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 schools, financial-services companies and independent firms that focus solely on wealth education. In addition, peer-education groups are sprouting up, allowing wealthy individuals to meet regularly and learn from each other and from guest speakers.

 

[..]

 

The classes and seminars don't teach the secrets of how to become rich; instead they focus on how to handle the money that the participants already have. As a result, they are all geared to those who anticipate having taxable estates and who can afford to invest in hedge funds, private equity and other investments generally open to accredited investors. Although none of the courses have hard and fast wealth thresholds, the University of Miami course, for instance, is targeted toward individuals whose family holdings are at least $4 million, while many students at the Wharton program have at least $25 million in family assets.

 

My company teaches wealth management to the next tier down, people who have accumulated between $500,000 and several million in investable assets, or those who expect to.

 

Some of Ms. Anderson's clients say they are frustrated with their experiences at larger private banks. "One thing that Wall Street sometimes does is deliberately talk over people's heads to make their financial consultants sound smart," she says. "Much of what is called education is actually disguised product sales."

 

The core problems are the same, whether you have $10,000 to invest or $10 million: 1) How do I formulate my investment objectives? 2) How do I decide which tactics will have the highest likelihood of meeting those objectives? 3) How do I measure my performance against those objectives? and 4) Who do I trust?

 

The fact that we all need a working knowledge of money and investing is a given. If you don't have that working knowledge yet, or it is sketchy in places, your choices for obtaining it are simple: 1) You can educate yourself - which is time consuming but doable; 2) You can pay for sensible financial education; or 3) You can do nothing and hope that your naïve choices work out.

 

The smart thing is probably a combination of the first two. Unfortunately, most people will likely continue to opt for naiveté - at least until we begin to see the consequences come home to roost for the Baby Boomers.

 

The smart ones won't wait.

 

SOURCE:

 

1. Rachel Emma Silverman, "Upper Class: Why the Rich Are Heading Back to School" Wall Street Journal 17 January 2007; p D1.

http://online.wsj.com/article/SB116899825849778371-email.html

 

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

 

Educating the Family CFO

I talk a lot about the concept of the Family CFO. It is a fairly new concept born of the unprecedented and ever-increasing responsibility individuals face for their own economic well being. The complexity of the personal finance landscape intensifies every day with more information, more products, and frankly, more bullshit.

 

Studies indicate our financial literacy isn't keeping pace with the demands being put on us. This is especially true of women, minorities, young people and the less educated. But the problem is certainly not limited to those groups. In fact, those we would expect to score highest in financial literacy - near retirees who have presumably made a great number of financial decisions during their lifetime - don't understand basic concepts necessary to make sound financial decisions. They are in desperate need of financial education.

 

The urgency of financial literacy started to get the attention of researchers in the mid-1990s. Since then, quite a few studies have been done. In a 2004 study, early Baby Boomers aged 51 to 56 were asked the following questions:

 

1) “If the chance of getting a disease is 10 percent, how many people out of 1,000

would be expected to get the disease?”

 

2) “If 5 people all have the winning number in the lottery and the prize is 2

million dollars, how much will each of them get?”

 

Anyone who answered either of the first two questions correctly was asked a third question:

 

3) “Let’s say you have 200 dollars in a savings account. The account earns 10

percent interest per year. How much would you have in the account at the end of

two years?”

 

80% were able to correctly determine that 10% of 1000 is 100. Only half could divide 2 million by 5 to get the lottery question right. Only 18% could compute the compound return over two years in the third question.

 

I have mentioned the University of Washington study in previous posts that found very little understanding of financial instruments. Most people have no idea that bond prices fall as interest rates rise for example. Many did not know what a no-load mutual fund was, or that mutual funds do not pay a guaranteed rate of return. More than one-third did not know that stocks had returned more than bonds over the last forty years, and many did not the basic concept of diversification to spread risk.

 

This is relevant because the research has established a clear link between those that understand things like simple percentage calculations and compound interest and those who save and plan for retirement. There is a clear link between financial education and economic behavior.

 

The Council for Economic Cooperation and Development defines financial education as:

 

The process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction, and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.

