Kimmunications

Cutting through the confusion

There are a lot of financial talk shows on the radio every weekend. My show is one of nine on KRLD each Saturday and Sunday, and if you consider all the other stations in the area, you can get an idea of the variety of voices and opinions that confront the average investor each week.

If I were someone who tuned in every week, intently listening to hopefully learn the best way to manage my finances, I think I would be incredibly frustrated. That's because there's so much conflicting advice out there. One host may tell you that variable annuities are the greatest thing that ever hit the market. I, of course, will tell you the opposite -- to stay away from them at all costs. One host might say that the stock market is too risky and that you should invest in real estate instead. Another will say that real estate is no good; life settlements are the way to go. (By the way, they're not!)

If you opened your brokerage statements over the last couple of weeks and said to yourself, "I've got to try something different," your head is probably spinning with all the choices out there. Who's saying the right thing? Who is trustworthy? You know that doing nothing isn't really an option, but you don't know where to turn.

I won't tell you that I'm the only trustworthy one out there and that you should just come to me. That would be too blatantly self-serving. Not everyone has the same investment objectives and temperament. Although I know I can help many, many people out there, I recognize that what we do isn't for everyone. And I would be dishonest to tell you otherwise.

I've noticed in my years helping people with their investments that there seems to be two kinds of financial advisors. The first kind is the one who will say or do anything to make a buck off of you. Sadly, that seems to be the majority of advisors out there. They're more interested in selling you whatever product will earn them the highest commission, regardless of whether it actually fits your needs.

The other kind of advisor is the one who really does care about your needs. But even those advisors can and will disagree on the best course of action for you. More on that in a second.

So how do you distinguish between the advisor who just wants to make a buck off of you and the one who really cares? My best advice is don't take anything at face value. Do your research. Meet with the potential advisor and go over your objectives. Treat this as a job interview, because your advisor is really an employee. Read my articles on financial advisor red flags (here and here) to help you weed out the bad ones. Screen out the ones who try to hide the facts from you or try to hype up any particular investment.

After you've narrowed down the list, it's time to pick the advisor who best matches your values and objectives. And this can be the most difficult -- and most important -- task.
Very smart, thoughtful and caring advisors can have very different opinions on what makes a good investment. Let's use the variable annuity as an example. I've written extensively on the problems I see with variable annuities. Every time I write one of those articles, I get several emails from financial advisors who I'm sure are very earnest and have a lot of integrity, but they disagree vehemently with my position. And they'll put forth a very well-thought-out argument stating their case.

I've often wondered, how can we both have our clients' interests at heart and yet come to opposite conclusions? After running into this situation time and time again, it occurs to me that it must come down to what you value and what you place a priority on.

Investing is really just the management of a series of trade-offs. All of investing is about balancing risk and reward, and risk and reward both come in many different forms. An advisor who puts safety and security first and focuses on trying never to lose a dime for his clients will probably recommend low-yielding but very safe investments like CDs and bonds. An advisor like me, on the other hand, who puts a priority on generating a maximum amount of income for you to live on will recommend something different. A CPA who is mostly concerned with minimizing this year's taxes may tell you that converting a traditional IRA to a Roth is a very bad idea, while I may think it's a very good idea. We're both sincere and attuned to your needs; we just happen to think that different things should take priority.

So what's an investor to do? Before you seek out an advisor, whether it's an educator or a money manager, think long and hard about your objectives and your values. Find out where your priorities lie. Then ask lots of questions as you interview to find the advisor who best matches up with your needs. When it's a good fit, chances are you'll know fairly quickly.

Any financial advisor worth his or her salt will welcome the chance to go over your needs and objectives, and they'll recognize when their philosophy isn't a match with yours. When I meet with clients, I can tell when someone is a good fit. If they're not a good fit, I'll politely tell them so and try to direct them to another advisor who may be a better match.

I guess finding the right financial advisor is a lot like dating. You'll meet several scumbags and genuinely nice people who don't quite fit along the way, but when you find the right match, you know. And the right match makes all the difference. 

Interested in learning whether our approach makes sense to you? Give me a call at 214-245-5236 or toll-free 1-888-6SNIDER. I'll be happy to talk things over with you and even schedule a one-on-one meeting.

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

We don't have enough time to buy and hold

Market commentator and analyst Barry Ritholtz has recently posted on his blog about the big divide between the pundits and the public over the state of our economy. Or, as he puts it, “the disconnect between reality and the Pervasive Pollyannas of Prosperity.” Most of the analysts you see on CNBC, he says, are touting the strength of the economy, or at least its potential to turn around soon. The public, he says, sees the situation very differently – they’re expecting more rough seas ahead.

