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.

Investing Like Yale

In times when the market is going every which way, it can be comforting -- and rewarding -- to follow a rigid system. This video from Investment News shows how large university endowment funds follow a system to get better results. It also features an interview with a big-name fund manager who also follows a system.

Key quote: "We've found over the years that the numbers are more reliable than opinions, and that includes my own opinion." - Steve Leuthold, The Leuthold Group

Also, for those of you in the Snider Method® who are nervous about the international stocks Lattco® gives you, pay close attention to the discussion of overseas markets.

Go here to watch the video: http://link.brightcove.com/services/link/bcpid1125967528/bclid1125949998/bctid1498976295

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.

Shaped Skis and Cash Flow Investing

I have been skiing as many years as most of you have been investing - almost 40 years. I may not be the best skier on the mountain but I have always taken pride in my proficiency on skis.

 

After decades of skiing on long, stiff, straight boards, ski technology has shifted dramatically. Now everyone skis on short, supple, shaped skis. These new skis require you to ski differently than we did in the old days. In fact, everything is almost the exact opposite. To ski well on the new skis, I have to unlearn a lot of years of skiing.

 

Us old-timers learned to ski with our knees together. On the new skis you ski with your legs apart. On the old long boards, you weighted and unweighted your skis with one sliding in front of the other to turn. Now you turn both skis at the same time by applying the slightest amount of pressure with your big toe to the inside edge of the ski. Skiing the old way, your weight was all on one leg. Now you put weight on both skis. And here is the one that really screws me up - now I lean to the right to turn left and visa versa!

 

The overwhelming temptation is to stick with what I know. Why try to learn this new way of skiing? After all, I have gotten this far with the old way, right?

 

In a nutshell, it is because the new way is better. More accurately the new way is more appropriate, given my objectives, which are to be able to ski all different types of terrain with minimal energy expended and the least chance of bodily injury.

 

These were not my major concerns when I was younger. My objectives have changed and so too must my style of skiing.

 

So, here I am, in Squaw Valley, taking a few days vacation after a convention in San Francisco. I finally broke down, after several years of resistance, and took a lesson on how to ski the new way. Let me just tell you … I hate it.

 

Now I know how investors feel when they switch from the old capital appreciation model to this new-fangled way of cash flow investing. The old way was comfortable. This way I feel totally awkward. Every time the instructor tells me to lean left to turn right, my brain revolts! It feels similar to the sensation of trying to pat your head and rub your stomach at the same time. I get angry. At him? At me? I am not sure - maybe both.

 

The easy thing to do would be to go back to the old way. But I can't. I am determined to push through this initial awkward stage. No doubt about it, it's going to take awhile.

 

Some people have a natural sense of where their body is in space and can make physical adjustments quickly and easily. I have never been one of those people. I have to work at it - just like some of our investors instantly "get it" and others struggle before the light bulb finally goes off.

 

But why? Why do I have to make this change? Because in a logical moment I realized the new way was better suited to what I was trying to accomplish.

 

I am older now and no longer have the benefit of a young body - just as an older investor no longer has the benefit of time. Now I enjoy being able to cover maximum terrain with minimum effort - just as our investors want maximum results with minimal risk. The new way lets the skis do all the work instead of me - just as our way is about making your money work harder so you don't have to. And most importantly, the new way allows me to safely navigate difficult terrain because I am skiing on a more stable platform - just as our investors want/need a platform to navigate difficult markets.

 

So, in spite of the fact that I felt like an out of control beginner today, I will stick with it. I have to trust. I know, eventually, this too will feel natural. In the meantime, my logical brain will just have to drag my lizard brain along.

 

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. 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. Individual results may vary.

The Performance Paradox: The Antidote (Part 3)

For the last two weeks, I've written about what I call the Performance Paradox. It goes like this: The more you want or need it, the more you try to get it, and the more you micromanage it, the worse it will be.

 

The two sides to the Performance Paradox are fear and greed. These emotions cause us to buy at tops and sell at bottoms, and to repeat that pattern over and over again. Buying high and selling low is the opposite of what we should be doing, yet most investors can't seem to help themselves.

 

This week so far demonstrates the power of emotional decision-making. On Tuesday, the Dow opened down 465 points, and just about every analyst on TV was spouting doom and gloom. Investors, afraid of losing more money, sold off their shares, only to see the market rebound the next day.

