Kimmunications

You May Be in Good Financial Shape and Not Know It

Yes, many people are staring retirement in the face and aren't even close to being prepared. Yes, our economy is in a funk right now. And yes, everyone is feeling the pinch of higher prices for gas and food. Don't you think it's time to turn away from all the gloom and doom and think something positive?

I'll start with this: You may very well be on your way to a secure financial future, no matter what you keep reading in the media. 

The press likes to focus on doom and gloom, and it likes to tell us time and time again that millions of Baby Boomers are heading toward retirement without nearly enough saved up. They'll emphasize the findings of the latest EBRI Retirement Confidence Survey, which says that most workers aren't confident they'll have enough to retire on. All this may be true, but by focusing solely on the unprepared, it strikes fear in the minds of everyone, including the millions of Baby Boomers who actually DO have plenty of resources to get them through retirement.

I'll admit; I'm just as guilty as the next guy. For the last several years, I've trotted out tons of statistics to try to scare people into shaping up their retirement portfolios. What I've found, however, is that I've been scaring the wrong people.

The fact that you read my articles tells me that you are trying to be on top of your financial situation. The ones who are truly ill-prepared aren't likely to be seeking advice from someone like me. They're probably blissfully ignorant of their financial situations.

I meet with people all the time to go over their individual circumstances, and I've found that most of them fall into three categories:

1. Those who have enough to retire comfortably on (sometimes a lot more than enough), but don't think they're in good shape. Most of them just need to learn how to structure their portfolios to target a sustainable income stream.
2. Those who could have enough, they just need to adjust their spending or their income, and sometimes both. They typically have enough time to get back on the right track; they just need someone to point them in the right direction.
3. Those who really don't have enough, but they think they do. They spend like they have lots of money to burn, when they really don't. They typically need a dose of tough love! They'll probably have to work longer, cut their expenses to the bare nub and save like crazy – not the advice they want to hear.

If you're worried about whether you're adequately prepared, then let's talk.  Let's have a conversation about your situation and your goals. I won't try to hard-sell you on Snider Advisors or the services we offer; I truly just want to help you and maybe calm your fears. The sooner you find out where you stand, the sooner you can make the necessary adjustments – and the less painful those adjustments will be. Give me a call at 214-245-5236, toll-free at 1-888-6-SNIDER, or shoot me an email. You might be better positioned than you think.

SOURCES:

1. Helman, Ruth, et al. “Americans Much More Worried About Retirement; Health Costs a Big Concern,” Issue Brief, Employee Benefits Research Institute, April 2008. [accessed 29 July 2008]
2. Hurt III, Harry. “Who Wants to Retire Later? (Don't Laugh)” The New York Times, 20 July 2008. [accessed 28 July 2008]

---

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.

Time to Tackle Some Widespread Myths

I was going through my magazines the other day, and one little graphic jumped out at me. It showed the results of a survey of working 56-65 year-olds who were asked about their retirement plans. What it told me was that there are still a lot of misconceptions out there on how to plan, save and invest for the future.

The mainstream press doesn't do much to shatter these myths. So I'm going to go point-by-point through the survey results, and I hope I'll be able to set many people straight.

Finding: 43% of those surveyed believe they'll be able to withdraw 10% or more of retirement savings each year without exhausting their capital.

Reality: The widely accepted "safe" withdrawal rate is more like 4%-5% per year from a well-diversified portfolio of stocks and bonds, according to several studies. As with most of investing, the term "safe withdrawal rate" comes with a disclaimer: 4%-5% is merely a figure based on historical data that provides a high probability you won't outlive your money.

How can that number be so low if the stock market, on average, returns 10.4% a year? It's because the 4%-5% figure takes into account the fluctuations of the stock market as well as inflation -- an often overlooked piece of the retirement income puzzle.  First, the "safe" withdrawal rate assumes you aren't 100% invested in stocks; you have at least some assets in bonds and cash, which carry lower returns. Second, the average market return is an oversimplification of how the market really works. If the S&P 500 is up 10% one year and down 10% the next, the "average" return is 0, but you would end up with less money. Third, you have to take into account inflation. If you assume that the historical rate of inflation is 3.5% per year, your portfolio's returns have to grow that much just to keep up, and your withdrawals have to increase at the same rate so you don't lose purchasing power.

This is why I say that you have to target double-digit returns with your investments.* To be able to withdraw 4% a year, keep up with inflation (3.5%) and pay your taxes (assuming a 25% bracket), you'll need to aim for at least 10% a year -- more if you want to withdraw more, if inflation is higher than 3.5%, or you're in a higher tax bracket. I wrote an article on bonds a while back that explained the math behind this statement.

Remember, this is a target of at least 10% so you can potentially withdraw 4% a year. Most retirement portfolios aren't set up to target double-digit returns, which means withdrawing 10% is well beyond a pipe dream for most people.

Finding: 49% of those surveyed believe their income needs will drop by half after they retire.

Reality: I meet with retired clients all the time to go over their financial situations. Rarely do I see cases where their spending has declined in retirement. In fact, the opposite is true more often than not -- they typically spend more!

That's just from personal experience, but academics are finding similar results. Researchers at the University of Michigan found that in the aggregate, pre-retirement spending and post-retirement spending are about the same. Other studies suggest that spending initially goes up in retirement and doesn't begin to decline below pre-retirement levels until the retiree gets much older.