Barry says the pundits have just gotten ridiculous:

How absurd has the Panglossian cheerleading become? On my pal Larry Kudlow's show last night, several of Candide's descendants talked about how great stocks are if you hold them for 30 years. That's right, the holding period for equities according to this crowd is three decades. Of course, this means every pullback is a buying opportunity. Words such as these can only be spoken by someone who has never worked on a trading desk or managed assets professionally -- or if they did, they lost most of their clients' money.

Barry illustrates very clearly here the problem with the strategy of buy-and-hold. It’s true that the U.S. stock market has returned on average 10-12% annually over long periods of time. To take advantage of the long-term growth, you’d need to buy when the market is down. To a buy-and-hold investor, the current market downturn is a perfect buying opportunity.

But investing isn't just about knowing when to buy. The problem with buy-and-hold isn’t the “buy” part. It’s the “hold.” To get the long-term 10-12% return, you potentially have to hold for a really, really long time.

The Wall Street Journal is calling this “The Lost Decade.” From Dec. 31, 1999 to December 31, 2007, the return of the U.S. stock market was practically zero (1469.25 in 1999; 1468.36 in 2007). Here we are in the middle of 2008, and the S&P is below 1300. For us to get back to the 10-12% average, we would have to experience a very long period of above-average returns. The question is, how long? Nobody knows. It could take 10, 20 years or longer. History tells us there have been 20-year periods in the past where the average return of the stock market was less than 2%.

If you’re in your 50s, your retirement time horizon may be 40 years (10 years pre-retirement; 30 years in retirement). 20 years is a long time to wait for the market to even itself out.

That’s why buy and hold doesn’t work for most of us. We don’t have time for it!

This is precisely why I am a cash-flow investor. My goal is to exchange the long-term 10-12% annual returns of the stock market for something more tangible in the short-term. If I focus on generating cash in the short run, the ups and downs of the market over time don't tend to bother me as much.

I admit, investing in the stock market this way is a bit of a paradigm shift. You have to think of your stocks not as an appreciating asset, but as a means to an end. Once you view your stocks this way, it’s a little easier to endure the market slowdowns. 

SOURCES:

1. Ritholtz, Barry. "Persuasive Pollyannas of Prosperity," The Big Picture, 02 July 2008. http://bigpicture.typepad.com/comments/2008/07/more-on-the-pub.html

2. Browning, E.S. "Stocks Tarnished By 'Lost Decade'," The Wall Street Journal. (accessed 02 July 2008)

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Kim Snider is the President and Founder of Snider Advisors, an SEC Registered Investment Advisor, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method and how to stop enriching your investment advisors at your expense, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal. Click here for performance statistics of the Snider Investment Method and a discussion of yield vs. total return.

Know Your Greatest Risk

What is your most valuable asset? Your business? Your house? Your investment portfolio? The pile of gold buried in your backyard? What would you guess?

 

If you guessed anything tangible, you guessed wrong. Your most valuable asset is what economists call your human capital. This is the sum total of the skills knowledge and wisdom you possess which you then trade with your employer or your customers for money.

 

When you are young, human capital represents the lion share of your total wealth. As you age and begin to accumulate other assets, human capital becomes a smaller proportion but still is your largest asset.

 

If that is so, and economists tell us it is, then your biggest risk is not being sued if someone slips and falls in your driveway, a protracted bear market or the cost of long-term healthcare. Your biggest risk is disability or obsolescence. Both have the potential to seriously disrupt your income.

 

Think of it. As long as my income stream keeps flowing, I can get through almost everything else. Suppose someone does slip and fall in my driveway. They sue me and the court awards them millions of dollars. I may file for bankruptcy but the court will allow me to keep enough of my income to keep a roof over my head and feed and clothe my family.

 

Imagine we experience a depression which takes thirty years for stock prices to recover from. As long as I don’t lose my job and I can still work, I can still eat. Imagine I work in a family business that continues to pay me long after I have become old and feeble. Long term healthcare is not a problem.

 

I am not saying life would be champagne and caviar. I am just saying it would be better than the alternative. A steady income solves many problems. Loss of one can wreak havoc.

 

Disability

 

We have two choices when it comes to risk. We can either hedge it or insure it. Insuring a risk is almost always more costly than hedging it because the intermediaries, namely insurance companies, have to make a profit over and above the cost of the hedge.

 

We can insure the risk of disability by purchasing disability insurance. Some employers offer disability insurance as an employee benefit. Disability policies can be either short term or long term.

 

Short term disability policies pay you a percentage of your salary if you are temporarily unable to work because of injury or illness. A typical policy will you anywhere from 50% to 65% of your pay for anywhere from two weeks to two years, depending on the policy you purchase. A period of 13 to 26 weeks is more common and then long-term disability kicks in if you have it.

 

Long-term disability replaces income for a much longer period of time. Policies usually limit benefits to five years or age 65, whichever comes first.