 

Think of all the money they just lost by panicking when stocks had fallen, when what they should have done was ... nothing.

 

The key to successful investing is being able to tune out the influence of our emotions. You can do that by developing a set of rules when you are sane, before you have any money on the line, and by sticking to those rules even when your emotional brain is screaming at you to do otherwise.

 

When people ask me why they should take our workshop and invest the way we do, I tell them about our true value proposition. Ours is a behavior-modification plan as much as it is an investment strategy. It's not about the performance that our investment method generates; it's how we help you behave as an investor.

 

The annual Quantitative Analysis of Investor Behavior study by Dalbar Inc. shows that the average equity mutual fund investor badly underperforms the average equity mutual fund investment. In other words, it's investor behavior, not the investment itself, that truly determines return. I could have an investment that returns an average of 30% a year over 20-30 years, but if you continually bought it high and sold it low, the fact that it averaged 30% a year doesn't matter. Your return would be much lower because you let fear and greed drive your decision-making process.

 

By creating a rigid system that you follow no matter what, even when the market is down 400 points and you feel just awful about the economy, you can avoid the behavior that sabotages most investors. If you can correct that behavior, you can improve your performance, regardless of what you're invested in.

 

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. 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.

Are You Navigating or Just Drifting?

I've been reading a management book titled "Mastering the Rockefeller Habits" by Verne Harnish. The central premise is how to create alignment in an organization. Alignment can best be understood as everyone and everything working together toward a defined objective.

 

I am attracted to the Rockefeller Habits because Harnish has created a step-by-step system for managing a small but rapidly growing business, much like the Snider Investment Method™ is a complete system for managing your investments. Like the Snider Method, there are steps to be followed, one after the other and always in the same sequence. Also like the Snider Method, there are worksheets to keep up with all the data and metrics to track performance.

 

As I was reading, I quickly realized that my company is suffering from a lack of alignment. We have 20 people all doing stuff every day - stuff that "feels" important, or at the very least urgent. But a lot of it has nothing to do with meeting our most important goals. We are all rowing very hard but all to a different cadence. We are moving, but not in a straight line and not with the efficiency we could be.

 

I also realized that I am much more successful at achieving goals in my personal life than in my business life. Maybe it's because there are fewer people to get onboard. In my personal life, it's just Jim and me. The dogs don't put up much resistance - or provide much input for that matter!

 

Our dream is to build a polo farm in Aiken, SC. Everything we have done for the last few years has been about making that a reality.

 

First, we had a vision that we were absolutely 100% committed to. Next, we had to ensure we had enough money put away to support us for the rest of our lives - not lavishly, but at least comfortably. In other words, take care of retirement savings first, then the dream.

 

Then we had to figure out what it would take to make the dream a reality. The first thing we realized is we needed to build the company into one that was not so dependent on Jim and I on a daily basis. In others words, we had to build a business. We are working on that.

 

It also meant quantifying the dollars involved. How much would it take to build our dream? Yikes! Polo farms don't come cheaply, at least not the one I see in my dreams. So we did that too.

 

Then we started working towards those goals. Everything else has taken a back seat because that is what we decided was most important. When we wanted to take a vacation, we measured it against the dream. "For the cost of a trip to Sun Valley, we could buy an acre of land." or "Is that worth a polo pony?" Sometimes we would say yes. Most of the time we decide it isn't worth it.

 

Our actions are generally in alignment with our goals. As a result, we have bought the land and hope to start moving dirt some time next year.

 

I have always believed that our lives, especially our financial lives, are just micro businesses, to which business principles apply. That is why I always stress the concept of the Family CFO. I believe it is a useful metaphor.

 

I realize now that my personal life is better aligned with my personal goals than my business is with its business goals. We aren't as focused, in the business, as I would like us to be. That is my fault as the CEO and I have determined to fix that.

 

But what can you learn from my experience? Well, here is my question - are YOUR actions aligned with YOUR goals or are you allowing YOURSELF to drift day-to-day without getting any closer to your dreams? And if you are drifting, what do you need to do to take hold of the helm and start creating an intentional course? If you'd like to share, your thoughts and comments are welcome 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.

 

You Decide

I posed the question a week or so ago, on this blog, "What would you like to see me write about?" The two year anniversary of the blog got me to thinking about how I could make it more relevant for my readers.