Although your job-related expenses may decrease and you may have paid off your mortgage, you have to take into account other expenses such as travel and healthcare. The cost of healthcare, and the cost of healthcare insurance, is rising at twice the rate of inflation.

Finding: 38% of those surveyed believe that long-term care is covered either by health insurance, Medicare or disability insurance.

Reality: Medicare covers few long-term care services, and people must meet strict income and asset requirements to qualify for Medicaid. Health insurance and disability insurance generally doesn't cover the cost of long-term care. And those costs can be huge.

A private room in a nursing home today costs about $70,000 a year.  Since 1990, the price has been increasing at an average of 5.8% a year. If you have enough millions in the bank to cover these kinds of costs, you probably don't need long-term care insurance. For everyone else, it's a different story.

Finding: 60% of those surveyed believe that at age 65 they will have a 25% chance or less of living beyond age 85.

Reality: The odds are more like 50%, and the expected joint life expectancy of a healthy 65-year-old couple is 30 years. That means there's a good chance that one member of the couple will live to age 95. Which brings us to the next point…

Finding: 56% of those surveyed say the greatest financial risk for retirees is longevity risk.

Reality: I'm glad to see they got this one right. But it tells me that a large number of people aren't connecting the dots: They think they can withdraw 10% or more per year and have much lower expenses, but they're still worried about outliving their money. They don't seem to realize how one affects the other.

But you aren't like that now, are you? You now know that to successfully make it through your golden years, you need to save prodigiously and invest wisely. And you need to plan. If you feel you're already on the right path, then congratulations! If not, it may not be too late. Email me or give me a call at 214-245-5236, and perhaps we can work together to get you back on track.

SOURCES:
1. "Taking a pass on financial reality," Investment News, 30 June, 2008.
2. Bengen, William P. "Determining Withdrawal Rates Using Historical Data," FPA Journal, [accessed 21 July 2008].
3.  Cooley, Philip L., Carl M. Hubbard and Daniel T. Walz. "Retirement Savings: Choosing a Withdrawal Rate That is Sustainable," AAII Journal, February 1998, Volume XX, No. 2, [accessed 21 July 2008].
4. Easterling, Ed. "Waiting For Average," Crestmont Research, [accessed 21 July 2008]
5. Hurd, Michael D. and Susann Rohwedder. "Changes in Consumption and Activities at Retirement," Michigan Retirement Research Center Research Brief, July 2005, [accessed 22 July 2008].
6. "Facts on Health Care Costs" (National Coalition on Health Care, 2007) [accessed 22 July 2008]
7. "The Importance of Personal Financial Protection" (American Society of Pension Professionals & Actuaries, 2006),[accessed 22 July 2008]

*Double-digit returns is an objective, not a guarantee

---

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.

Who's watching your pack?

Last week, I was in Alaska with the Bora Bora Society, a great group of Snider Method workshop alumni who travel together once a year.  While there, I met an Iditarod racer and his dogs. The racer, called a "musher," explained to us just how grueling the race can be -- more than 1,150 miles through mountains, across frozen rivers, and into dense forest and desolate tundra. All this at sub-zero temperatures, gale-force winds and blinding blizzards. The wind chill was once recorded at -100 degrees Fahrenheit! 

To see the work and training involved in such an endeavor is truly amazing, and I think I could have spent my entire trip just learning about the dogs and the care it takes to cross the finish line.

It takes a steely resolve and a little insanity to even want to compete in this race, and the mushers ought to be admired. But the real athletes, the real stars are the sled dogs themselves, which the mushers treat like their own children.

They were training one young dog -- maybe a little over a year old --  who was obviously new to the game. All the dogs were hooked together and running, but the young one kept turning his head, looking at the scenery around him.

I noticed one of the older dogs, perhaps the oldest in the pack, was right beside him. Every time the young dog broke his concentration, the older one nipped at him to keep him in line.

"We don't really do much training," the musher said. "The dogs really train each other."

That got me thinking about how families treat investing and personal finance. Your family is like a team of sled dogs; you all must work together to navigate the rocky terrain through all sorts of weather. The older, more experienced members of your family need to make sure the younger ones learn how to run the race the right way.

So who's watching out for the young pups in your family? Are you teaching your children and grandchildren good money habits? They won't pick it up in school -- most high school graduates don't even know how to balance a checkbook!

Sure, the younger pups may not appreciate your nipping at them whenever they wander astray. They'll yelp and bite back… but you must keep at it. Your involvement in your family's financial education will serve your pack well.

(By the way, there are more photos from the trip on our Bora Bora Society page on Flickr.)

---

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.

Lack of a financial education hurts the super-rich, too

Conventional wisdom holds that the ultra-wealthy have many more investment advantages than you or I. After all, they have access to highly selective hedge funds. It’s an exclusive club where the stakes are high and the rewards are out of this world.

Or that’s what they want us to believe.

The big hedge funds claim to offer much higher returns than what the normal investor can get through mutual funds. That’s why the buy-in is so high. But it turns out, hedge fund performance isn’t much better than that of run-of-the-mill mutual funds. What’s more, the incentive programs given to the managers leave hedge funds open to fraud and chicanery.