 

Of course, being the optimists that we are, no one likes to think about what happens if disaster strikes. But the question asked by a Family CFO most often has to be, “What if?”

 

Data from the American Council of Life Insurers tells us one in seven will experience a disability lasting more than five years. The odds increase to one in five for those of us between the ages of 35 and 65.28 It turns out the leading cause of disabilities is not freak accidents, as many people think, but instead is caused by devastating illnesses such as cancer or heart disease. The long-term loss of income is so disruptive that 46% of home foreclosures are due to medical disability.

 

Obsolescence

 

You cannot insure against obsolescence but you can hedge against the risk. How? By making constant upgrades to the software between your ears. The best hedge against being replaced by a 23 year old whiz kid is lifelong learning.

 

	Those who do not read are no better off than those who cannot.€ ~Proverb

 

Lifelong learning need not be formal to be effective. I had the pleasure of interviewing Dr. Benoit Mandlebrot for my radio show several years ago. Dr. Mandlebrot is a mathematician who is best known as the father of fractal geometry. Fractal geometry is what makes the stunning reality of modern day computer animation possible.

 

Dr. Mandlebrot'€™s accomplishments are unique in that he has been awarded major prizes not just in mathematics but also in physics, medicine, science and technology. His concepts have also been applied to economics, earth sciences and linguistics.

 

Dr. Mandlebrot credits his ability to think outside the traditional confines of a single branch of science to his unconventional education. He said in one interview, "€œTo tell the truth, and not to sound pretentious, but circumstances prevented me from acquiring a real college or university education in the traditional sense, so I am primarily self taught."

 

Passive income

 

Disability and obsolescence can both be hedged by building a portfolio which produces enough passive income to pay all the bills, as described in chapter 14. When passive income equals or exceeds day-to-day living expenses, work is no longer a necessity, it is a choice.

 

For my husband Jim and I, we use a combination of passive income and disability insurance to hedge our risk. Because I am the public face of our company, if I were to become disabled, our business would be seriously impacted. But we still have employees and bills to pay.

 

We have a disability policy on me which specifically covers the overhead of the business in the event I am disabled. We rely on the passive income from our investments to replace our income from the business.

 

Longevity

 

Americans' increasing longevity can be an economic blessing or a curse. Provided we remain healthy, increased longevity increases our human capital. If our mental and physical health declines as we age, our human capital is diminished.

 

Thus, there is one other thing you can do to increase your odds of financial success and it has nothing to do with saving or investing. Take care of your body and your mind. Quit smoking, eat right and exercise. These are as much a part of achieving lasting financial success as a sound investment strategy.

 

The preceding is an excerpt from Kim Snider's yet-to-be published - but getting closer book, "The Family CFO's Guide to Financial Success." This book should be available in bookstores everywhere (don't you agree?), but isn't - until Kim stops procrastinating on the second draft!

 

Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Are you unhappy with your job?

According to the Hudson Employment Index, 28% of workers in the Dallas Fort Worth area, where I live, are unhappy with their job - more than one in four. And yet, what is our antidote for insufficient retirement savings? I'll just work longer.

 

The Retirement Confidence Survey done by EBRI in 2006 finds 67 of workers expect to work past age 65. Really? Even though one in four hate their job now and only 27 percent of people over 65 work today? Sounds like a classic case of putting off until tomorrow what I don't want to do today - save.

 

A comfortable retirement, at whatever age, requires you to do only three things:

 

1. Plan and budget carefully so you can save for tomorrow

2. Manage your retirement funds very wisely - don't be greedy, fearful or dumb

3. Turn those funds into a source of low-risk, reliable income

 

If you ask some people their financial objective, they'll say growth, or income. Some will say to be able to retire at 62. Others will say to have a million dollars by age 65.

 

My personal financial objective, for a very long time now, has been financial freedom. I define that as having enough portfolio income to sustain my lifestyle indefinitely out into the future. I want work to be a choice, not a necessity.

 

I don't express that goal in terms of a number. I express it in terms of an income. If it takes $10,000 a month for me to live the way I want to, then I need an after-tax portfolio income of at least $10,000 a month. I also need that $10,000 a month to grow by at least 3% a year to keep up with inflation. Whether my portfolio is worth $500,000 or $3 million is irrelevant. It is the portfolio it can generate that I care about.

 

I think the entire notion of a growth investor is outdated. The primary investment goal for almost every American under the age of 65 has become income replacement, whether they think of it in those terms or now. Given the Hudson Survey, I'd say it is full income replacement as soon as possible. Failure to meet that goal is a life sentence of work.

 

If you go to one of these retirement calculators on the web, they will tell you how much you need in order to retire. What is the magic number? But to say I need a portfolio of $X to retire, which is our old way of thinking about income replacement, is bassackwards. I don't intend to spend my entire portfolio on the day I retire. I intend to live off of it for 30 years.