 

Now I have a much more specific question. I try to keep references to my Snider Investment Method™ very limited. This blog is not meant to be a sales tool as much as a thought leadership blog. It is a place for me to synthesize my thoughts on the concepts, statistics, and events relative to investing the way I do.

 

To the extent that my thoughts lead to sales, that is great. But I have always tried to keep the sales motive in the background.

 

That being said, there are many practitioners of the Snider Method who read this blog. There are many people who read this blog who may be considering the merits if the Snider Investment Method. And I need a forum to answer larger questions posed to me about the method and our workshops.

 

I can do one of two things. I can begin to discuss the Snider Method here, in addition to the topics I am already covering. Or, I can start a separate blog devoted only to the Snider Method. I would like to put it to you, the readers, as to which you would prefer?

 

Please take the poll below and let me know what you think. You can leave any other thoughts you may have in the comments section.

 

 

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.

 

Principle-Driven Portfolio Management

Nick Murray is one of my favorite financial writers. He is an author, speaker and advisor to investment advisors. While I disagree vehemently with the diversified portfolio approach he advocates, I cannot help but agree with most of his views on how to "think about" portfolio management.

 

He publishes a column each month in Financial Advisor magazine, which is unfortunately, not published on their web site. That also means, in order to share any of it with you, I must re-type it or scan it and run it through OCR. I thought the article, "Portfolio Management As Belief System" was so right on target, that I have done that.

 

The subtitle is "Principles, not prognostication, produce superior returns." I could not agree more. The Snider Investment method™ is, as it turns out, a principle-driven approach to portfolio management, not one based on prognostication. Here is an excerpt from the column:

 

Investors should not be seeking the maximum return possible anywhere in the universe, but rather the best return available with the least stress. In this construct, if Investor A gets a 9.5% lifetime return and thereby achieves his goals with the expenditure of little or no time and energy, while Investor B gets 10.7% working on his portfolio nearly every day, Investor A is held to have outperformed by a significant (if not precisely measurable) margin.

 

(This hypothetical comparison is made only to illustrate the idea of a quality-of-life component in real returns. You will not have failed to note that, in actual practice, the above juxtaposition of outcomes could probably not happen, everything else being equal, because the guy "managing" his portfolio every day would have made so many more market-driven portfolio switches that he'd have drilled his return into the ground.

 

The principle-driven portfolio management belief system thus begins with the dictum that "performance" is not a financial goal, and that the only rational basis for the construction and management of a long-term portfolio is the long-term financial goals of its owners. Thus questions like "When will the Fed stop raising rates?" and "What will the S&P 500 earn this year?" are subordinate, by several orders of magnitude, to the questions that really matter: (1)"Who is the money for?" (2)"What is the money for?", and (3)"When will this money be needed?" Or, if you prefer: the portfolio doesn't follow the market; it follows the human needs of the investor household/family.

 

My way of expressing this same belief is "Focus on outcomes rather than numbers." The idea is exactly the same. Obsession with performance is a disease inflicting most investors. A principled, rational approach makes more sense but the medicine is difficult to swallow for most. Here is another excerpt:

 

The third principle in this system states that the dominant determinant of real-life long-term return isn't what the portfolio does; it's what the investor does. That is, investor behavior dwarfs investment performance in determining the actual return that investors get.

 

[...]

 

Of necessity, since most financial input ordinary people receive is from journalism, they are constantly being brainwashed by a selection-and-timing culture. The primacy of asset allocation may be the immutable truth, but it isn't "news", and therefore journalism can't cover it. The truth is not merely different from the news, it is antithetical to it. The news is the disease; the truth-telling principled advisor is, for most investors, the cure ... assuming, of course, that they want to be cured.

 

Again, I have a different way of stating the same principle: "Investors are their own worst enemy." Investors are irrational. Investors emotions cause them to react irrationally - to do the opposite of what they should be doing - to view things as important that aren't and to view things very important as not.

 

Principle-driven portfolio management requires discipline. It also required, as Nick Murray states elsewhere in his article, for you to remain lashed to the mast of your principles in the face of storms of pounding fury. That is hard, for anyone. It is even harder to get others to stay lashed to the mast with you. And yet, we must.

 

So what do you think? Does this idea make sense to you or do you think it is all wet? Let us know. Leave your thoughts and comments below.