As with so many problems on Wall Street, this has to do with the compensation system. The manager of an ordinary actively managed mutual fund may take a fee of 1-2%. That’s bad enough, but it’s chump change compared to what the hedge fund manager gets. The typical fee arrangement for a hedge fund manager is usually 1 or 2% of the assets PLUS 20 percent of the returns that exceed some benchmark. So let’s say a fund has $200 million in assets and has a benchmark rate of return of 7%. After the first year, the fund was up 10%, or worth $220 million. The manager would earn $4.4 million for the management fee, plus $1.3 million for beating his benchmark (20% of the 3% extra gain).

You can imagine how this incentive arrangement just invites manipulation – and leaves hedge fund investors exposed to tremendous risk.

According to a study from the University of Pennsylvania's Wharton School:

…[I]t is very hard to set up an incentive structure that rewards skilled hedge fund managers without at the same time rewarding unskilled managers and outright con artists. Furthermore, any incentive scheme that does not directly penalize underperformance can be gamed by the manager so that his expected fees are at least as high, relative to expected gross returns, as for the most skilled managers.

The authors show how an enterprising hedge fund manager can use the derivatives market to generate what look like above-average returns. By placing highly leveraged bets on unlikely events, the manager can generate enormous amounts of cash. If his bets are right, the fund investors are very happy. If he's wrong, the fund collapses and the investors lose almost everything. Either way, the manager stands to make a fortune regardless of how the fund performs. This is a process the authors call “piggy-backing.”

In mutual funds and hedge funds, the term “alpha” is used to explain the part of a fund's performance that isn't explained by market forces. In other words, it's the result of the manager's supposed skill. By piggy-backing, an unskilled manager can fake alpha. By writing a number of covered calls using his investors' money as collateral, “it allows an unskilled manager to mimic a target series of excess returns without having the slightest idea about how a skilled manager would actually generate them.” [emphasis in original]

Dean P. Foster, one of the authors of the study, gives an example of this strategy at work:

An enterprising man named Oz sets up a new fund with the stated aim of earning 10 percent in excess of some benchmark rate of return, say 4 percent. The fund will run for five years, and investors can cash out at the end of each year if they wish. The fee is the standard '2 and 20': 2 percent annually for funds under management, and a 20 percent incentive fee for returns that exceed the benchmark.

Although he has no investment track record, Oz has a smooth manner, a doctorate in physics and many rich acquaintances. He raises 100 million and opens shop. He then studies the derivatives market and finds an event on which the market places fairly long odds, say 9:1. In other words, it costs .10 to buy an option that pays 1 if the event occurs and 0 otherwise. The nature of the event is unimportant: it might be a large fall in the stock market, Florida getting hit by a Category 5 hurricane or Russian President Vladimir Putin dying before the end of the year.

Next Oz writes some covered options on this event and sells 110 million of them in the derivatives market. This obligates him to pay the option holders 110 million if the event does occur and nothing if it does not. He collects 11 million on the options. To cover his obligations in case the 'bad' event occurs, he uses the investors' money plus the proceeds from the options to buy 110 million in one-year Treasury bills yielding 4 percent, which he deposits in escrow. This leaves 1 million in "pocket money," which he uses to lease some computer terminals and hire a few geeks to sit in front of them, just in case his investors drop by.

The probability is ninety percent that the bad event does not occur and Oz owes nothing to the option holders. With a gross return (before expenses) of 15,400,000, the investors are thrilled, and so is Oz. He collects 2 million in management fees (of which he has only spent 1 million), plus a performance bonus equal to 20 percent of the 'excess return', namely, 20 percent of 11,400,000. All in all, Oz nets over 3 million for doing absolutely nothing.

Foster says Oz can repeat this scheme next year. If his bets continue to pay off, he'll attract more investors and pocket more money. If the fund collapses, Oz can simply close the fund early and start a new one next year.

This scheme is not illegal, but it is risky – risky for his investors, but not for himself. In no scenario will Oz actually lose money. Actually, the more risk he takes with this investors' money, the more he stands to profit. That's the way his incentive structure works. You may get screwed if the fund collapses, but he walks away with millions.

This is yet another example of how Wall Street’s compensation system puts the interest of brokers and fund managers ahead of the investor. No matter how much money you’re working with, unless you know what’s really going on, you’re just asking to be taken advantage of.

That’s why it pays to learn as much as you can about how Wall Street really works, and why you ultimately should be in control of your own investments. Wall Street is set up to take advantage of the little guy, even if that little guy has millions and millions of dollars.

SOURCES:

1. Foster, Dean P. and H. Peyton Young, “The Hedge Fund Game: Incentives, Excess Returns, and Piggy-Backing.” March 2008. http://www.brookings.edu/~/media/Files/rc/papers/2007/1114_hedge_fund_young/1114_hedge_fund_young.pdf (Accessed April 23, 2008).

2. Foster, Dean P. and H. Peyton Young, “Hedge Fund Wizards,” Washingtonpost.com, December 19, 2007. http://www.brookings.edu/opinions/2007/1219_hedgefunds_young.aspx (Accessed April 23, 2008).

---

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 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, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

The Marvelous Miss Mary

I was on the phone the other day with the nicest lady. Her name was Mary. She had called in to my radio program the previous Saturday. I had given her my number and told her to call me so I could give her the name of a good, fee-only financial planner because that was what she really needed.

 

Mary had worked hard her entire life. Her job wasn't glamorous. It didn't pay anywhere near the top of the pay scale, but you can tell she did it with pride. She started putting money in her employer's retirement plan back in the 1980s, when they first came out, and she had been contributing religiously ever since.

