Super Savers are a special breed.

They are not concerned about keeping up impressions; they exist outside the mainstream of seductive consumerism.

Call it a mindset, call it walking a different path; perhaps it’s an offbeat childhood money script. Whatever it is, those who fall into this category or save 20% or more of their income on a consistent basis are members of an elite group who strive for early financial independence.

Speaking of independence: At RIA we believe households should maintain 3-6 months of living expenses in a savings account for emergencies like car and house repairs.  They should also maintain an additional 6 months of living expenses as a “Financial Vulnerability Cushion,”  whereby cash is set aside for the big, life-changing stuff like extended job loss especially as we believe the economy is in a late-stage expansionary cycle. Job security isn’t what it used to be; best to think ahead.

In 2018, TD Ameritrade in conjunction with Harris Poll, completed a survey among 1,503 U.S. adults 45 and older to understand the habits that set Super Savers apart from the pack. The results are not surprising. However, they do validate habits all of us should adopt regardless of age.

Like a physical exercise regimen, shifting into Super Saver mode takes small, consistent efforts that build on each other.

So, what lessons can be learned from this elite breed?

First, on average, Super Savers sock away 29% of their income compared to non-super savers. 

Super Savers place saving and investing over housing and household expenses.

Keep in mind, the Personal Saving Rate as of December 2019 according to the Federal Reserve Bank of St. Louis was a paltry 7.6%.  How does this group manage to accomplish such an arduous task? They abhor the thought of being house poor. They focus attention on the reduction of spending on the big stuff, or the fixed costs that make a huge impact to cash flow. Candidly, they’re not concerned about cutting out lattes as a viable strategy to save money. Super Savers spend 14% on housing, 16% on essential household expenses compared to non-supers who spend 23% and 21%, respectively. Any way you cut it, that’s impressive!

Perhaps it’s because Super Savers think backwards, always with a financially beneficial endgame in mind. There is great importance placed on financial security, peace of mind and freedom to do what they want at a younger age. They consider the cumulative impact of monthly payments on their bottom line, which is not common nature for the masses.  They internalize the opportunity cost of every large or recurring expenditure.

Super Savers weigh the outcome of every significant purchase, especially discretionary items, which invariably increases their hesitancy to spend. This manner of thought provides breathing room to deliberate less expensive alternatives and thoroughly investigate the pros and cons of their decisions.

Tip for the Super Saver in training: Sever the mental connection between monthly payments and affordability. How? First, calculate the interest cost of a purchase. For example, let’s say you’re looking to purchase an automobile. First, never go further than 36 months if you must make payments. Why? Because longer loan terms like 48 to 72 months is a payment mentality that will undoubtedly increase interest costs.

For example, let’s say an auto purchase is financed for $23,000. At 3.49% for 36 months, the payment is roughly $674 with total loan interest of $1,258. For 72 months, naturally there’s a lower monthly obligation – $354. However, total loan interest amounts to $2,525.

A Super Saver’s consideration would be on the interest incurred over the life of a loan, not the affordability of monthly payments. An important difference between this manner of thinking and most, is to meet a lifestyle, it’s common for households to go for the lowest monthly payment with little regard to overall interest paid. Super savers will either consider a less expensive option or adjust household budgets to meet higher payments just to pay less interest in the long run.

Second, Super Savers live enriching lives; they don’t deprive themselves.

Members of the super crowd don’t live small lives -a big misnomer. I think people are quick to spread this narrative to ease personal guilt or envy. Certainly, a fiscal discomfort mindset is part of who they are when they believe personal financial boundaries are breached. However, the TD Ameritrade survey shows that both super and non-super savers spend the same 7% of their income on vacations!

Third, starting early is key for Super Savers.

Per the study, more than half of Super Savers started investing by age 30 (54%).  I’m not a fan of personal finance dogma. Many of the stale tenets preached by the brokerage industry are part of a self-serving agenda to direct retail investor cash into cookie-cutter asset allocation portfolios; all to appease shareholders.

However, one rule I’m happily a complete sucker for is Pay Yourself First. It’s not just a good one. It’s the core, the very foundation, of every strong financial discipline. Why? Paying yourself first, whereby dollars are directed to savings or investments before anything else, reflects a commitment to delayed gratification. An honorable trait that allows the mental breathing room to avoid impulse buys, raise the bar on savings rates and minimize the addition of debt.