 

SOURCE:

 

Nick Murray. "Principle Driven Portfolio Management: Principles, Not Prognostication Produce Superior Returns," Financial Advisor, May 2006; p45, 46 <No on-line version available>

 

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.

Does the Snider Investment Method Buy and Hope?

I discussed what I call the Buy and Hope strategy in a post dated June 28, 2006. A number of people, including some practitioners of the Snider Investment Method™ left comments asking if the Snider Method didn't also rely on buy and hope. I started to post my reply as a comment but it got so long I decided I'd just put it up as its own post. So here goes …The Snider Method doesn't rely on hope - not in my mind - although some people may do it anyway.

 

I don't have to hope because I don't care what the stock price does. The reason I don't care what the stock price does is I am an income investor. I would be willing to hold any of my Snider Investment Method positions forever because I created them for the express purpose of generating a consistent income over very long periods of time regardless of what the stock price of the underlying asset does.

 

Many people can never let go of the concept of account value. That's fine. It's their money so they are entitled to think about it in any way they want.

 

For me, my account value is an irrelevant concept. I never look at it and I never worry about it. I only care about the standard of living my portfolio can sustain. You don't measure standard of living using account value - you measure it by income generated.

 

Every dollar of income that can be generated indefinitely out into the future is the equivalent of a dollar of income I would otherwise have to make by working. My goal is to make sure I always have enough passive income that I never have to work. So long as I am meeting that goal, the only person who cares about my account value is my heirs and I am thinking my heirs care a lot more about my dignity when I am living (and not having to take care of me) than they do about the amount I leave them when I die.

 

Steve mentioned winters in his post. Winter, in the Snider Method, is a month in which a Snider Method position does not generate any income. I know most people view winters as bad. I don't. Winters were designed into the system and are included in our historical return numbers.

 

The problem with winters, of course, is as soon as you enter one you are convinced that spring will never come. That feeling is compounded if you get multiple positions in winter at the same time - which happens. My grandmother used to say, "Nothing is impossible, just highly improbable." Our experience over the years is no matter how bad they feel, positions generally come out of winter within a few months - though not always.

 

Sure, we could have designed the Snider Method so we didn't have winters. That would mean there would be no risk. No risk means low return. There are already no-risk investments - CD's and Treasuries, for example. That wasn't our objective. We are willing to take an acceptable amount of risk for an acceptable amount of return. That is, for us, a standard deviation of 6% for a yield of 13% annually. Others may or may not find this risk reward trade off appealing.

 

You have to remember the Snider Investment Method is not a short term trading strategy. It is a long term investment strategy. It is absolutely self-destructive to look at the returns of any investment from month to month. The question you must ask is, "Is this investment meeting my needs and objectives over my given time horizon?" If your time horizon is a month, six months, or even a year - you are in the wrong vehicle.

 

The Snider Method is nothing more than a substitute for bonds in your portfolio. The Snider Method creates a portfolio of synthetic bonds, which in the aggregate, have about the same level of risk as investment grade corporates and act similarly.

 

My own personal philosophy, as I have stated many times, is that I will not put my own money at risk in stocks. I think they are too risky given that each of us must now create a portfolio capable of sustaining an acceptable standard of living for 30+ years. I have also said, as a result of that philosophy, that my own money is only invested in CD's, money markets, and bonds. I, of course, include the Snider Method in the bond category as it is a terrific alternative to traditional bonds because the yield is so much higher for the same level of risk and shorter duration.

 

Accordingly, my family and I have the vast majority of our investable assets in the Snider Investment Method. Where else would we put it given that approach to investing? That doesn't mean you will, or even should. That is a decision you have to make given your tolerance for risk versus return and your temperament.

 

The best way to understand the liquidity issue, I think, is to think of a Snider Method portfolio as what it is - a portfolio of laddered, synthetic, investment grade corporate bonds. By laddered, I mean the bonds in your portfolio are of varying durations. Some of them "mature" after only a month. Many will go as long as two years. The infamous Checkfree position we dissect in the workshop took four years and one month to close. The average duration of a Snider Method position over time has been about six months - but that is just an average.

 

The Snider method is definitely not highly liquid - any more or less than a traditional bond portfolio is. We tell everyone not to put any money in the Snider Method that you aren't willing to leave the principal invested for at least two years. The income you can scrape off monthly but there is a liquidity risk, which we discuss in great detail in both the workshop and our free information sessions.