 

Her house is paid for and she has saved a hundred thousand dollars or so outside her 401(k). She will also get a small pension and Social Security. She is getting ready to retire at the end of the year. She told me she has always read as much as she could about personal finance. She wanted a financial planner who could help her, not tell her what to do. (You go girl!)

 

We chatted about mutual funds. Some of her friends, she said, were afraid of the stock market because they didn't want to lose money. But she understood, from watching her 401(k) all those years, that sometimes it goes up and sometimes it goes down, but over the time she has had it, it has gone up a lot! You just have to leave it be.

 

Unlike most of her generation, she understood intuitively that she had to focus on not outliving her money rather than the fear of losing it. She knew she had to keep investing in the stock market for her nest egg to keep up with inflation. She is the exception, not the rule in this regard.

 

Mary listens to me on the radio all the time, she says. The idea of that makes my heart skip a beat and brings a smile to the corners of my lips. I love the idea that I might have helped her in my own small way.

 

She brought up the Snider Investment Method™. She never graduated from high school, she told me, and she doesn't know how to use a computer - yet. She is thinking about taking some courses now she is retired.

 

"I just wish I was smart enough to do your Snider Method!"

 

"Miss Mary", I said, "I can tell you one thing for sure. After what you have told me today, what is holding you back is not lack of smarts. When it comes to your money, you have accomplished what only 20% of people ever do - financial success. If you ever set your mind to learning the computer well enough, I am CERTAIN you could do the Snider Method. Look what you have already learned on your own!"

 

As you can probably tell, I thought Miss Mary was just marvelous! I could have talked to her all day. It just goes to show, investing and personal finance is mostly common sense … and they don't teach you that in school or hand it out with your promotions!

 

What Miss Mary teaches us is anybody can be a good investor and a good steward of their money.

Kim Snider Financial Communications 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. All investments are subject to risk, including possible loss of principal. 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.

Not Your Average 12 Year Old

John-Paul Pigéon is not your average twelve year old. He is a Rich Dad, Poor Dad prodigy and the youngest graduate of the Snider Investment Method™ Workshop. John-Paul is an accomplished speaker on the subject of money, speaking to children and adults alike. In fact, he has shared the stage with the legendary Les Brown, which is more than I can say.

 

John-Paul has recently written his first book, called John-Paul's Secret Recipe. It is the story of his first business - a lemonade stand.

 

This tale of two brothers and a classic road-side lemonade stand illustrates in kid-friendly terms the basic underlying principle of finance, cash flow. Though John-Paul does have a secret lemonade ingredient the message of the book extends far beyond a tasty pitcher of ice-cold, refreshing lemonade.

 

An autobiographical account of John-Paul's first entrepreneurial venture designed for audiences ages 3 - 9. The book includes a classic recipe for homemade lemonade and space for children to write in their own recipe and 'secret' ingredient. This book's brightly colored illustrations, fun caricatures and brotherly camaraderie exude wholesome family values.

 

A third of the proceeds from John-Paul's book benefit the Les Brown Out of the Rain Autism Center. This book will teach your children about important financial concepts that will help them succeed in life.

 

It is a delightful book, filled with John-Paul's passion for financial literacy. Purchase copies for the little people in your life directly from John-Paul's website.

 

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.

.2(S) + .8(M) = FS

There are two formulas that I apply to financial success. One is E + S + I = FS and the other is .2(S) + .8(M) = FS. For those of you who don't like math, I can picture your eyes starting to glaze over now, but stick with me. I am not about to get all nerdy on you.

 

The first is a formulaic expression of something you have heard me say many times before. Financial success comes from thinking like an entrepreneur (E), saving prodigiously (S), and investing wisely (I). Hence, E + S + I = FS. This basic formula for financial success is the subject of my first book, which I have finally started to make headway on after three years of swearing I was going to get it done!

 

The second refers to my belief that financial success is only 20% skill-set (S) and 80% mindset (M). That is true at the broad level and it applies to each of the three areas of financial success mentioned above.

 

When I say think like an entrepreneur, you don't have to have years of management experience to benefit from that perspective. You just need to be educated on some basic management tools, like personal financial statements. That is the easy part. Anyone can learn those. The hard part is the mind set side of the equation.

 

The traits of successful entrepreneurs are the same traits you should bring to your personal finances in order to be successful. Those are 1) commitment and determination; 2) creativity, self-reliance and the ability to adapt; and 3) believing in yourself and that you are worthy of financial success.

 

Saving money doesn't take all that much knowledge. I think it is fair to say anyone can do it. With proper financial literacy education, like that provided by Money Camp, even kids can grasp the concept of saving for what you want and different wallets for spending, saving and charitable contributions.

 

Having the discipline to save is another matter altogether. It has been said, "The reason most people fail instead of succeed is they trade what they want most for what they want at that moment."

 

I know in my own life, if left to my unconscious, I tend to be a spender rather than a saver. I didn't really become a saver until I met my husband, who is a natural saver. But once I started doing it, I realized I got a lot of satisfaction from seeing my net worth grow. Who knew the number on the bottom of personal balance sheet could bring more deep and lasting satisfaction than some gee-gaw I bought?

 

Don’t get me wrong. I still like nice things. But now whether I spend or save is a very conscious decision rather than an unconscious one.

 

Finally, you have investing. No where is my 80%/20% formula more pronounced than here. When it comes to skill set, it helps to understand that many of the most powerful concepts in investing are the simplest ones. It does not take complex investment strategies to build wealth through investing. In fact, the opposite is true. The more time you spend on it, and the more complicated your investment schemes, the less likely you are to get your desired result.