Per Ilene Strauss Cohen, Ph.D. for Psychology Today, people who learn how to manage their need to be satisfied in the moment thrive more in their careers, relationships, health and finances when compared to those who immediately give in to gratification. Again, the root of Pay Yourself First is delayed gratification; the concept goes back further than some of the concepts the financial industry has distorted just to part you from your money.

Fourth, Super Savers embrace the simple stuff.

When it comes to financial decisions, basics work. For example, Super Savers avoid high-interest debt (65% vs. 56% for non-super savers),  stick to a budget (60% vs. 49%), invest in the market (58% vs. 34%) and max out retirement savings (55% vs. 30%).

Listen, these steps aren’t rocket science; they’re basic financial literacy.

For example, I’ve been ‘pencil & paper’ budgeting since I began my Daily News Brooklyn paper route at age 11. Budgeting over time fosters an awareness of household cash flow.  Try micro-budgeting for a few months. It will help you intimately engage with  personal spending trends.

Micro-budgets are designed to increase awareness through simplicity.

Yes, they’re a bit time-consuming, occasionally monotonous; however the goal is worth it – to uncover weaknesses and strengths in your strategy and build a sensitivity to household cash-flow activities. My favorite old-school book for budgeting comes from the Dome companies. For a modest investment of $6.50, a Dome Budget Book is one of the best deals on the market.

Last, Super Savers believe in diversified streams of income and accounts!

44% of Super Savers prefer to bolster already impressive savings rates by funding diversified sources of income, compared to only 36% of their non-super brethren. In addition, Super Savers are especially inclined to lean into Roth IRAs compared to non-super savers. It is rewarding to discover how the best of savers seek various income streams to build their top-line.  They are also tremendous believers in Roth IRAs. The reason I’m glad is this information further validates why our advisors and financial planning team members have passionately communicated the importance of the diversification of accounts for several years.

Super Savers build the following income streams outside of employment income – Dividends, investment real estate, annuities (yes, annuities – 21% vs. 14% for non-super savers), and business ownership (14% compared to 8%).

Their retirement accounts are diversified; over 53% of Super Savers embrace Roth options (53% compared to 29%). A great number of Super Savers fund Health Savings Accounts and strive to defer distributions until retirement when healthcare costs are expected to increase.

Why diversification of accounts?

Imagine never being able to switch lanes as you head closer to the destination called retirement. Consider how suffocating it would be to never be able to navigate away from a single-lane road where all distributions are taxed as ordinary income. There lies the dysfunctional concept that Super Savers are onto – They do not believe every investment dollar should be directed to pre-tax retirement accounts.

Congratulations -With the full support of the financial services industry you’ve created a personal tax time bomb!

As you assess the terrain for future distributions, tax diversification should be a priority.  Envision a retirement paycheck that’s a blend of ordinary, tax-free and capital gain income (generally taxed at lower rates than ordinary income). The goal is to gain the ability to customize your withdrawal strategy to minimize tax drag on distributions throughout retirement. Super Savers have figured this out. Regardless of your savings habits, you should too.

Many studies show that super savers are independent thinkers. Working to create and maintain a lifestyle that rivals their neighbors is anathema to them.

Now, as a majority of Americans are utilizing debt to maintain living standards, Super Savers set themselves apart as a badge of courage. No doubt this group is unique and are way ahead at crafting a secure, enjoyable retirement. and financial flexibility. Whatever steps taken to join their ranks will serve and empower you with choices that those with overwhelming debt cannot consider.

And speaking of badges: Did you know Amazon sells Merit badges for adulting? It’s true. I believe they need to add a “I’M A SUPER SAVER” badge to the collection.

If you’d like to read the complete T.D. Ameritrade survey, click here.

The suicide deaths of celebrities like Anthony Bourdain and Kate Spade has brought an uncomfortable and tragic attention to a growing problem. According to a recent report by the Centers for Disease Control and Prevention, rates of death by suicide in the U.S. have risen by close to 25% over the last 20 years.

We’re not here to debate how and why. It’s not our area of expertise. However, suicide is a choice. Not a good choice. Suicide doesn’t know age, success, color, social status. Suicide knows demons. When they overwhelm, you listen.

Coming from a family where suicide and depression runs deep, to this day I wonder if I should have saved my mother the third time she tried to take her life. I needed 6 months absence from junior high school to care for her.

Before a person takes a horrible step, before you would make the choice, look for divine intervention. Search for a message, a sign, anything. That it’s not your time.