 

So to Steve's second post: We agree totally. You should always have an emergency fund of cash set aside for emergencies. Everyone should have six months' to a year's worth of bills set aside in liquid cash equivalents before you invest in anything - your 401(k), stocks, bonds or the Snider Method. Otherwise, you are robbing Peter to pay Paul. To invest before you have your basic needs covered is crazy.

 

So we assume you do have cash reserves. Given that, my personal philosophy is that your nest egg is sacrosanct - no matter what happens, you never, ever, rob your retirement funds to cover short term cash flow problems.

 

If circumstances are such that you have run through your emergency funds then it is my belief you have to do whatever you would do if you had saved nothing for your retirement. In my mind, it is as if the principal in your retirement doesn't exist.

 

I do have one caveat: If your retirement funds are producing income, like the Snider Method does, I think it is not only OK to use the income if you have to, but it is in fact one of the reasons I advocate becoming an income investor early in life. But robbing principal? Never.

 

That is the easy way out and years from now you will wish you hadn't. You can never recover the gift of time in the market. No matter how you rationalize it, you'll never catch back up. You are robbing money from a period in your life when you will have no earning power during a period in which you do - even if that means flipping hamburgers at McDonalds or picking up cans by the side of the road.

 

So, as far as I am concerned it is as if that money doesn't exist. From that mindset, which is the way I look at it, the liquidity issue becomes a non-issue because no matter what, I am never going to cash out a Snider Method position for any reason. Any money Jim and I know we will need later, we plan for and systematically remove from our Snider Method portfolio well in advance of needing it.

 

I think the main point is this - no investment is perfect. All have pros and cons, including the Snider Method. Every investor, and every investor's situation is different. It is up to you to develop a coherent philosophy that makes sense to you. Mine may or may not work for you - it does work well for me but that's because I am me. Your job is to be as rational and realistic about the future as possible, plan accordingly and then employ the tools that make the most sense to you in order to actualize your plan.

 

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.

Alternative Investments

Brian Beaulieu, Chief Economist for The Executive Committee (recently renamed Vistage International), a global organization of over 10,000 CEO's, spoke about the need for alternative investments, in a private podcast to the TEC members. In that podcast he said:

 

Alternative investments may be on people's lips but they are not in their minds - or in their hearts - and its not in their portfolio, at least not to the extent that it should be. They are still working off the paradigm that existed in the 1980’s and the 1990’s.

 

This is a brand new game that we are in and you can’t look for the equity market to perform like is has in the past. That means you need to shift your thinking abut how you are going to make your money work for you over the next five, ten, even 15 years.

 

If you are not really focused on alternative investments like commodity markets, like really some creative REITs, some creative tax strategies that are out there - you need to be.

 

I just recently did a presentation in concert with a wealth management firm in Appleton, Wisconsin and they had this great line. They said, “Think outside the circle.”

 

I just thought that was great because the typical portfolio is this pie chart - you have so much in stocks, a smaller portion in bonds, and an even smaller portion in cash. People need to think outside that circle. They need to be thinking in terms of an investment pyramid paradigm, not this pie chart that worked well in the past, because it isn’t going to yield the returns that these guys want and need in the future.

 

Brian Beaulieu has been an economist with the Institute for Trend Research since 1982, serving as its Executive Director since 1987. At the Institute, he has been engaged in applied research regarding business cycle trend analysis and the utilization of cyclical analysis at a practical business level.

 

In case you are wondering, alternative investments include options, commodities, hedge funds, closed end funds, mortgage based securities, etc.

 

Brian's comments make me curious about three things: 1) Do you agree? 2) Do you have any alternative investments in your portfolio and if so, what percentage of your portfolio is invested in alternatives? and 3) Has your advisors ever mentioned the need for alternative investments? Take our poll. Also 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.

 

 

Spend less than you earn

The U.S. Savings rate has gone to zero for the first time since the Great Depression. Studies say people are counting on equity in their homes or inheritances to fund their retirement. They are relying on things outside of their control instead of things totally within their control. How scary - at least to a control freak like me!