 

For years now, women who have just completed the Snider Investment Method™ workshop come up to me with incredulous voices and say, "I can do this!" In my mind I think, "Well, duh!"

 

Often they will say something like, "My husband has always taken care of our money", or "I am an artist. I didn't think I would understand investing", or "I didn't know anything about investing when I walked in and I was sure I would be totally lost."

 

(By the way - I am pretty sure there are men who think the same thing but I just don't think they are as willing to admit it to me!)

 

Anyone can learn to invest. It has nothing to do with whether you are an artist or an engineer. In fact, academic research says it has nothing to do with how smart you are.

 

Jay Zagorsky, a researcher from Ohio State University has studied the relationship between IQ and wealth. "Smarter people tend to get paid more on the job, but there's no relationship between intelligence and net worth when holding other factors constant," says Zagorsky, whose report was published in the journal, Intelligence.

 

(Just as another aside, we have scheduled an interview with Jay Zagorsky. So listen for my interview with him in the coming weeks on my radio show, Saturdays at noon CT on 1080 AM KRLD in the Dallas Fort Worth area and in our Financial Success Coaching podcast available from iTunes, Odeo and right here on the Kimmunications blog.)

 

So what does account for your ability to build net worth through investing? It is your ability to control your emotional responses to meaningless, short term price movements. It is your ability to avoid extreme states of fear or greed. It is your ability to do the right thing every single day even though it often feels wrong.

 

In short, investing is almost totally a mind game. That is why hedge funds hire psychologists to work with their traders in the same way professional sports team hire sports psychologists to work with athletes. I know because one of them was one of my mentors. Investing is 20% skill and 80% in your head. That is one of the very first things he said to me when we started working together and I know it is as true as the sky is blue.

 

That is why the way I invest my own money is a system that tells me what to do in every single circumstance. It leaves nothing to my discretion because I worked it all out based on probabilities beforehand. Then I follow it religiously to take the game out of my head and make it all about knowledge. That is a game I can win and in my opinion the only way you can win it.

 

So follow my convoluted algebra here. If E + S + I = FS and .2(S) + .8(M) = FS then E + S + I = .2(S) + .8(M). In other words, in order to achieve financial success, you must be educated on the nuts and bolts. That is important. But more important is your mental approach to money.

 

If that is true, then doesn't it also follow that the people you need to surround yourself with are not just salesmen who make their living by selling you annuities and mutual funds, but rather a mentor who will help you with both sides of the equation?

 

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.

Do You Deserve Financial Success?

I saw an article in MarketWatch the other day that made me sad. Apparently, 50% of Americans believe a secure retirement is an impossible dream. It makes me sad because self-defeating beliefs like this become self-fulfilling prophecies. There is absolutely no reason this has to be true.

 

Financial success requires three things: save prodigiously, invest wisely, and act like an entrepreneur. These things are simple. They are doable. But they are obviously not easy or we would all be millionaires.

 

In The Millionaire Next Door, Drs. Thomas Stanley and William Danko tackle the question of quantifying how wealthy you should be. They use a formula I have find quite useful. Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

 

If your net worth is more than twice this number, you are a PAW - a prodigious accumulator of wealth. If it is less than 50% of this number, you are a UAW - an under-accumulator of wealth. In between and you are average - an AAW.

 

At the age of 28, I was wealthy, by any measure. I didn't inherit it. But it was a stroke of luck. The company I worked for went public and my stock options were suddenly worth a lot of money.

 

By age 30, I was dead broke. I didn't have a penny to my name and I was in debt up to my eyeballs. All my cool toys were re-possessed. I sold my beautiful Uptown condo at a terrible loss just to stay out of foreclosure. My credit was wrecked and I had no job.

 

Today I am 43 - I'll turn 44 in May. I am again wealthy - by any measure. This time it wasn't a stroke of luck. It was damn hard work. And let me tell you something. It is far more gratifying than the first time.

 

There are many lessons to be learned in how and why I lost all that money the first go around. I'll save that for another day. I prefer to focus on how I got from the there to here - and to ask you a question? What can you learn from my experience?

 

One of the most useful exercises for me has been finding people who had what I wanted, figuring out what they were doing that got them the result I was after and then doing the same thing. That is why I found the Millionaire Next Door to be so helpful. It gave me a shortcut. I didn't have to talk with all these people, the author's already had.

 

Financial success starts with a simple principle. If you earn $100 and spend $110 you will always be poor - it doesn't matter how much money you earn. If you earn $100 and spend $90, you will always have money - it doesn't matter how little you earn. If you want to be financially successful, you must spend less than you earn.

 

Once you have put away enough to cover emergencies start investing your savings. The key to investing wisely is knowledge. I believe a financial education is one of the best investments you can possibly make.

 

Investing is simply a trade-off between risk and reward. You cannot have one without the other. That law is as fundamental as gravity - it cannot be suspended. The investor who manages that trade-off well will do well. If you don't, you won't. Too much risk or too little can be equally detrimental to achieving financial success. Your job is to always maintain a happy medium.

 

Risk is connected with financial success in many ways. For example, two-thirds of high net worth (HNW) individuals are entrepreneurs even though the self-employed only make up 20% of the workers in America. That makes sense given that profit is the reward for risk. The entrepreneur takes the risk to start and sustain a business and therefore makes more, when successful, than the person who works for someone else and has less risk. But he or she also stands to lose more if the business fails, which it often does.

