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Posts Tagged ‘Accumulating Wealth

Are Risk Questionnaires A Waste of Time?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Are these things worth anything? … or nothing.

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor.   Frankly, I’ve always felt they were a little stupid.

Elmer Duckhunter walks into Brainy Smartsuit’s office at Behemoth Securities.  It’s a beautiful place, full of mahogany with lots of beautiful brochures in the lobby.   Brainy has been successful at Behemoth, gaining promotion to Sr. Vice President after selling more Secure Your Future product than anyone else in the office using the “Secret in a Box” software supplied by the product wholesaler. 

“How can I help you?”, Brainy asks.

“Well,” says Elmer, “I have a lot of money from all those Tractor Pulls I won and I think it’s time I began investing for my future.  What should I invest in?”

“I think I can help you, but first I have to know more about you!”

“Makes sense.  What do you want to know?”

Brainy pulls out the Behemoth Risk Assessment questionnaire.  “First, I’d like to know a little about how you feel about investing.”

“Okay.”  Elmer settles in.  “How many questions are there?”

Brainy smiles, “Just six.”

“Six?  You can learn everything you need to know about me with just six questions?”

“Trust me.  This is very scientific, “says Brainy.

“Okay.”

Brainy begins.  “On a scale of zero to 10, how much risk do you feel you can handle?”

“I don’t know.  What would a ‘five’ feel like?”, asks Elmer.

“Just pick one that you feel comfortable with, says Brainy.  “The people who prepare these know what they’re doing.”

Elmer thinks for a second.  “Well, back in 2007 I was a 9, but after the crash I was a 2.  Now, I don’t know what I am.  That’s why I’m here!”

“Well, I can’t tell you how much risk to take until you tell me how much risk you want; then, I can tell you what you told me and we’ll have the answer!”

“Huh?”

They both look at each other, then Elmer continues, “How much risk do I want?  Seems to me you should be telling me how much risk I need or don’t need!”

“But what if it’s more than you want?”, asks Brainy.

“I don’t know how much I want.  I need to know how much I should or should not have?

Brainy perks up.  “Now we’re getting somewhere.  What are your goals?”

“Simple”, says Elmer, “to retire with as much money as possible with as little risk as necessary.”

“How much is that?”

“How should I know?  You tell me.”

Brainy senses a lack of forward progress.  “Let’s come back to that.   Try this one:  If your portfolio went down, what would you do?”

“I’d probably ask you for advice!  Isn’t that your job?”  Elmer’s beginning to wonder if Brainy Smartsuit is so smart after all.  “Why are you asking me all this.  I just want to know what I should be doing!”

Brainy comes clean.  “We have regulatory compliance concerns.  We have to make sure what we recommend is consistent with how you feel about investing.”

“I’d rather have advice that’s consistent with what I need,” says Elmer.  Are you protecting me or your firm?

“Well, actually, both…”

“There are six of these?”  Elmer’s fed up.   He puts on his duck hunter cap with earflaps, and stomps out of the office.

Maybe these questionnaires can shed some light about attitudes; but, they don’t tell Elmer what he needs to know.  Elmer just wants to know what he should be doing and why.

Once he understands what and why, the rest gets easier.  Fear can exist only where there’s a knowledge vacuum.    When knowledge replaces ignorance, fear dissipates and understanding prevails.

Maybe questionnaires have zero to do with long term success for the client; but, they maybe do help sell more Secure Your Future product.

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

Does Market Avoidance Really Work?

IFG BlogWe’ve been in choppy times since 2008.  Many people feel the markets are ‘uncertain’ and have been avoiding the markets until they “see what the market will do”.  It’s an old mantra I remember hearing when I began in this business more than twenty years ago.  The markets were uncertain then, too.  Problem is, markets are always uncertain. 

Has avoidance worked?  Not likely.  Investors who wait until they feel good about the markets are, by definition, waiting until the market has gone up – they buy ‘high’, which means they usually are overpaying, rather than underpaying, for their investments.

Investors who have self-discipline, or lucky enough to be in auto-enrollment, automatic increase company retirement plans, have probably done a little better.

Let’s use a little hypothetical mathematical exercise to illustrate the point.  Let’s compare two investors: 

One has $20,000 in a retirement plan but stops investing just as the market starts to go down…. And won’t invest again until the market ‘comes back’. 

The other investor who has NO money in a retirement plan, but actually starts investing when everyone else is freezing up! 

Now let’s assume a market that starts going down and takes six years to realize a 30% loss, then ten years just to get back to even. 

Both investors end-up with the same amount invested in the same market, represented with a starting price of 50.

Who won?

Hmmm.  Maybe buying ‘on the cheap’ is good, ya’ think?

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization. 