 

The minimum amount that can be invested using the Snider Investment Method ™ is $25,000. The number of people who don't have $25,000 in liquid investable assets is staggering. The 15th Annual Retirement Confidence Survey by the Employee Benefits Research Institute and Matthew Greenwald & Associates finds that over half of workers have less than $25,000 saved! Only 11% say they have saved more than $250K. The 2001 Survey of Consumer Finances done by the U.S. Census Bureau finds that even including the value of our houses the median level of household assets is $136,010!

 

I know this is basic but in this day and age of unbridled consumption I think it bears repeating. You can't earn anything on money you haven't saved. The harsh truth that no one wants to acknowledge is that failure to plan adequately for the risk of financially disruptive events and 30 years of retirement income will ultimately lead to a loss of lifestyle, followed by independence, followed by dignity and that is the fate awaiting the vast majority of baby boomers if they do not take drastic measures to cut spending, actively manage risk and lock in a consistent income to replace their W-2 income.

 

Come to think of it - maybe I am being too hasty. There is one other alternative - hope that you can work forever or die in your sleep at an early age. 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.

Risk Is Not a Knob

I was doing an interview on Monday with Ed Easterling, author of Unexpected Returns, for this week's radio show. He reminded me of a phrase he uses in his book - risk is not a knob. Every time I am asked, as I often am about the Snider Investment Method ™, "If I am willing to take more risk, can I get more return?", I am also reminded that most investors mistakenly think risk IS a knob.

 

One of the fallacies of investing is that taking more risk guarantees you a higher return. Here is another case where our instinctive behavior is the opposite of what we should be doing. Mathematically, as you increase risk, your probability of higher returns decreases. The only thing that increases is your chances of losing. Academics call this the probability of ruin.

 

To continue then, with the theme from yesterday's post, if you are heavily weighted in stocks, if you buy more stock as markets go up instead of after they have gone down, if you think you can time the market, you are taking on huge amounts of risk. I know it feels like the right thing to do but it is the opposite of what you should be doing. You are quite simply setting yourself up for failure.

 

One of the central tenets of the way I invest my own money, and the way I teach others to invest, is that your primary focus has to be on managing risk. Forget about returns. Forget about your account value. If you properly manage risk, over time, the returns not only take care of themselves, they are far superior than what you get by chasing them.

 

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.

Are you risk perverse?

If you listen to my radio show, you have heard me say that our brains are wired backward. Our instincts trick us into doing the opposite of what we should be doing most of the time. This paradoxical behavior is most obvious at extremes - either when markets are making new highs or sinking to new lows.

 

Think about it. The time to buy is when everyone else is feeling fearful. The time to sell is when everyone else is feeling exuberant. Look at any of the investors who have made their fortunes in the financial markets - men like Warren Buffett or Sir John Templeton. The one thing they all have in common is the discipline to buy when stocks are on sale and sell when everyone else is paying top dollar.

 

Let's say you need a new set of sheets for your guest bedroom. Linens and Things is having a white sale. Do you think, "I don't want to buy now. What if they lower the price more?" Of course not. Do you wait until the sales ends and then rush in to buy?

 

Investing may be the only place in our lives where we insist on buying things when the price is going up and selling them when the price is going down. Ask yourself whether this really makes sense. The obvious answer is no, which is why I say our brains have been wired backward - at least as far as investment decision making.

 

So, by definition, we should be buying as markets fall and selling as they rise. This is so easily said but so difficult to do. I know this to be true because it is a discipline built into the Snider Investment Method and it is met with almost universal resistance. Right now, just getting into the Snider Method requires you fight this instinct.

 

People will say to me, "I really want to use your method. I know I need to. But I can't sell my mutual funds now. They have been going up lately." So what are you going to do? Wait until they go down again before you sell them?

 

Let's see if your brain is wired backward. The Dow has been flirting with an all-time high in recent weeks. Do you think your risk is greater or less today than it was a year ago? Does your brain tell you to buy or sell here? Should you be moving money from bonds to stocks or from stocks to bonds?

 

How did you do? If you are like most people, you perceive the risk to be less today than a year ago. Your brain wants you to buy stocks here and it is probably tempting to think about moving money from low risk investments to higher risk investments.

 

If this is your inclination, it would be wrong. The appropriate thing to do as markets make new highs is not to go all in but to take some chips off the table. Now is the time to be managing risk, not chasing performance.