 

So it is not surprising that HNW individuals are predominantly entrepreneurs. I am an entrepreneur. Not because I set out to make a lot of money but because I have a passion that burns deep inside my core - to make a profound difference in the financial lives of others by teaching them what I had to learn the hard way.

 

But the good news is that you don't have to be an entrepreneur to be financially successful - you just have to act like one. Most successful entrepreneurs I know have three traits you need to be financially successful: 1) commitment and determination; 2) creativity, self-reliance and ability to adapt; and 3) believing in yourself.

 

People sometimes ask me how I went from broke, to not, in thirteen years. I tell them I decided to. That is the truth. Without commitment and determination, you probably won't get there, because financial success requires making hard choices - usually involving giving up what you want now for the opportunity to have something better down the road. That is hard.

 

It is also hard not to get caught up in what everyone else is doing or to not keep doing the same thing over and over and expecting a different result. When the traditional Wall Street offering didn't meet my objectives, I created my own. If what you're doing isn't working, change what you're doing. Otherwise, you shouldn't be surprised when you keep getting what you've always gotten.

 

50% of Americans don't believe they can create a secure retirement. Sadly, they are right. Because if you don't believe you will, then you most assuredly won't.

 

Why do so many people doubt their ability to achieve financial success? Is it because they are afraid to try? Is it because too many people have told them they can't do it? Is it because we are a gluttonous, consumer goods oriented society where no one knows the value of delayed gratification any more? Maybe.

 

I saw an old beater car driving down Stemmons Freeway yesterday with a big screen plasma TV tied in the trunk. The driver was pretty obviously on the lowest rungs of the economic ladder. Yet there he was with his big screen, which by the looks of it, was worth more than the car!

 

But maybe, just maybe, it is because we do not believe we are deserving of financial success. One thing I know for sure, anything I believe I am unworthy of - love, money, respect, friendship - will elude me until I can say with certainty, "I deserve this!". Do you deserve financial success?

 

	TAKEAWAYS:   1. To be financially successful you must: save prodigiously, invest wisely, and act like an entrepreneur.   2. If you don't believe you are capable of financial success, figure out why.

 

So now you know what I think. How about you? What do you think? Feel free to leave your thoughts and 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.

The Road to Financial Success Is Well Marked

Do you ever look at people who are more financially successful than you are and wonder how they got there? There are only three ways to become rich: inherit it, marry it, or earn it.

 

Most of us aren't heirs to a fortune and unless your parents are in the minority, they are going to need all they have just to live out their power years. Some may be fortunate enough to marry into wealth but I certainly wouldn't recommend it as a wealth-building strategy. It reminds me of the line in Pretty Woman, "Meet the Olson sisters. They have made marrying well an art form."

 

So that leaves earning it. The good news is the road to financial success is well-travelled and those who have gone before you have left it pretty well marked. The only thing required from you is the discipline to make it happen. Here's how:

 

Forget about appearances. I bet you know someone who makes a lot of money, lives in a fancy house, drives fancy cars, and lives paycheck to paycheck. I know a lot of people like that. But I bet you also know someone who lives in an average house, drives the same paid-for car for ten years, and has a net worth of several million dollars. Thomas Stanley and William Danko call these people "The Millionaire Next Door." If you haven't read the book, get it.

 

Don't buy things you cannot afford. My grandmother is 88 years old. She was ten years old, living on a farm in East Texas in 1929 when the stock market crashed. She grew up, like so many of her generation, believing that you didn't buy something you couldn't pay cash for. When you have the discipline to save for the things you want, it gives you the time to decide if they are really important. If they are, they'll mean more for having saved to buy them.

 

Kick your bad habits. Do you smoke, drink, gamble or live on junk food? Our bad habits rob us in many ways. Let's take the difference between eating breakfast at home or grabbing a McDonalds on your way to work each morning. My breakfast every morning is a bowl of oatmeal and Crystal Light. I am guessing that meal probably costs me about $0.75. Compare that to $3.00 for an Egg McMuffin, hash browns and a soda (I don't drink coffee). Do that five days a week, 52 weeks a year, that's almost $600 a year. $600 compounded at 10% for twenty years is $4000. Do that every year for ten years and you have cost yourself a years worth of living expenses. That doesn't take into consideration the extra cost of insurance and healthcare if you are a high risk.

 

I am not suggesting you have to live in abject poverty or deny yourself a splurge once in awhile. I like a Whataburger as much as anyone. But you have to admit bad habits are expensive. If financial success is a priority for you, then kicking bad habits is one way to get there.

 

Visualize your goals. There is a tendency to become what you imagine yourself as being. So how do you attain your goals in life? By having a goal and knowing what it is! I, for example, have had a goal for almost ten years of owning a polo farm in Aiken, SC. Not a day has gone by that I didn't picture in my mind what the house would look like, how the barns and pastures would be laid out, and me playing polo on my own field. Today, that goal is a reality.

 

It is not enough to say I have a goal. The trick is to imagine exactly what that looks like, in excruciating detail, and hold that thought doggedly in your mind. The one thing we know is that our minds can't stand to have the inside not match the outside. If you are persistent with the visualization, and you have full faith in you ability to achieve your goal, your mind will, over time, make your outside world congruent with your inside world. I don't know why it works that way. I only know that it does.