As I work on a few big projects, one being a book with business partner and individual I greatly respect, Lance Roberts, I try my best to listen to what I usually ignore. The divine intervention reaches to me through the tall pines that surround my house. When I assist someone overcome a money obstacle, I consider it divine intervention, too.

I firmly believe divine intervention was involved when I saved my mother for the third time.

She never attempted suicide again, but her existence was far from happy. So occasionally, I wonder.

Was saving her the best choice?

In your life, many questions will remain unanswered.

“You just learn to live with open circles, I guess.”

Lucas McCain delivers these words in my screenplay to bring the 50s western, “The Rifleman,” to the big screen.

Many of us must don’t learn to close open circles when it comes to poor financial decisions. Even the worst money habits can be turned around, changed for the better. It doesn’t take much effort to identify poor financial paths and initiate small steps to turn the tide.

The tragic events over the last two weeks reminded me of an incident that occurred when I was a boy. It was back then I realized that minutes can slow down and feel like forever.

Here are some lessons I learned back in 1976.

“Another nine minutes. She’d be dead.”

I wonder what he meant.

Almost 4 decades ago.

As memories fade leaving pin-hole punctures wrapped in thick haze of distant moments, there remain a few clear snapshots left in my head of what happened that August morning.

You know. Nine minutes that border life and death.

So specific. So odd.

Her body was glowing cold. Dressed in the previous day’s outfit. Low faded jeans, bell bottom style. Shoes. A floral halter top circa 1976.

Tight in a fetal position. Her head and neck awkwardly stuck between the bottom shelf of the refrigerator and a crisper bin.

The paramedic pulled 92-pounds of stiff limbs from a cold cage. He heaved her to the linoleum kitchen floor as easy as a person tosses a used candy wrapper.

She was solid.

An overdose of pills and booze.

I was certain it was rigor mortis. I’d witnessed enough of it spending time staging G.I. Joe adventures in the plush red-draped lobby of the neighborhood funeral parlor owned by my best friend Joey.

But she wasn’t dead.

The paramedic said in nine more minutes things would have been different.

But how did he know?

I looked up at the kitchen clock. He said those words with such confidence. Who was I to doubt him?

2:51am.

In nine more.

Game over: 3:00am.

Lesson #1 WE ARE ALWAYS MINUTES AWAY FROM A BIG EVENT. LIFE OR DEATH. YOU NAME IT.

May not be full release of the mortal coil but some kind of game changer is imminent.

As you read this a thousand of your skin cells just died.

A cancer you don’t know about yet grows larger.

The love of your life is about to enter your space.

You’re on track for an encounter with a jerk or the greatest inspiration you ever met.

A phone call away from a life-changer. A drive. A walk. A run. A jog.

You just made a purchase of something you really don’t need.

A fall. A rise.

Minutes humble you. Not years. Years mellow you. Minutes keep the receptors open. Allow the flood of your life and the lives of others to fill where you stand. The next move you make can change your world whether you want it to or not.

Lesson #2: TRANSFORM NINE MINUTES INTO 9 HOURS.

Never question why a challenge, a person, an illness, an opportunity, a setback, gets thrown in your groove. The intersection came upon you from a source you’ll never be able to explain or completely understand. It’s a waste of time to trace what lead you here but worth the minutes to live the steps you’re taking now.

Signs are all around if you just let go of skepticism, lessen the noise. Whose life remains in the balance once you open your eyes, mind and heart to the signs? When a change places a purpose in the road, your brain will hum endlessly until you follow it and hum the tune every day.

Lesson #3 NINE MINUTES TO GREATNESS.

I can write the best 250 words of my life in 9 minutes. I can watch my pup Rosie monitor the neighborhood from the open blinds in the living room and ponder how happy I am to have adopted her from the animal shelter.

Greatness is defined by the whispers of time. In the small of actions that move and make you stronger, life is lived large. It’s when greatness appears.

Greatness is not earned through the validation of others. It comes when you recognize and develop talents you’ve had since youth.

When you positively affect one life, you’ve earned prominence.

We answer money questions, bust Wall Street myths, set lives on the right financial path every day. If we affect one life positively, help one individual meet a retirement goal, we’ve accomplished a noble mission.

Like a paramedic who believed he was nine minutes early. Able to save a life.

An unassuming master of greatness.

Lesson #4: IS IT RIGOR MORTIS OR SOMETHING WORSE? IS THERE ANYTHING WORSE?

