midsize companies, and just 37% at small companies, according to the Employee Benefit Research Institute of Washington. Small companies, especially those with very slim profit margins, may need government assistance with the costs of starting and running such plans.

Second, employees must be given an opportunity and encouragement to annuitize a significant part of their retirement plan assets beginning at 50. Annuitization minimizes the damage to retirement income that can be caused by a major bear market as retirement approaches.

Although many other improvements to 401(k)s and similar plans are possible, these two would go a long way toward helping private-sector workers build a comfortable retirement.

The recession and bear market have revealed the weaknesses of the U.S. retirement system.

Perhaps the downturn also will spark the reforms needed to strengthen it.


Oh my aching head! The obvious benefit to Putnam specifically and the investment management industry at large aside, do these people really believe that government should be mandating retirement savings?

Wasn’t that the idea behind Social Security and Medicare? And gosh, look at what an overwhelming success that has been! And whatever happened to personal accountability? 

While I'm on the subject, partial credit goes to the Obama administration for pulling back on the pay limits they tried to impose on the companies that received government bailout money.  

The government had announced plans to "fix" the pay problems of the banking industry by having conflicting plans, one from the administration and one from Congress, to limit pay in the companies that took TARP money.  And it turns out we need a "pay czar" to watch over the whole thing.  What's with all the czars?  I hear we need a car czar, too.  Is this because the drug czar idea worked so well?

As it turns out, the government's plan (plans?) could hurt the very companies we all now "own" by pushing talent out the door to hedge funds, private equity firms and foreign firms.  Or, some attorneys and compensation consultants would get rich designing plans to get around the limits anyway.  

This is just another example of government trying to legislate the end result rather than addressing the root causes.  Passing these laws help get politicians reelected.  They help some special interest groups score some short-term revenue increases.  But in the end they come years after the market finds a different way to fix the problem, and they leave behind an entrenched bureaucracy whose only job is to perpetuate their own existence long after their usefulness has expired.

There has to be a better way to fix the retirement system. Here are my ideas (and a few of Jim’s).

1.    Let’s get rid of the 401(k) system altogether. It was never intended to be the cornerstone of our retirement anyway. Why is it up to the employer to decide what investment choices you have, what your contribution limits are (based on what type of plan they choose)  or whether you even have access to a retirement plan? It’s a bad investment vehicle, it is inefficient and it is limited in access.

Let’s give everyone the exact same plan – an IRA with higher contribution limits that is the same for everyone and has access to the entire range of investment choices. If I have to bear the risk of funding my own retirement, at least give me access to the full range of choices to be able to manage the risk!

2.    Let’s address the disease rather than the symptom. If you want people to save, don’t force them – teach them. Let’s take some of the money government wastes each year and use it to fund basic financial education in our schools.

I would love to hear your ideas. What should be done, if anything to address retirement savings in this country? I will temporarily open up comments on the blog just for this special occasion. What say ye?

Sources:

 1. ‘Stock-Research Reform to Die? - WSJ.com’ < http://snurl.com/jt42m > [accessed 10 June 2009].

2. “Let's rebuild retirement's three legs - Investment News,” <http://snurl.com/jt45r> [accessed 10 June 2009].

May 23, 2009

Financial Success Note #2

"To know what is right and not do it is the worst cowardice."

                          ~Confucius

May 15, 2009

Mutual Fund Returns - Skill or Luck?

Now that we must rely on our investment prowess to provide sustainable retirement income, it is more important than ever to understand investing in mutual funds does not create wealth - quite the opposite.

Two of the most pre-eminent economists alive today, Eugene Fama and Kenneth French, have recently published a paper that revisits, yet again, the question of whether anyone can accurately pick stocks. Their paper is titled, "Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates."

Here is the long and short of it, from the abstract:

"Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If we add back costs, there is some evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates. The evidence for performance is, however, weak, especially for successful funds, and we cannot reject the hypothesis that no fund managers have skill that enhances expected returns." (emphasis mine)


So why do Americans continue to buy actively managed mutual funds when it almost guarantees sub-par performance? Largely because they don't know any better.