 

Written by Jim Lorenzen, CFP®, AIF®

June 21, 2012 at 8:00 am

Underperform the Market and STILL Beat It?

The Independent Financial GroupJim Lorenzen, CFP®, AIF®

What?  Never beat the market and STILL end-up outperforming it? 

Could that be possible?

If you watch enough tv or read enough articles, blogs, newsletters and e-letters, you’ll soon easily conclude that the two most important investment concepts seem to revolve around one of two basic concepts: Outperforming the market and/or limiting expenses.

What if they’re both wrong?

While I’ve never promoted the idea of trying to outperform the market, I have often talked about controlling expenses.  After all, it’s logical, isn’t it?   Any money you save on expenses goes into your pocket!   Not rocket science.

But, what if I’ve been wrong, too?

What if we’ve all been looking at the wrong things?

What if all the financial advisors – the ones who’ve been talking about managing risk and limiting the downside – actually have been telling everyone the little-known secret:  It’s maybe about limiting `downside capture’!

Let’s take an example and, just too keep our comparison of performance outcomes `apples to apples’, we’ll make all expenses equal at zero.

The following hypothetical example reflects a fictional market return showing 20% swings each year over a ten year period and what would have happened to Portfolio A, which invested $100,000 in ‘the market’.  As you can see, even though 6 of the 10 years were ‘up’ years, including both the first and last year, and even though 3 of the last 4 years were ‘up’ years, the market portfolio achieved an annualized return of only 2.12% and a gain of only $22,306. 

What’s interesting is what happened in portfolio B!    Portfolio B’s management emphasis was not on beating the market.  In fact, during the ‘up years’ it underperformed the market by 20% each time!   But, while the managers captured only 80% of the upside, they were successful in capturing only 70% of the downside.    How important was limiting the downside?   Take a look!

Interesting!   Now this is a hypothetical mathematical excercise, to be sure; but, it does illustrate the importance of managing risk and how unimportant ‘beating the index’ actually is!   It also demonstrates another important principle:  While it’s important to limit expenses, you don’t want to get caught in a ‘race to the bottom’.  Managers who know how to ‘optimize’ portfolio performance just might be worth what they’re paid.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Are You “On-Track” to a Successful Retirement?

IFG BlogJim Lorenzen, CFP®, AIF®

If so, you may be alone.

I attended a 401(k) Recon conference north of Los Angeles last week and was amazed, though not totally surprised, to hear a few very interesting points.

One speaker relayed a story about one company’s 401(k) enrollment meeting where 100% – yes, everyone – said they wanted to enroll in the company’s 401(k) plan.  They all were going through the materials and even choosing allocations they felt were appropriate – and all them were excited about starting to save for their retirement!

Would you like to guess how many actually followed through and actually participated?   3%.  That’s right; only three in one hundred actually did it.   Education didn’t seem to help, at least in that particular case, despite all the glowing post-meeting comments.

Benjamin Graham, the ‘dean’ of value investing who taught Warren Buffett at Columbia University, once said that behavior, more than investment choices, represent the largest impediment to financial success for most Americans; and the data seems to bear that out.

Poor savings habits, poor investor performance due to behavior, and paralysis often due to too many choices create roadblocks many have trouble overcoming.

Maybe the best gauge of investor success (or failure) might be whether they are ‘on track’ to a successful retirement, which some define as replacing 75% of preretirement income at age 67.   According to a study – I think it was conducted by Mass Mutual – revealed that only 15% of American workers are ‘on track’.   Even without my HP12-C, it’s obvious that means 85% are not.

It’s not rocket science.  It’s about three simple components:  time, savings rates, and return.   Time is the only component that constantly declines; and, as it does, it creates pressure on the other two.  When procrastination behavior impedes one of those, all the pressure falls on investment return.  This may be why some people reach a point where they begin making the risky choices they live to regret.

I’ve spoken about financial literacy before and how our schools need to do a better job – I even once met a CPA who didn’t know the difference between gain and yield.  When an accountant doesn’t know, it explains the deficiencies the rest America’s workers are experiencing.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Waiting to Fund Your 401(k)? Not Good.

Jim Lorenzen, CFP®, AIF®

In fact, that may be the most expensive mistake you’ll ever make!

When I was young, my father told me, “Jim, if you just save 10% of everything you ever make – and start NOW – you’ll never have to worry about money the rest of your life.”   

Parents.  What do they know?

The fact is, the “start NOW” part is the most important part of that sentence!  I didn’t know it, of course; but, saving during those early years truly does make a huge difference!

Here’s a little lesson that will prove just HOW important it is.    I’ll keep the numbers simple for my little hypothetical comparing Fred and Gary.  

Let’s start both of them at age 25; this would give them 40 years before the normal retirement age of 65, though many today are working or even starting businesses past that date.   Also, to keep our hypothetical simple, let’s assume that each saves only $2,000 a year and never increases their savings, and that they earn an average annual return of 8%.