 

If that is true, the goal of an investor has to be to maximize income, not to maximize the portfolio value. What do you think? Agree? Disagree? Leave your thoughts and comments below.

 

SOURCES:

 

1. "National Employment Index," Hudson, Dec 2006

http://www.hudson-index.com/node.asp?SID=4394

 

2. "2006 Retirement Confidence Survey," Employee Research Benefits Institute, Apr 2006

http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3630>

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Hedging Your Biggest Risks

Our paycheck protects us against all sorts of risks. You are in a much better position to absorb unexpected bills, divorce, a lawsuit, or a 20 year bear market when you are employed and have a steady and dependable source of income. A paycheck also hedges you against inflation. Typically, your W-2 income will rise over time to account for increases in the cost of living.

 

Our biggest financial risk is not losing assets or market value. It is losing our source of income.

 

According to a paper published by the Center for Retirement Research, more than three-quarters of adults age 51 to 61 experience financial shocks over a 10-year period. They include widowhood, divorce, job layoffs, health problems, or the onset of frailty among parents or in- laws. Health problems and layoffs dominate at this age. They also find the incidence of financially disruptive events increases with age.

 

If our biggest risk is losing our paycheck and the safety net it provides, how do we hedge or insure against that risk? We build an investment portfolio that generates a steady and consistent source of cash flow. The goal has to be to generate enough inflation-indexed income to replace our W-2 income at a moments notice.

 

Investing solely for growth is not adequate to insure against these risks. Paper gains are fleeting. Assets that must be sold are too risky. And contrary to conventional wisdom, stocks are not a good hedge against inflation.

 

When do we lose our job? When the market and the economy are booming? No. The more likely scenario is we lose our job when the economy is slow, profits are being squeezed and stock prices are down.

 

I believe the job of our portfolio is 1) to protect us against financial risk; and 2) to create wealth. These two things are not mutually exclusive. If you accept my definition of wealth, which is the ability to maintain a certain standard of living indefinitely over time, then wealth is not measured by the number at the top of your statement. It is instead, measured by the inflation-indexed income your portfolio can generate.

 

It is my deeply-held belief that your focus should not be on how to grow your portfolio, although that is certainly a by-product of income re-invested. Rather, "How do I create MORE sustainable, inflation protected income?"

 

What do you think? What is your definition of wealth? Has it changed as you approach retirement? Does the ability to maintain an agreeable standard of living indefinitely without worry make sense to you as a definition of wealth? Leave your thoughts and comments below.

 

SOURCE:

 

1. Richard W. Johnson, Gordon B.T. Mermin, and Cori E. Uccello. "When the Nest Egg Cracks: Financial Consequences of Health Problems, Marital Status Changes, and Job Layoffs at Older Ages" Working Paper Center for Retirement Research at Boston College, Number 18; Released December, 2005.

http://www.bc.edu/centers/crr/papers/wp_2005-18.html

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

What is dead money?

Dead money is money that is earning its owner nothing. Examples of dead money include:

 

1. Money buried in your backyard or stuffed under your mattress

2. Equity in your home

3. Money invested in an asset that is under water and produces no cash flow

 

The opposite of dead money is money that is actively working. Examples include:

 

1. Interest bearing investments - CDs, money market funds, bonds

2. Cash flow investments - rental properties, dividend stocks, REITs, royalty trusts, etc.

3. Money invested in an asset worth more than you paid for it and still rising

 

I believe a fundamental rule of managing money is to avoid dead money like the plague. Your money is a tool. It has to work for you every single day. In this day and age, it has to work harder than ever because you face more risks than ever before.

 

Look at the first list up above. The old way of thinking about money encourages dead money.

 

The old way of thinking says to buy a house and put as much money down as possible. Make extra mortgage payments if you can. Get your mortgage paid off before you retire.

 

Today's reality is you cannot afford to have hundreds of thousands of dollars tied up in a mortgage. You are very likely going to need that money at some point along the way. Mortgages, home equity lines of credit and reverse mortgages have to be used as a strategic tool for financial planning today.

 

The old way of thinking says buy and hold. Stock prices go up over the long run.

 

But what about the short run? The new highs in the Dow notwithstanding, money invested in stock has been dead as a doorknob since 2001. It may still be dead. Dollars to doughnuts says if you remove any contributions you have made in the interim and add back any distributions, your portfolio value is less than it was.

 

Sorry to burst your bubble, but it's true.

 

The new way of thinking says losses in market value are unavoidable. Markets are cyclical and can't be timed. Cash flow is king. The only way to make money work consistently in the short run is for it to generate cash flow.

 

As long as I have sufficient cash flow, I can afford to hold for the long run because in the short run I have the income to deal with the unexpected without selling assets while they are down.