 

Clearly the need for financial education is great. My question is the extent to which individuals realize they need to augment their skill set and the profound implications a small investment in education can have on their future standard of living?

 

What do you think? Leave your thoughts and comments below.

 

PROPS:

 

I found this abstract for the research paper which is the basis for this post on Barry Barnitz's very utilitarian Financial Page blog. Thanks Barry for all that you do.

 

SOURCE:

 

1. Lusardi, Annamaria and Mitchell, Olivia S., "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs" (January 2007). Available at SSRN: http://ssrn.com/abstract=957796

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.

 

Financial Advisors Useless Says Study

According to a ground-breaking study, the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for investors working on their own and 2.924% for funds chosen by advisors.

 

In other words, the do-it-yourselfer did more than 100% better than financial advisors when it came to selecting equity mutual funds. After factoring in inflation and taxes, clients of financial advisors lost money and lost purchasing power. This should be criminal.

 

The study, "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry" is written by Daniel Bergstresser of Harvard Business School, John Chalmers of the University of Oregon, and Peter Tufano of Harvard Business School. You are going to be hearing a lot more about this study in the months and years to come. Some are calling it one of the seminal studies of the decade, like those done on asset allocation in the past.

 

The BCT study (after the initials of the author's last names) is an exhaustive analysis of the cost and performance of more than 4,000 mutual funds sold by financial advisors as compared to those selected by investors on their own over the years 1996 to 2002. This is the first study ever to scientifically quantify the benefits of using financial advisors.

 

The study attempts to find tangible evidence of a benefit from hiring an advisor by answering these five questions. It appears they came up empty-handed!

 

1. Do investors who hire advisors get access to funds that would otherwise be harder to find or evaluate? The answer is yes, but as already noted, advisor-selected funds underperform funds that investors select on their own.

 

2. Do advisors help clients find funds that are lower cost (excluding distribution costs)? After analyzing several trillion dollars worth of transactions, the answer is no. In fact, another new study released in late November by the Zero Alpha Group (ZAG) and Fund Democracy supports this finding. Their study showed investors who buy index funds through brokers pay half a percentage point more in management fees than do independent investors who go through no-load channels - for essentially the same fund.

 

3. Do advisors give clients access to funds with better performance? Once again, the answer here is a resounding no. Contrary to everything we are led to believe, the evidence shows that advisors not only underperform indexes--they underperform what most people do on their own if they don't have an advisor. If that is not a damning indictment, I don't know what is!

 

4. Do advisors provide superior asset allocation? After years of research covering trillions of dollars of asset allocations, the finding is that advisors do not provide superior asset allocation. They are as likely to get caught up in the hot sector as we are - possibly more likely.

 

5. Do advisors help correct bad investor behavior such as chasing fads and chasing performance? Unfortunately, no. In fact, the evidence shows that advisors even contribute to such behavior.

 

Lest you think the authors were biased against advisors, let me set you straight. They went out of their way to give advisors the benefit of the doubt. Not only that, they were aided in their research by some of the largest and most respected industry groups and research organizations.

 

One last thing that is worth noting - this study also found that the clients of advisors are less educated and have lower net worth than do-it-yourselfers. You can certainly make a chicken and the egg argument here. But still, let's call a spade a spade. Using an advisor to choose your investments is just plain dumb when you can do better on your own.

 

What does this mean?

 

Get educated about personal finance in general and investing more specifically. If you need help, avoid commissioned sales-people like the plague. Seek out someone you can pay a one-time fee, by the hour or a retainer if necessary.

 

No one is going to take care of your money for you. The only person who has no conflict of interest is you. The person best qualified to handle your money is you -or at least you should be. If you are not, you need to get cracking, right now.

 

My thanks to Snider Investment Method™ investor Wayne Jackson for bringing this study to my attention. We are going to try to get one of the authors of the study on the radio show. In the meantime, I am curious about what you think. Do these findings surprise you? Do they prompt to you to change what you are doing? Please leave your thoughts and comments below.