 

Manage risk. Shit happens. Make sure you have six months of living expenses in a bank account. Insure any risk you cannot afford and update your insurance as your situation changes. The paradox is, the more at risk we are, the more likely we are to skip this step. When money is tight, it is easy to raid the emergency fund or cancel the insurance policy and hope lightening doesn't strike. But Murphy's law says that is just when it will and if it does, the financial setback may be too drastic for you to ever recover from.

 

Abolish get rich quick fantasies. Wealth is built one dollar at a time. I like the quote by Theodore Roosevelt. He said, "The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life."

 

Manage your own money. Imagine a broker has two mutual funds he can sell you. One is a low cost index fund that will match the market's performance exactly but pays him no commission. The other will under-perform the market two-thirds of the time but will pay him all sorts of money. Which do you think he is going to recommend? The only person who has no conflict of interest when it comes to taking care of your money is you. That makes you uniquely qualified to manage your own financial affairs.

 

Stop chasing the herd. The person who chases the latest hot idea, whether it is internet stocks, real estate, or commodities, is condemned to repeatedly buy high and sell low. The key to wealth is to buy when everyone else is irrationally selling and sell when others are irrationally buying.

 

Think of your money as a tool. Your money is no different than a carpenter's hammer or a truck driver's truck. It is a tool. Every day you put its little coveralls on, hand it its lunch pail and send it off to work. If, at the end of the day, it doesn't come back with four buddies in tow, your money isn't working hard enough. You need to find it a different job.

 

Be the Family CFO. You are your family’s chief financial officer and it is arguably the most important job you will ever hold. The CFO of a company is responsible for that company’s financial health. You are responsible for the financial health of your family. What separates the good CFO’s from the bad is knowledge. A good CFO works to be as educated about financial matters as possible. The more you know, the better you’re able to distinguish between a great investment opportunity and a cleverly disguised sales pitch.

 

	TAKEAWAYS:   1. There are only three ways to become wealthy: inherit it, marry it, or earn it. The last one is the most reliable.   2. Get started today. Tackle the items on this list one at a time. Make a plan for implementing these ideas. Let us know how you are doing.

 

Care to share? Which of these needs to be your highest priority? Leave your thoughts and 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.

The Need For Financial Education

I write a lot about the need for financial education - not surprising given I am in the financial education business!

 

The Employee Benefits and Research Institute (EBRI) published an issue brief this month which looks at how new retirees are doing financially in retirement. The study finds that many Americans age 65 - 75 appear to be starting of rather well. 53% have experienced no decline in household income and 71% had no decline in total wealth. That is good news.

 

The bad news is those who are losing money are losing it fast.

 

There was a roughly 50 percent median decline in total wealth from 1992–2004 among those who experienced a decline, and the median average annual decline in total wealth surpassed 5 percent for this group — putting them at significant risk of running out of money in retirement. Those seeing a decline in financial wealth are posting a median decrease at approximately twice the level that research suggests is advisable. Although the HRS dataset does not allow detailed analysis, this is probably due to excessive spending rather than investment loss.

 

I am going to make a bit of a leap here and suggest the most likely reason these retirees are spending down their nest egg so quickly is not extravagant spending but because they didn't have enough to support a retirement income in the first place.

 

The study also finds a clear correlation between those with regular income from pensions and financially successful retirements. Of course, an increasingly smaller percentage of Americans will have the benefit of pension income in the future as employers shift from traditional pension plans to 401(k) type plans.

 

The report concludes that many individuals need to learn much more about managing assets in retirement. The data suggests that how individuals manage their individual account assets—especially IRAs—will be a critical factor.

 

Current data indicate that many Americans appear to be on the right track for financing their retirement, have successfully managed their assets to date, and could likely have a reasonably comfortable retirement. However, other Americans appear to be in for a trying time in retirement—not just because of insufficient savings, but also because of their apparent lack of money management skills to properly utilize whatever retirement assets they do have.

 

The Snider Investment Method workshop is for people who have accumulated at least $25,000 in retirement savings, either in their IRA or taxable accounts. The goal of the Snider Investment Method is to grow the amount of income your portfolio can generate while you are young and then give you the means of harvesting it when you retire.

 

But what about all those people who have the majority of their retirement savings locked up in 401(k), 401(b) or SIMPLE plans? It isn't as much as is held in IRA's but still - it is a lot. For many people, their 401(k) will be the foundation of their retirement savings. It is critically important that you make the right decisions in your 401(k) from the get-go to maximize it's benefit later on.

 

That is why we created our newest course, How To Turn Your 401(k) Into A Million Dollar Nest Egg.

 

Our new course is a system, like the Snider Investment Method, for picking from among the different funds available in your 401(k), 403(b) or SIMPLE plan, deciding how much to allocate to each, what to do in a brokerage window, and how to rebalance. It also gives you guidelines for how much to contribute, the real skinny on company stock, loans and hardship withdrawals, what to do when you leave your employer and how to make your money last once you stop working.

 

If you read my blog or have heard me speak, you know I don't like mutual funds. I think it is a travesty that we are limited, unless you are one of the lucky few with a brokerage window, to mutual funds when the 401(k) and similar type plans are the cornerstone of our retirement system. Furthermore, I think it is particularly problematic that the people responsible for putting these plans together, namely HR folks, probably don't know beans about investing. As a result, the choices we get are bunch of horribly over-priced, under-performing actively managed funds.