 

Many smart people believe these market highs are very temporary. They predict a recession is approaching. A lot of other really smart people say this is just the beginning of a new period of prosperity. I am just smart enough to know none of them know for sure. Flip a coin. It could go either way.

 

I always ask "what if?" I think a family CFO must plan for the unexpected. The way you do that is by asking "what if?"

 

What if I became ill and couldn't work. What if I lost my job or my business went under? What if housing prices fall - a lot? What if I can't flip this real estate investment I bought? What if 2007 is the start of another recession? What if the market loses 35% of its value over the next few years and takes another five to get back to current levels?

 

What if? And then -- what next?

 

The time to buy is when everyone else is selling and the time to sell is when everyone else is buying, not the other way around. These new highs are an opportunity to cash out and move to investments that will work for you even if "what if" happens. The key is to always plan so that no matter what happens, you'll still be OK.

 

Agree? Disagree? Leave your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Cash Flow the Best Measure of Wealth

I would like to share with you an excerpt from the November 2, 2006 edition of John Mauldin's Thoughts From the Frontline newsletter. As I have said elsewhere, if you don't already subscribe, you should. It is one of the most cogent letters out there. Which is why it goes out to over two million readers each and every week I am sure.

 

In this week's issue, titled "The Return of the Muddle Through Economy", John includes a summary from Rob Arnott in the Financial Analysts Journal on wealth:

 

What Is Wealth?   "How we define wealth," says good friend Rob Arnott, "or investment success, drives our approach to investing. Benjamin Graham was fond of saying that the essence of investment management is the management of risks, not the management of returns. Well-managed portfolios start with this precept."   Writing in this month's Financial Analysts Journal, Rob gives us a different way to look at wealth. (Rob, besides successfully running billions of dollars at various funds, is the editor of the FAJ and has given me permission to use this material.) Quoting:   "Can we measure our wealth as the value of our portfolio? Hardly. Today, $1 million buys much less than it did 25 years ago. "Is wealth defined by the real value of our portfolio? Only if we plan to spend it all right away. "Is wealth the long-term spending that our portfolio can sustain--the annuity that our assets could procure? This definition is closer to the truth, but like the first, it ignores purchasing power. "Is wealth, then, the inflation-indexed real income that our assets could sustain over time? For most investors, this is probably the most useful definition of wealth."   But what assets should we invest in to get the best inflation-indexed returns? Stocks? Bonds? Commodities? And what about the risks of these various asset classes? In a very interesting study, Rob redefines risk not as volatility of the asset class in terms of price but in terms of real sustainable spending. And he defines returns as not just a simple return, but as the growth in the real spending stream that the portfolio can sustain.   It's all about cash flow, or about the cash flow an asset or business can maintain. Real estate can produce a stream of income. Stocks can produce dividends or can be sold and invested in an annuity. Bonds pay an income. Entrepreneurs strive to build a business income model that does not solely depend on their continual involvement. (If you can't walk away and the business still produce an income, or if you can't sell the business to someone for cash to invest, you have a job, not a sustainable business.)   As investors, what we are ultimately concerned with should be future streams of income or cash flow. We work to get our portfolios to grow faster than inflation, and to enough size to support our desired lifestyle. But Rob is suggesting that it is not the size of the portfolio, but the ability to produce a sustainable long-term lifestyle.   Normally we think of T-bills as being the most risk-free investment. When viewed in terms of sustainable spending, however, T-bills become riskier than TIPS (inflation-adjusted bonds) and/or a regular bond portfolio. Look at the chart below. It represents the sustainable spending risk-adjusted returns of various asset classes. The red line is drawn between T-bills and stock market returns (as represented by the S&P 500). This is the classic capital market line between the "risk-free" asset and risky stocks.   Surprise. What you find out is that almost all asset classes produce a return or alpha higher than does the classic capital market when your define risk in terms of sustainable spending.

 

This is the point I have tried to make so many times and in so many ways. When your ultimate objective is income, traditional investments are not ideal - far from it. That idea is a throw-back to the days when all investments by the individual were essentially risk capital.

 

That is no longer the case. It hasn't been the case for almost twenty years. Unfortunately, we have been slow to recognize that fact and it isn't until we see the outcome for the retiring Baby Boomers that this reality will hit home. By then, in my opinion, it will be regarded as obvious but too late for tens of millions of Baby Boomers who were erroneously taught to focus on accumulation and capital appreciation instead of cash flow.

The way to measure performance is not the growth in the account value but the growth rate of the cash flow produced by a portfolio. If that cash flow is sufficient to sustain a decent standard of living, and is growing faster than inflation, then and only then do you have the ability to enjoy a sustainable standard of living indefinitely into the future.

 

My thanks to Snider Investment Method™ alumni, Shel Travis, for giving me the heads up on the John Mauldin newsletter.