How many people do you know who died long ago?

You see them daily. They live in a perpetual fetal position. Stiff. Lifeless. Nine minutes closer to a dirt nap.

They work little corporate jobs, have little middle managers who define their big fates. They don’t have time to bask in their kids or the live life stories that add richness.

My former regional manager at Charles Schwab, told me “you don’t need to see your kids play baseball or attend dance recitals. You need to be at work.”

Not for me: I pulled my head out of the fridge.

Do something in nine minutes every day that makes you glad to be here. Breathe deep. Take your life back. Start a book from our RIA Reading List. Nine minutes of reading a day. Observe what happens over a year based on only nine minutes of reading a day.

Lesson #5: YOU CAN FIGURE OUT THE FLOW OF YOUR FINANCIAL LIFE IN LESS THAN NINE MINUTES.

Yes, I know we live to complicate things in the financial services business. Complicated is designed to sell product you don’t need. Simplicity is the key to financial success. The best long-term asset allocations are those designed using low-cost investment vehicles along with rules to manage risk which include liquidating stocks to minimize the effects of the time required to break even and meet financial goals.

If I ask, you already know what your greatest money weakness is. Take nine minutes to write it out. Spend another nine to consider one specific action to improve.

Ask yourself: Are you happy right now? Where is resistance coming from? Are you working for a future that never appears? When the future is the present do you look ahead to another future? In the silent noise that vibrates in the back of your head is there regret? Anxiety? Look inside yourself for answers. Others can’t be blamed. They’re not the cause. You’ll never discover truth if you’re not accountable.

In nine minutes can you write nine reasons why you feel the way you do? That’s the flow of your life. The time that bridges big events is where flow is discovered. Or changed, re-directed, improved.

Your choice.

We alternated nights in the only bed. Mom and I.

Monday couch (no sleep), Tuesday bed (sleep). There was a full-length mirror in our three-room walk up. I recall dad cursing, fighting to secure the clunky structure to the hall-closet door.

At the right angle the mirror provided a clear view of the kitchen. From the bedroom you could observe everything. The present events. Now I understand how it saw the future too.

Since mom always seemed to gravitate to the kitchen late at night, the reflection in the mirror of her pacing back and forth was not uncommon. I was a light sleeper. My habit was to wake, look in the mirror, turn away to the darkness of the wall. Many nights I was forced to get up and close the bedroom door, so I couldn’t see what was going on in the rest of the apartment.

10pm: Wake up. Glance in mirror. Observe kitchen. Fridge door open. More beer for mom I was sure. 12:02am: Wake up. Look in mirror. See kitchen. Fridge door open? Heavy drinking binge. Turn. 2:16 am: Wake up. Turn. Look in mirror. See kitchen. Fridge door ajar. Again? Still?

Weird.

I was mad. So mad. I got up to see what was going on. Mom half on the floor. On her side. Tangled in the extra-long, engine-red cord of a dead Trimline phone. Her head inside the bottom shelf of the fridge. I touched her shoulder. Felt the freeze of her body.

2:18am.

I happened to glance at that damn kitschy cat clock. Waggy tail. Shifting eyes.

Tick. Tail. Tick. Tail. Eyes right. Eyes left.

Never forgot 2:18. Plastic cat eyes.

Taunting me.

A human accordion. She wouldn’t unfold. Still breathing. Shallow. I noticed the slight movement of a tiny chest. Up and down. Slow. Mouth open. Tongue shriveled. Lips colorless. Light blue.

I was in a panic. Half asleep. My mind reeling.

2:20.

Cat eyes away.

Suddenly calm, I sat on the floor. Staring at her.

Thinking.

I watched mom’s chest go choppy. Still. Move. Move. Nothing.

Cat tail. Swing left. Right.

Extended on the exhale. Awaiting permanent stillness. Hoped for it. 2:22.

Crossroad. Intersection.

Whatever you call it. The power to make a decision that would change all. Slowed down everything. An inside voice, one I never heard before. Kept asking. Slightly teasing. The repetition of the question felt forbidden. But continued. Cat tick-tock.

A thousand pounds tied to a melamine tail.

Live or die? Choose. Now. No time left.

2:24.

In nine minutes. Decide.

Go on the way you have been.

Or live.

Choose.

Lesson #6: CAN YOU STOP IN YOUR TRACKS BEFORE MAKING A PURCHASE?