 

That being said, it is no use tilting at windmills. Until the system changes, you have to do the best with the choices you are given. In spite of all the problems with 401(k) plans, I still believe that every person with an employer sponsor plan should contribute as much as they possibly can. The tax benefit outweighs the negatives and the company match, if you have one, makes it a no-brainer.

 

The question I have been asked most often over the years is what to do with retirement money that can't be invested using the Snider Method? So this course is our answer to that question. My plan is 1) to teach people how to maximize the many choices they must make in their employer sponsored plan for as long as they have it 2) give them enough information to know if their choices are really awful and encourage them to go pitch a fit to management and 3) give them a better alternative in the Snider Investment Method as soon as they are able to roll their 401(k) fund out into an IRA when they leave their employer.

 

F you have a 401(k) or other similar type plan and you are baffled by the fund choices and all the terminology, I hope you will take our new online course. You can watch the free preview here.

 

SOURCE:

 

1. Craig Copeland. "How Are New Retirees Doing Financially In Retirement?" EBRI Issue Brief Number 302; February, 2007.

http://www.ebri.org/pdf/briefspdf/EBRI_IB_02-20071.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.

 

Front Running - The Next Wall Street Scandal?

The SEC has launched a widespread investigation into front-running by major Wall Street firms, including Merrill Lynch, Morgan Stanley, UBS and Deutsche Bank. From the New York Times:

 

The inquiry, these people said, seems aimed at determining how pervasive insider trading, or the illegal use of market-moving nonpublic information, may be on Wall Street. Knowledge about a large trade, like the sale of a big block of stock by the mutual fund giant Fidelity, would tell a trader which way the stock would move.

 

Trading ahead of client orders, or front-running, has long been an issue on Wall Street. Large mutual fund companies have often complained in the past that Wall Street brokerage firms were front-running their trades, using information about the funds’ plans to buy or sell to make a risk-free bet on a stock’s direction.

 

But the latest S.E.C. investigation appears to have a new twist: Rather than examine whether a bank is trading ahead of its own client by using knowledge of the customer’s trade, the scope of the investigation will allow regulators to see if banks tip their valued customers who then go trade at another bank, making the paper trail harder to detect.

 

At this point, the SEC is in fact-finding mode. If they find evidence of insider trading, they will start a formal investigation.

 

Here is why this matters to you. Let's say brokerage firm XYZ gets an order to sell a major portion of Fidelity's holdings in some stock. The article uses DELL or IBM just as an example. When Fido sells, because the quantity is so big, the price of that stock is going to go down. That is known as market impact cost.

 

Now let's assume a big hedge fund is told in advance about the impending sale of shares. Knowing what is going to happen, the hedge fund gets to make a risk-free bet. But in doing so, they drive the price down too, before the mutual fund sells their shares. So they aren't just profiting on the knowledge, they are taking money out of the pockets of the mutual fund owners by, in effect, increasing market impact costs.

 

If true, and I have to say there is no hard evidence of that yet although it has been alleged for a long time, it is yet another case of brokerage firms making money at the expense of the little guy - you and I. The hedge fund makes a risk free return, the brokerage firm gets more business from the hedge fund, and you and I get screwed.

 

I have said it a million times. The reason I think you have to learn to manage your own money is Wall Street is one great big ball of conflict of interest. Everywhere you turn, there are systemic problems that cause the people who are supposed to be helping us to put their own financial interests ahead of ours.

 

I think we have enough to worry about - the possibility of financially disruptive events during our working lives and funding thirty years of retirement. Every penny that gets siphoned off to enrich Wall Street is less for you and me. The best way to make sure you make all the money off of your money is to bypass the financial services industry and take care of your money yourself.

 

That's what I think. How about you? Leave your thoughts and comments below.

 

SOURCE:

 

1. Jenny Anderson. "SEC Is Looking At Stock Trading" New York Times 6 February 2007.

http://snipurl.com/frontrunning

 

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.

 

Informal Market Research

I am trying to understand the terminology investors use to describe themselves. So if you wouldn't mind participating in my little informal market research project, please rate yourself on a scale of 0 to 10 with 0 being I know absolutely nothing about investing and 10 being I think I know a ton about investing. Then fill in the following sentence:

 

"I rate my knowledge level a ____ and consider myself a ______________ investor."

 

Leave your answer in the comments section below. If you want to elaborate in any way, that would be helpful too.

 

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.

Why the Rich Are Headed Back to School

It is my contention that financial education is going to become a very hot topic in the next few years. It is needed at every level, from school age children to retirees, for those living on minimum wage to those who have a very high net worth. It seems, like many things, the market is developing at the top of the financial spectrum, where people can afford to pay for it.

 

According to a January 17, 2007 article in the Wall Street Journal ...

 

The wealthy are flocking back to school to learn how to be rich.

 

As investing and estate planning grow ever more complex -- with labyrinthine trusts, derivatives, hedge funds, structured products, complex philanthropic options and ever-changing tax laws -- wealthy individuals increasingly want to get a better handle on what to do with their money.

 

Often, the students are successful business owners who have recently sold out and are struggling with how to invest their windfall. In other cases, they are women who have been widowed or divorced and may not have handled tough financial decisions before. And a growing number of fortunes are passing into the hands of baby boomers, who are more apt than their parents to reach out for help in understanding how to manage their finances.

 

To that end, they are signing up for courses offered by universities and business school