 

If anything in this post inspires you to agree, disagree or ask questions, please feel free. You can leave your comments below.

 

SOURCES:

 

1. John Mauldin, "The Return of the Muddle Through Economy," Thoughts From The Frontline Weekly Newsletter; 2 November 2006. (subscribe here)

http://www.frontlinethoughts.com/pdf/mwo110406.pdf

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

10-25-2006 - Items of Interest to Family CFOs

This short paper, "Will Reverse Mortgages Rescue the Baby Boomers?", from the Center for Retirement Research, gives a wonderful explanation of reverse mortgages and how they can be used to tap equity in your home without selling it. It also explains the limitations and the risks. The best part is, the CRR is totally unbiased. They are academics looking at the problem of creating enough cash flow to rescue a generation unprepared for retirement. We are working to get one of the authors on the radio show very soon. (http://www.bc.edu/centers/crr/issues/ib_54.pdf)

 

Barry Ritholtz, offers this from The Big Picture. The chart is originally from the New York Times. Lest we are tempted to forget, in the short run, markets don't always go up. When they go down, they create long periods of dead money for the capital appreciation investors. That is why I chose to invest my money for cash flow in the short run and growth as a secondary objective over the long run.

 

 

 

The average Wall Street employee made close to $300,000 last year. That is about 5X what the average person in this country makes. According to the CNN Money article, top traders and investment bankers are commanding compensation in the tens of millions per year. Wall Street is making more than ever while your portfolio has made little or nothing for the last five years. (See the chart above.) Do you feel they earned what you paid them? http://money.cnn.com/2006/10/17/news/newsmakers/bc.financial.wallstreet.pay.reut/index.htm?section=money_topstories

 

It is impossible to continue indefinitely with your cash outflows exceeding your inflows. There is only so much home equity to be tapped and so much credit to be had. Yahoo columnist Laura Rowley has a good piece on the rising gap between income and expenses in this country. She offers five suggestions for averting the disaster that always comes eventually when you live above your means.

http://finance.yahoo.com/columnist/article/moneyhappy/11094

 

Thoughts on any of these? Feel free to leave your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

10-11-2006: Items of interest for the Family CFO

Investing And Retirement

 

In an effort to shore up U.S. workers' retirement savings, the Labor Department has proposed new rules making it easier for companies to automatically enroll employees in 401(k) and other retirement plans. Retirement policy think tanks like the Center for Retirement Research and the Employee Benefit Research Institute have been advocating this for years based on studies that have found it increases participation. (MarketWatch.com)

 

Ben Stein talks about a fundamental principle of successful investing -- whether you are talking real estate or paper assets -- you buy, not bail when markets are going down. Conversely, rising markets are the time to sell, not blindly follow the herd. (Yahoo Finance)

 

Any fool can lose money on an investment. Any fool can make money in rising markets. The trick is how to make it every day -- day in and day out -- no matter what. Robert Kiyosaki makes the case for cash flow in, Learn To Invest Like a Pro.

 

How many opportunities have a 50% expected rate of return with no risk? Scott Burns talks about the impact of deferring Social Security benefits, even just a few years. (Dallas Morning News)

 

Scott Burns also talks about the increasing number of lawsuits against companies, for failing to live up to their fiduciary duties as sponsors of 401(k) plans. At issues are high fees which over time drag down performance. Suits have been filed against Bechtel Corp., Caterpillar Inc., Exelon Corp., General Dynamics Corp., International Paper Co., Lockheed Martin Corp., Northrop Grumman and United Technologies Corp. Can more be far behind? (Dallas Morning News)

 

Mutual funds have always reported their performance as a time-weighted return. Morningstar has announced it will begin reporting the dollar-weighted return which more accurately reflects the money investors made in that fund and are typically lower than the time-weighted return. You should read Mark Hulbert's article for a nice run-down of the difference between the two and the implications to investors. (MarketWatch.com)

 

The LA Times reports on "pension envy." While private-sector pensions are being slashed, leaving pre-retirees to fund a 30 year retirement on their own, public sector employees still enjoy rich pensions. The problem is, many of them, like private sector pensions, are under-funded. Guess who has to pay for the under-funding? Taxpayers. The same tax-payers who are having their retirement funds cut. Some taxpayers are getting really pissed off about it. (LA Times)

 

Managing Lifetime Risks

 

Does Tony Soprano need more life insurance than Mike Brady? If you answered yes, you are not alone and it could be costing you money. A survey, by the KRC Research firm, which asked people to choose which of five TV dads needs the greatest amount of insurance, illustrates a mistake many folks make when it comes to insurance: focusing on the chance that they will die instead of examining the financial losses their family would suffer if they do. (MarketWatch.com)

 