One of the most dangerous principles is social proof, which says in the absence of certainty, humans look around to see what others are doing and do the same thing. The more uncertainty, the more likely we are to stick close to the herd. This  behavior was very helpful, for the species, in getting to the top of the food chain. However, not so helpful in getting to the top of the investor food chain.

If you understand that markets don't reward all participants equally, you will also understand that doing what everyone else is not going to get you to the top of the investment heap.

If you are interested in what you might do as an alternative, I would encourage you to sit down with any number of our free special reports available to Snider Insiders (free registration required) and read them carefully. Specifically, I would recommend "How to Not Just Survive, But Thrive, in Turbulent Financial Markets."

Tip of the hat to Jim Mahar, of FinanceProfessor.com for the heads up on this paper.

No statement in this post should be construed as a recommendation to buy or sell a security or to provide investment advice unless specifically stated as such. All investments involve risk including possible loss of principal. Complete information can be found on our website or by calling 1-888-6SNIDER.

April 24, 2009

When to use a coach

What do Lee Iacocca, Bill Gates, Warren Buffett, Eleanor Roosevelt, Paul Newman, Vince Lombardi, Oprah Winfrey, Michael Jordan and Tiger Woods have in common? They all used coaches and mentors to help them get from good to great.

The first week of May, I will be going to Las Vegas to work with the brilliant speech coach, Patricia Fripp. Her services certainly don't come cheap and the expense comes at a time when it's hard to bring myself to take a financial risk.

But here are three things I know: Profit is the reward for risk, the time to make money is when everyone else is curled up in the fetal position and the best are never cheap. The reason Patricia can charge the fee she does is because the value she brings far outweighs the fee she charges. If that were not true, the market would vote with their feet and people would have stopped paying her long ago.

Like most businesses, my business has not been immune from the economic downturn. So why would I take a week away from my business when it needs me most and spend money that is not exactly falling off trees right now, on a coach?

I have been asked to give a keynote address at the annual convention of the National Speakers Association, in Phoenix, this July. This is a big honor. Being asked to speak to several thousand professional speakers demands my very best. And so, I have hired the very best coach to help me.

So when does a coach make sense? Whether we are talking about a sports coach, a speech coach, a life coach or financial success coach, I think the criteria are as follows:

  • The outcome is important to you
  • You want or need to shorten the learning curve
  • A fresh approach is called for
  • You need help getting started or staying on course

If all you want to do is learn to play tiddlywinks, then a coach is probably not appropriate. But if the outcome will have meaningful consequences, however you measure that, then a coach or mentor is probably a good idea.

IStock_000000771919Small When I decided to start a new career as an options trader, I had three different mentors who helped me learn my craft. That made sense. The financial consequences had the potential to be either very catastrophic or very lucrative.

Being a good polo player is not going to make or break my career, nor is it going to make me rich. But it is something I place a very high psychological value on. It is important to me. And so, over the years, I have hired professional players and coaches to work with me so I could get better.

Rocking this speech at the NSA convention could have both financial and psychological consequences. Clearly, I want to be wildly successful in front of such an accomplished group – NSA is not the place to fall flat on your face. Not to mention, there will be meeting planners and speaker's bureaus in the audience who have the potential to book me and those audiences have the potential to become clients. Again, the outcome is important to me so I have hired a coach.

One of the benefits of hiring a coach is to shorten the learning curve. Tiger Woods has spent his career playing golf. His coach, Hank Haney, has spent his career studying the perfect golf swing and how to teach it to others. Tiger Woods is, without question, a better golfer than Hank Haney. But Haney's skill set is different. He is a coach. He is able to help Tiger improve his swing - something that even a golfer as great as Tiger Woods is unlikely to accomplish on his own. And even if he could, it would take him much longer, diverting his time and attention from where it is better spent - which is winning golf tournaments.

Could I write and deliver a brilliant speech for the National Speakers Association. I think I could. But how many weeks and months would it take me? What is the opportunity cost? What is lost by taking all that time and psychic energy away from doing what I do best? What is the benefit of all the little tips and tricks I can get from a coach, gained over years and years of study?

Years ago, I had a coach pound on me about what he called the Law of Marginal Return. "Think of it like this," he said. "What is the difference in the paycheck collected by the professional golfer who wins the tournament compared to the paycheck for the guy who takes second? How much does the winning horse at the racetrack pay compared to the horse that finished second? A lot right? And what was the margin of victory? A nose? An extra putt?"