 

SOURCES:

 

1. Barbara Whelehan. "Do-It-Yourself Investors Win the Race." BankRate.com 6 Dec 2006. http://biz.yahoo.com/brn/061206/20408.html

 

2. Donald Moine. "The Study of the Decade." MorningStar Advisor 22 June 2006. http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4482&pgNo=0

 

3. Bergstresser, Daniel B., Chalmers, John M.R. and Tufano, Peter, "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry" (January 16, 2006). AFA 2006 Boston Meetings, Forthcoming Available at SSRN: http://ssrn.com/abstract=616981

 

4. Mercer Bullard and Edward S. O'Neal. "The Costs of Using a Broker to Select Mutual Funds." Zero Alpha Group November 2006.

http://www.zeroalphagroup.com/news/113006_release.cfm

 

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.

 

401(k) Brokerage Window

If you're interested in expanding your 401(k) investment options now is the time to speak up. Many companies are adding self-directed brokerage account options to their 401k plans. This trend is in direct response to employee demand for additional flexibility and control.

 

Based on questions I received when I posted my request for 401(k) data, many of you are unaware of brokerage windows and the benefits they can provide. A brokerage window, also known as an SDA, or self-directed account, gives 401(k) and 403(b) plan participants access to a wide range of investments including stocks, bonds, mutual funds, and options, just like an IRA.

 

Your employer chooses a broker for the brokerage window and you then have access to the full range of investments offered by that broker. There is a commission paid on all transaction within a brokerage window, and often, an annual fee is deducted as well.

 

Before you get too excited though, be aware plan sponsors often put more limitations on a brokerage window than you have in your IRA. Many limit the brokerage window to a percentage of your 401(k) assets. More often than not, there will be restrictions on commodities, options, collectibles and company stock, all of which are fair game in your IRA.

 

The advantages of a brokerage window are greater diversification, something your employer has a fiduciary responsibility to provide. The downside is that with greater choices will come dumber choices. At least, that is the fear of the employer and investment community at large. It is a fear that is not without merit.

 

The answer, in my opinion, is not trying to protect employees by limiting their choices, but to continue to step up financial education so that employees know how to do the right thing with their retirement money. It's the old thing about feeding the man a fish as opposed to teaching him to fish for himself. I prefer to teach people to fish for themselves.

 

If you're interested in lobbying your company for a brokerage window, you should put your request in writing and send it to the department that helps administer the plan, such as the Human Resources department. The more people you can get within the company to put pressure on the company, the more likely you are to get something done. It is not inexpensive for a company to change their plan to offer the brokerage window. But if they perceive you perceive it as a benefit, they just might do it.

 

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 Most Important Skill Today

The most valuable skill set you can have has nothing to do with your 9 to 5 job. The most important skill set today is financial know-how - the knowledge to manage your own personal finances to maximize their benefit to you over your lifetime.

 

This is from a Vanguard white paper:

 

Despite increased levels of advice and education, many people today have a relatively low level of understanding about investments. Indeed, investors generally recognize how little they know. In the Vanguard 2003 Participant Relationship Study, 28% of respondents fully agreed with the statement “A lot of financial information is confusing to me.”

 

A 2002 John Hancock survey, Insight into Participant Investment Knowledge and Behavior, found that 40% of retirement plan participants believed money market funds include stocks; just 8 knew that money market funds contain only short-term securities. Investors who fit this profile may assume unintended risk, construct poorly diversified portfolios, and fail to save adequately

for retirement.

 

Sadly, adequate financial education is not being provided in our families, our schools, our employers, or by Wall Street itself. Much of what passes for financial education is either old and out-dated or a sales pitch.

 

I believe you are smart enough, that once you start learning, you will quickly be able to tell the difference. But you need enough information from enough different sources to be able to weigh different approaches and viewpoints.

 

So get out there and start soaking it in. Listen to as many different people and different ideas as you can. Find people you trust and who make sense to you. Then learn as much from them as you can.

 

The financial impact over a lifetime is truly extraordinary.

 

SOURCE:

 

1. Kathryn D. Gordon and Cynthia Stockton. "Retirement Funds: The 'Life-Cycle' Approach." Vanguard Investment Counseling and Research 4 Dec 2006; p4.

https://institutional.vanguard.com/iip/pdf/life_cycle_funds.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.