No question healthcare costs are the big X factor in retirement planning. But, it is not totally out of your control. Robert Powell, editor of Retirement Weekly, gives us a rundown of seven steps outlined by the CEO of AARP, in his new book, that America and Americans can do to mitigate health-care costs in retirement. (MarketWatch.com)

 

 

Market Sentiment and Investor Psychology

 

Barry Ritholtz comments on the re-appearance of Dow 36,000 author James Glassman. He was on CNBC last week. Can anyone really take CNBC seriously anymore? What a farce. If there has ever been a better contrarian indicator of sentiment, I haven't seen it. (The Big Picture)

 

Something I learned later in life than I should have is that our psyche plays itself out in how we handle our money. Laura Rowley gives us a nice article on the three aspects of Money Maturity. Are you mature or immature when it comes to money? Read this article to find out. (Yahoo Finance)

 

The Economy 

 

Jim Mahar gives us an overview of the speech, by Fed Chair Ben Bernanke, on how the aging Baby Boomers will affect the economy. (Finance Professor.com)

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Power of a Portfolio Paycheck

I write often about the power of a portfolio paycheck. In other words, creating a portfolio whose main objective is to generate cash flow rather than capital appreciation. This is a ten minute video I did for KRLD's Online Investor Workshop on the topic.

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Conversion Risk of Real Estate Equity

Have you ever experienced a time where you had a deeply held belief and then, suddenly, exposure to a new idea caused you to question that belief? It happened to me, (again!) last night, at a Snider Investment Method™ information session in Scottsdale, AZ.

 

I believe that borrowing money to invest is a bad idea. There are, of course, exceptions. But I am just saying - as a general rule - I think it’s a bad idea. But then, one of my guests, Bob Kennedy, said something that put the idea in a totally different context, and suddenly I am thinking differently about the topic.

 

I talk a lot about what I call conversion risk. In fact, it was part of my program last night. Conversion risk refers to the idea that if your strategy is to hold an asset over the long term and you suddenly need money, because of some unanticipated event, and the market value of the asset is depressed (think 2003), you're screwed. When you HAVE to HAVE that money, you are in a weak position. You have no choice but to sell at the current market price. The value that is lost - is lost permanently. You no longer own the asset so there is no way to get it back.

 

We know from studies that financially disruptive events occur far more frequently than most people are aware. I haven't seen any studies that speak to rate of change specifically but I have to believe the frequency of financially disruptive events is increasing, not decreasing. Which means conversion risk is increasing.

 

So here is the Aha! from last night. Studies tell us, what little net worth Americans have, is tied up in the equity in their homes. It certainly isn't in the bank or their brokerage accounts. According to this year's Retirement Confidence Survey, done annually be EBRI, 52% of workers saving for retirement report total savings and investments, not including the value of their primary residence or any defined benefit plans, of less than $50,000. The large majority of workers who have not put money aside for retirement have little in savings at all: 75% of these workers say their assets total less than $10,000.

 

So let's give ourselves the benefit of the doubt and assume that there is some amount of equity tied up in our homes. Isn't there a conversion risk there as well? And isn't it even greater because there is less liquidity?

 

What if there is some catastrophic medical issue and the equity in your house is the only money you have? That is not the time to be trying to get a home equity loan! Who is going to give it to you? It certainly isn't the time to try to sell your house.

 

If a loved one is sick and dying and the only way to pay the bills is to sell the house, what kind of price are you going to have to accept to dump it? Finally, real estate is an asset with fluctuating market values just like paper assets. What if the price is down when you need to tap that equity?

 

So the question Bob got me to thinking about last night is, "Doesn't prudent planning REQUIRE you to separate the equity in your house somehow, probably through the strategic use of mortgage products, so that you can better manage the conversion risk? Hmmm.

 

It kind of casts my old thinking about never borrowing money to invest in a whole new light. I had always thought of the question, probably because it was the way it had always been posed, as a speculative strategy. Can I borrow from my equity in my house, invest it, and hopefully make more than I pay in interest?

 

But Bob turned it around as a risk management question. Don't I have to separate the equity in order to manage the risk? Wow! I love it when that happens: instant insight just from having a conversation with someone who has thought about something differently than I have!

 

Clearly, I am going to have to do some more research and thinking to wrap my brain around this idea. I think you should too. In the meantime, any thoughts you might have are welcome. Leave them below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Power of a Portfolio Paycheck

Suppose I buy a diversified portfolio of stocks hoping that over time they will increase in value so I can sell them. Until that happens, and I have consummated the sale, I have not made one thin dime. So, until that happens, I sit and I sweat. I worry about interest rates, the dollar, the economy, the possibility of terrorism. Everything is a potential boogie man lurking under the bed. No wonder investors are manic depressive!

 

Suppose instead I buy a portfolio that generates enough passive income, year after year, to pay all my bills and then some. Suddenly, interest rates, the dollar and geo-political events become much less scary because my standard of living is not at risk.