The Law of Marginal Return says that the one little bit of extra effort or preparation that puts you over the top pays a huge dividend relative to the time or effort spent. I believe hiring a coach is often a great way to get that little extra edge that creates that marginal return.

Sometimes we just get stale. We get in a rut. There is an old saying, "We cannot see our own eyes because we see with them." Sometimes, to get out of that rut, what we need is a fresh set of eyes - or a fresh set of ideas - to energize us.

There is a phrase in sports - "mailing it in." It is when a team who has a shot to win or contend obviously does not put forth their best effort. One job of a coach is to keep their team energized - to make sure they are never accused of mailing it in.

The other important benefit of a coach is accountability. The path of least resistance - especially in today's plugged in, always on, 24/7, multi-tasking world - is that good is good enough. To get those marginal returns I talked about earlier requires us to start a little sooner, work a little longer, think a little harder or accept a little more discomfort than the next guy or gal. That is so much easier when there is someone you are accountable to - someone looking over your shoulder, giving you that little nudge.

I not only employ coaches, I am one. I am a financial success coach. My definition of financial success is the ability to support a reasonable standard of living, indefinitely into the future, without work or worry. Should you hire me? That depends.

Is financial security an important objective with meaningful consequences worthy of paying a coach? Do you want a systematic transfer of the knowledge I have accumulated from over a decade of study and working with thousands of clients similar to you? Are you working hard but feel like you aren't getting closer to your goals? And could you benefit from a sounding board for your decisions and honest feedback when you are about to make the wrong one?

The other way to look at it, of course, is what is the downside? Can it be any worse than what you are doing right now? When you are playing probabilities, an action with little or no downside and a lot of upside is almost always the best bet.

Studies show the average investor underperforms their investment by 50% because they consistently buy and sell at the exact wrong time. The higher the return of an investment, the harder it is to actually capture that return because your actions are likely to shave off a large portion of the return.

So back to the Law of Marginal Return - look at the difference between $10,000 growing at 5% over 30 years versus growing at 10%. Would you rather have $43,000 at then end of 30 years or $174,000? If my helping you get on track and then stay on track is the difference between the successful investor and the not-successful investor, what is that worth? Sometimes the real value of a coach is in avoiding the cost of a mistake.

We all place different value on different things. Your decision about whether or not to hire a coach, any coach, really depends on the value you place on the outcome. For me, I am a big believer in finding someone achieving the results I want and learning from them. Experience has taught me that gives me the highest probability of succeeding at something that is important to me.

So I am off to Las Vegas soon. I'll let you know how it goes.

No statement in this article should be construed as a recommendation to buy or sell a security or to provide investment advice unless specifically stated as such.  All investments involve risk including possible loss of principal.  Our goal is your financial success.  Individual results may vary. Complete information can be found on our website or by calling 1-888-6SNIDER.

March 27, 2009

Audio: Long Term Care Insurance with Bobby Whisnand

Kim talks with long-term care expert, Bobby Whisnand, of National Long Term Care

 

MP3 Download: Hi (~23MB ) | Lo (~6MB )

Length: approximately 25 minutes


0:01    What is Long-term care?
2:07    LTC insurance vs. health or disability
3:20    Does Medicare cover any LTC?
5:00    Kim talks about what LTC insurance as to do with financial success
5:43    Who needs long-term care insurance
7:29    Misconceptions about cost and benefits of LTC
13:58    Who should I buy LTC insurance from?
15:41    Should you buy LTC through work?
20:25    Does your insurance agent go this far for you?
22:18    Bobby's contact information
23:41    What does LTC insurance cost?

Contact information for Bobby Whisnand:

National Long Term Care
6601 West Plano Pkwy, #1216
Plano, TX 75093

(214) 926-2639
bwhisnand1@gmail.com
http://www.center4ltc.com

No statement in this article should be construed as a recommendation to buy or sell a security or to provide investment or tax advice. All investments involve risk including possible loss of principal. We strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation. Our goal is your financial success. Individual results may vary. Complete information can be found on our website or by calling 1-888-6SNIDER.

Focus of This Blog

Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.

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