Fred saves $2,000 a year for ten years from age 25 to age 35 and stops saving.  But, he does leave his money in his account to accumulate at 8% until he’s 65.

Gary waits until he’s 35 before starting.  But, Gary invests $2,000 a year, beginning at age 35, for thirty years… all the way to age 65.  Who won?

At age 65, Fred, who invested during only the first ten years, ended up with $291,546.  Gary, who invested for thirty years but started ten years late, ended up with $226,566… almost $65,000 less!    In fact, for Gary to have tied Fred, Gary would have had to invest $2,573 a year – 29% more – each year for all thirty years!

Fred invested for only ten years!  But, it was the FIRST ten!   What if Fred hadn’t quit after ten years?  What if he’d kept going to age 65?  His final number, on only $2,000 a year, would have been $518,113?  That means those first ten years, by not investing, cost Gary $291,547!

Do the math:  Those first ten years, by not investing $2,000 in each year, cost Gary $29,154 per year! 

What if Fred had invested $3,000 each year instead of $2,000?   That would have been an additional $40,000 in savings over that 40-year period; but, given the same returns, the ending dollar figure would be $777,169…. $259,056 more!     And, all of it accomplished on $250 a month!

So, the $40,000 would have purchased a nice car – or, it would have created over a quarter million dollars in additional wealth!   How does that new car look, now?  Pretty expensive, huh?

But, the market is risky, you say?   Good!  You’d better hope it is!  Without risk, you don’t get volatility; and without volatility, investors would have a hard time building wealth.  Volatile markets actually work in favor of the person who’s building; but, that’s another article.

In the meantime, think about what a publisher can accomplish starting early enough!   Then, when sale-day comes, you’ll be adding additional value to a base-line that could be pretty sweet!

Dad was right, as usual.  Tell everyone you know:  Start NOW.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner®and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

Plan Sponsors: Retirement Plan Insights Archive.

Written by Jim Lorenzen, CFP®, AIF®

May 10, 2012 at 8:00 am

Contributing To A 401(k)? Count Your Blessings!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Particpants in company 401(k) plans may be in the best market they could hope for! 

Yes, you read that right.  It was just about one year ago when I showed the math on why investors who don’t quit can win, even if the market goes down and only gets back to even!  You can read that post here.

Unfortunately, they don’t teach investment literacy in school; so, most plan participants know only what they see on the financial entertainment shows or in one of the consumer publications.   But, make no mistake about it, this is the time participants shouldn’t quit, especially if your employer is contributing for you with some kind of match!

Tune out the noise!  Just keep on contributing!  And, don’t try to pick winning stocks.   A good mix of low-cost indexes will likely do just fine.  Remember, studies show most investors can’t even tie an index, much less beat it – and that includes the so-called professionals!

Questions?  Talk to your plan advisor or to your personal advisor.  Of course, if all else fails, you know where to find me.

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NOTE:  Jim Lorenzen was interviewed by The Wall Street Journal’s Glenn Ruffenach for an article appearing in SmartMoney magazine.  You’ll find it on page 46 in the September 2011 issue now on newstands.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary®  in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Scared of Stocks? Take a Lesson from Warren!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If you have to ask, “Warren Who?”, you probably should just pass on this posting altogether.

If you do know who Warren is, read on – you may enjoy this.  I’ll let him talk to you in his own words, taken from The Essays of Warren Buffett, which is really a collection of his reports to Berkshire Hathaway investors.  This from Essay II, Section A, entitled, Mr. market:

“Whenever Charlie and I buy common stocks for Berkshire’s insurance companies (leaving aside arbitrage purchases, discussed in the next essay) we approach the transaction as if we were buying into a private business.  We look at the economic prospects of the business, the people in charge of running it, and the price we must pay.  We do not have in mind any time or price for sale.  Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate.  When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomic analysts, and not even as security analysts.”

The rest of the essay goes on to point out that market movements in the pricing of the company’s stock are immaterial and largely go unnoticed.  Again, it’s the intrinsic value of the company that’s important.  Mr. Buffett says that each day, “Mr. Market” offers him a price for his share of the company; but, if the company is still meeting his business performance expectations (not price performance), he simply ignores the offer.  He says that even though the business may be stable, Mr. Market’s price quotations virtually never are.

It’s an interesting read.   For those of you who want to know how one of the best investors who ever lived does it, I recommend the essays, which I’m sure you can find through one of the online stores.

Jim

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NOTE:  Jim Lorenzen was interviewed by The Wall Street Journal’s Glenn Ruffenach for an article appearing in SmartMoney magazine.  You’ll find it on page 46 in the September 2011 issue now on newstands.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary®  in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.