 

Now suppose we experience a ten year bear market. Both portfolios lose 80% of their value. The stock portfolio just sits there - dead - for ten years, doing nothing. It is not contributing to your well-being in any way. In fact, the opposite is true. You stress over it every day.

 

The income portfolio, on the other hand, is also down 80% in value but it continues to generate enough cash flow each year to pay all your bills, and then some. Which do you feel better about? Which causes the most anxiety? Which sounds like the better alternative for you and your family?

 

That is the power of a portfolio paycheck. It is the power to make your portfolio a source of comfort rather than a source of anxiety. It is the power to make work a choice rather than a necessity.

 

If an understanding of any two words has the power to change your financial situation, I believe it is income, or cash flow, versus capital appreciation. Let's recap:

 

Capital appreciation is when you buy something for a dollar and hope it goes up to two dollars so you can sell it to someone else. The difference between what you bought it for and what you sold it for is known as capital appreciation. An example of capital appreciation investing is buying a piece of land in hopes that its value increases and you can sell it to someone else for more.

 

Income, or cash flow investing, is when you buy something for its ability to generate passive cash flow. Income investing is the farmer who buys the land, never intending to sell it, but buys it instead for its ability to grow crop that can then be sold for cash, over and over again.

 

In the past, we have thought of income investing primarily in terms of real estate (rental properties), bonds (coupon payments) and dividend paying stocks. Today, there are many more ways to safely generate portfolio income with much higher yields than what were available in the past.

 

I believe one of the reasons most of us are so stressed out by our investments is we have been taught to focus on capital appreciation investments instead of cash flow investments. Capital appreciation focuses on a number to gauge success - either account value, return percentage, or both. Income investing is focused on outcomes - can I live comfortably without fear of running out of money?

 

One of the biggest disservices done to investors was brain-washing them to believe that income investing is only appropriate as you approach retirement. Income investing is not only appropriate at all ages, I believe it is essential. Here's why:

 

The biggest risk we face is not market risk. Our most valuable asset is what economists call our human capital. It is the skills and abilities we possess, which we trade in the form of employment, for money. Our biggest risk, therefore, is disability, losing our job or obsolescence.

 

There is no law that says you have to spend portfolio income. When you don't need the income, because you have a W-2 paycheck coming in, you re-invest the income to create growth. But what a portfolio paycheck does for you that capital appreciation portfolios can't, is it limits conversion risk.

 

Suppose you lose your job in your company's most recent lay-off. Imagine that you are approaching retirement age and so you are finding it difficult to get a new job because no one wants to invest in training you only to have you retire a few years from now.

 

The good news is that you have saved a lot of money over the years and have invested it in stocks. The bad news is the market recently declined 50%. In order to live off that money, you have to sell those stocks at a depressed price. Once you convert the assets, the lost value can never be regained. That is what I refer to as conversion risk.

 

Now imagine, instead, that you had a portfolio of income producing investments that generated enough income to pay all your bills. While you were working, you just re-invested the income to get growth. Again, you are laid off and again the value of your portfolio is down 50%. But now, there is no need to convert assets and lock in the losses. You simply divert the income to your checking account and use it to pay the bills, leaving the assets intact. This allows you to participate in the long term growth of the stock market, which we all know doesn't go up in a straight line, while at the same time protecting your standard of living.

 

Maybe, at that point, you decide to just hang it up and retire. You hadn't planned on it, but the point is, you can - because a portfolio paycheck makes work a choice, not a necessity. When you decide to finally move on to the next phase of your life, there is no stressful reorganization of your assets. You already have the means in place to harvest the wealth you created. Whether the S&P is at 1000 or 1500 is no longer a consideration when you are deciding when to retire.

 

Modern Portfolio Theory, the most widely accepted investment theory, was developed in the 1950s. These are not the 1950s. Our parents and grandparents lived in a very different world. They went to work for a company and stayed there until they retired and got the gold watch. Today's worker has changed jobs nine times by the age of 32! Pension? Social Security? Do you want to count on that? Not me!

 

Capital appreciation investing may have been appropriate when we our sources of income - both before retirement and after - were guaranteed. But today, if there is one thing I know to be true, there are no guarantees. That means it is up to you to create your source of permanent income that you can count on, both now, and in the future.

 

 

SOURCE:

 

1. Elaine Chou. "Working Together to Build the 21st Century Workforce" Speeches by Secretary Elaine Chou, Department of Labor website; 15 Nov 2002.

http://www.dol.gov/_sec/media/speeches/20021115_GHWB_Library.htm

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Crash Course in Investing

As the baby boom generation hurtles toward retirement, many investors face a crash course in investing. Baby boomers have gotten caught in a set of bad assumptions.

 

First,