Kimmunications

What Dara Torres Can Teach Us About Investing

backstage@kimsnider.com (Kim Snider) — Thu, 14 Aug 2008 13:20:31 -0500

Don't you just love the Olympics? I don't watch much television, but I was glued to the set last Friday night, watching the opening ceremonies. The pageantry and the technology on display were simply breath-taking.

I've always admired Olympic athletes for their dedication and discipline. It takes long hours at the gym, on the track and in the pool, each and every day, to reach elite status. And every Olympic games, I look forward to the stories behind the athletes, the tales of triumph and overcoming adversity.

This year, my favorite story has to be that of Dara Torres, the 41-year-old swimmer who helped her relay team win a silver medal. This is her fifth Olympic games. She first competed in the Los Angeles games of 1984 -- the year before her fellow Olympian, Michael Phelps, was even born!

Can you imagine the discipline it took for Torres to maintain her elite status as a swimmer? She's battled through countless surgeries and grueling training sessions over the years, and she's arguably better than she's ever been -- last year, she set an American record in one of her events. And did I mention she had a baby just two years ago? Think of all the times she could have easily given up and walked away. And yet, she persevered.

Dara Torres is a success story because of her discipline. And the same commitment to discipline can do for investors what it does for elite athletes.

Success in investing comes from creating a plan and sticking to it every day. That sounds awfully complicated, but it really isn't -- provided you have a solid system in place.

Systematic investing strips away the complex external variables and tells you exactly what to do and when. A huge rally or one-day drop in the stock market may cause your emotional brain to make rash decisions that you'll regret later, but a system will help keep you on the right track. In the event you suffer an investing "injury," a system will help you recover faster. By sticking to your system, you're more likely to avoid the mistakes that send other investors permanently to the sidelines.

Dara Torres' system of disciplined training has made her the oldest Olympic swimming medalist in history. A disciplined system of investing – be it dollar-cost averaging or the Snider Investment Method®-- may make you a successful investor at any age.

SOURCE:

1. Clarey, Christopher. "With Silver, Torres Sets Age Record for Medalist," The New York Times, 10 August 2008. [accessed 12 August 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.

Lessons from the investment bank disaster

backstage@kimsnider.com (Kim Snider) — Thu, 07 Aug 2008 16:33:09 -0500

I saw last week that Merrill Lynch and Citigroup were in the news again for the exotic mortgage-backed investments that have helped to screw up the credit markets. Merrill sold off nearly $31 billion of the investments for just 22 cents on the dollar. Citigroup is expected to write down $8 billion because of its involvement in these crazy investments.

Lots of analysts and reporters are talking about how these losses reflect the trickiness of the financial markets and how these collateralized debt obligations were risky ventures from the start. But I don't think that's really the lesson to take from these announcements.

It didn't take a genius to see what was happening. The big investment banks created a bubble, not unlike the tech bubble of a few years back. Everybody knew that eventually the bubble would burst and that things would get ugly. Everybody knew these investments were risky. But the investment banks ran into them head-on. Why? Because of their compensation system. There was the potential to make huge sums of money in commissions, so they were incentivized to take on huge amounts of risk.

The investment banks also felt bullet-proof. They figured that they were too big to fail, and that the government would bail them out if they got into trouble. In other words, you and I would be on the hook if things went south.

A money manager at one of these investment banks has an incentive to take as much risk as he can with other people's money. He gets paid for gathering assets, and the more assets he brings in, the more he gets paid. The way to bring in more assets is to show outstanding performance over a short period of time and get publicity in the major financial magazines. The way to show outstanding performance in the short term is generally to take on excessive amounts of risk.

By taking that extra risk, the money manager puts his clients in position to lose a lot more down the road -- but the manager doesn't care. Why should he? He doesn't get penalized as a manager for the losses his clients get; he gets paid for the assets he brings in.

This shows the systemic problem behind Wall Street's compensation structure. Whether you're talking about these exotic investments such as CDO's or the way that fund managers handle your funds, it doesn't matter. Wall Street types are incentivized to put their interest ahead of yours, and they do not suffer the same consequences as you do when you lose money.

These managers are paid handsomely and are widely regarded as the best in the business. They're supposedly geniuses. But if they can screw up their own companies so bad, do you really want them managing You, Inc.?

The moral is clear. When Wall Street appears in genius mode, raking in huge profits on mysterious products and complex trades, the secret isn't genius at all. It's that hubris is running wild, and so is risk. And whether it's tomorrow or five years hence, risk will jump from the shadows, knife in hand, to cut genius down to size.

-- Shawn Tully, editor-at-large, Fortune Magazine

If you've been reading my blog or newsletter for a while, you probably know that I have six principles underlying my investment philosophy. Number One is "Most investments are designed to make Wall Street rich, not you," and everything else just cascades down from that.

I think the credit and liquidity problems we're seeing now is a fallout from the greed on Wall Street, and it's a prime example of why I advocate managing your own money. You are uniquely qualified to do it, assuming that you are properly educated. The good news is that it's not hard to learn. It's not a big mystery that takes years and years to decipher.

Even if you choose to have someone else manage your money, you still need to be educated. A properly educated investor is subject to the least amount of conflict-of-interest and can better distinguish between a good investment and a clever sales pitch.

Educating investors is what I do, and helping people succeed is what I love. If you're ready to take the reins of your own portfolio, or if you just want to be a more educated investor so you can make better, more informed decisions, let's chat. Give me a call at 214-245-5236, 1-888-6SNIDER, or send me an email.

SOURCES:
1. Story, Louise, "Write-Down Is Planned at Merrill," The New York Times, 29 July 2008. [accessed 30 July 2008]
2. Dowell, Andrew and Ed Welsch, "Merrill Deal May Cause Banks to Revalue Debt," The Wall Street Journal, 30 July 2008. [accessed 04 August 2008]
3. Tully, Shawn, "Wall Street's Money Machine Breaks Down," Fortune, 12 November 2007. [accessed 01 August 2008]

You May Be in Good Financial Shape and Not Know It

backstage@kimsnider.com (Kim Snider) — Mon, 04 Aug 2008 11:40:16 -0500

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:

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.
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.
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:

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]
Hurt III, Harry. “Who Wants to Retire Later? (Don't Laugh)” The New York Times, 20 July 2008. [accessed 28 July 2008]

Tax Cuts Explained

backstage@kimsnider.com (Kim Snider) — Wed, 30 Jul 2008 10:58:19 -0500

A friend emailed this to me the other day, and I thought it was worth sharing. The piece has been attributed to several people, but nobody seems to know the original author. In any event, I found it interesting:

Tax Cuts Explained

Because it's the election season, let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement until one day the owner threw them a curve ball. 'Because you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20.'

Drinks for the ten now cost just $80. The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth man and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our Tax System works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Time to Tackle Some Widespread Myths

backstage@kimsnider.com (Kim Snider) — Thu, 24 Jul 2008 15:07:31 -0500

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