 

So if our brain tells us to do the wrong thing, how are we to be successful investors? The solution is to find a system that works. Success comes from doing the right thing each and every day. It comes from doing the right thing even when it is hard.

 

If you can't do that naturally, formulating a set of rules, or a system, is the only way to force your brain to do the right thing. Once you have a system, then the key is to stick to it as if your very life depends on it, because in a world where you must someday fund 30 years of retirement, it does.

 

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.

Bora Bora

One of the central tenets of the way I teach people to invest their money is that emotions are an investors worst enemy. 80% of the battle is in controlling your emotions.

 

Our emotions, fear and greed, combined with our natural herd instinct, causes us to buy when we should be selling and sell when we should be buying, when in fact, we should be doing the opposite. Successful investors like Sir John Templeton, George Soros, and Warren Buffett have all made fortunes by buying when others are fearful and selling when others are exuberant.

 

One way to limit your emotional responses is to limit the information you allow to enter your brain. We tell our students not to watch stock prices or the news on their stocks from day to day, or even month to month.

 

Think of it this way. Exxon Mobil has a market capitalization of over $400 billion. It's current stock price is around $64. Let's say XOM loses $10 a share over the next two months. Do you really think the long term financial prospects of a company that big can suddenly turn that much in the space of 60 days? Of course not. It is all noise. It may be important to a trader but investors should not care about the short term movement in stock prices - ever.

 

To help people stay away from tracking short term prices, following news and reacting emotionally to noise, I coined the phrase "going to the caves of Bora Bora". In the Snider Investment Method, we make adjustments to the portfolio once each month. The rest of the time, we are in the caves of Bora Bora. In other words, there is absolutely nothing we should be doing between "trade days". We are in the caves of Bora Bora where there is no TV, no radio, no newspaper, not fretting - relaxing and enjoying life.

 

Over time, the metaphor has taken on a life of its own and come to mean more than just not paying attention to the noise. The image of Bora Bora has also come to represent the things we are able to do as a result of being a successful cash flow investor. For some people Bora Bora is time spent with their family. For others, it is the places they are able to travel or hobbies they are able to pursue. But for all, Bora Bora represents a sort of piece and tranquility that comes from being financially secure.

 

As Bora Bora has come to mean so many things to our 2500 Snider workshop graduates, I have started receiving postcards from Bora Bora, Bora Bora t-shirts, travel brochures and all manner of things with Bora Bora on them from our students. Now there is a song to add to the Bora Bora collection.

 

Suzi Ferrante, one of our students, wrote a little song. 50 of our die hard Snider Method investors were on a cruise together in April - not in Bora Bora, but in the Caribbean - including Suzi and her husband Russ. Suzi put together a willing ensemble and after a little practice (let me stress little), they sang the Bora Bora song for the rest of the group. We captured the only live performance of the Bora Bora Song, as sung by the founding members of the Bora Bora Society, for posterity. Have a look: (NOTE: The play button will appear in the top right when you move your mouse over it.)

 

 

The words are a little tough to decipher, so in case you want to sing along, here is the crib sheet:

 

Stay in Bora Bora

By Suzi Ferrante

 

Won’t you stay in Bora Bora (Bora Bora)

We can walk along the sand beside the sea.

Where the TV’s don’t get CNBC

There’s no brokers callin’ for me,

We’ll just sit under the coconut tree, in Bora Bora

 

Chorus

 

Oh, no one seems to worry in Bora Bora (Bora Bora)

It’s such a beautiful, relaxin’ place to be.

We’ll live out all our dreams in Bora Bora (Bora Bora)

Oh, won’t you stay in Bora Bora with me.

 

Won’t you stay in Bora Bora (Bora Bora)

We’ll take time to count the stars up in the sky.

We don’t care if our stocks aren’t high,

No one’s tellin’ us to sell or buy

We just drink another Mai Tai, in Bora Bora

 

Chorus

 

Oh, no one seems to worry in Bora Bora (Bora Bora)

It’s such a beautiful, relaxin’ place to be.

We’ll live out all our dreams in Bora Bora (Bora Bora)

Oh, won’t you stay in Bora Bora with me

 

TIP OF THE HAT:

 

My personal thanks to Suzi Ferrante for her passion and creativity, to the Bora Bora Singers for being such great sports and to everyone on the cruise for being such great advocates of the Snider Investment Method..

 

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.

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