Fiscally-fit people wait before making a purchase, especially a significant one. Waiting lessens the impulse to part with money for something you don’t need. Wait nine minutes. Then nine hours. Nine days. If you still want the item, buy it. Most likely the heat will pass. Your desire will grow cold.

The epidemic of suicide is real. And spreading. If you know of someone in crisis, reach out. The National Suicide Prevention Hotline is 1-800-273-8255.

So, you’ve decided to undertake comprehensive financial planning.

A properly designed financial plan will cover important elements like retirement savings, insurance analysis and estate review; a qualified planner will target and outline specific areas of strength and weakness along with flexible, realistic routes to each financial goal.

If you’re stressing over the process, how long it takes to get a plan together: Don’t. Yes, there’s a financial self-discovery period on your part and that will take effort and homework. However, a plan can be modular based on your most important concern first, then built on over time.

Let me be one of the first to say congratulations on your decision!

You must be serious about financial awareness. After all, there are none of the day-to-day highs and lows of the stock market.

No sizzle. So boring.

Financial planning doesn’t make headlines or capture the attention of media talking heads.

It flies under the radar.

And to that I say:

Thank goodness.

Consider financial planning the mundane sentinel which forms the foundation of money awareness. When plans are attached to goals or life benchmarks as I call them, they take on a life of their own as progress markers along the path to a successful financial life.

A plan is a complete diagnostic of money chemistry. And the numbers don’t lie.

At times, it’s is validation, other times, an awakening.

On occasion, a warning.

See? Perhaps planning is exciting (we’ll keep that between us. Our own little secret).

Now that I have your attention and you’re ready to go, I’ll share 4-hidden dangers for investors to heed.

Mistake #1: You depend on the wrong tools to get the job done.

Online publicly-available financial planning calculators are the junk food of finance posing as nutritious choices. I guess it’s better than nothing, however just because a planning calculator is available from a reputable firm like Vanguard or Charles Schwab surprisingly doesn’t make it worthy of consideration.

As a matter of fact, per a study, the efficacy of publicly-available retirement planning tools from 36 popular financial websites was challenged and results were extremely misleading.

These quick (worthless) financial empty-calories don’t provide enough input variables to provide a level of accuracy. Most egregious is the dramatic over-estimation of returns and plan success.

If you trust an online calculator to adequately plan for retirement or any other long-term financial life benchmark and feel confident in the output (most likely because it provided a positive outcome,) then you’re ostensibly setting yourself for dangerous surprises.

Avoid them. They’re not worth it. Best not to do any planning at all if it’s this route.

Mistake #2 – The plan is used to sell product.

Antoinette Koerner, a professor of entrepreneurial finance and chair of the finance department at the MIT Sloan School of Management, along with two co-authors, set out to analyze the quality of financial advice provided to clients in the greater Boston area.

They employed “mystery shoppers” to impersonate customers looking for advice on how to invest their retirement savings. Unfortunately, it didn’t work out too well.

Advisors interviewed tended to sell expensive and high-fee products and favored actively-managed funds over inexpensive index fund alternatives. Less than 8% of the advisors encouraged an index fund approach.

The researchers found it disconcerting how advisor incentives were designed to motivate clients away from existing investment strategies regardless of their merit. They found that a majority of the professionals interviewed were willing to place clients in worse positions to secure personal, financial gain.

So, let me ask:

“Would you rather have a comprehensive plan completed by a professional who adheres to a fiduciary standard where your financial health and plan are paramount, or a broker tied to an incentive to sell product?”

Brokerage firms are willing to offer financial plans at no cost. However, the price ultimately paid for products and lack of objectivity, is not worth a ‘free’ plan. It’s in a consumer’s best interest to find a financial partner who works on an hourly-fee basis or is paid to do the work, not based on investments sold.

Last month, I met with a gentleman whose comprehensive financial plan inspired most of this blog post. The financial plan completed by his advisor was fraught with conflicts of interest and mistakes I’ll expand upon. The plan was not designed for an individual who was about to “cross over,” as I define it.

In other words, the plan was not designed for an individual preparing to retire within 5 years and look to begin a lifetime income distribution strategy. Nothing about longevity assessment (which we do through analysis to help people plan realistically based on health habits and family history), zero about proper Social Security strategy including spousal retirement and survivor benefits maximization, nada about how or if he should take his pension, along with erroneous inflation rates.

What stood out was the recommendation of a sizable investment in a variable annuity.

I couldn’t understand why an annuity was recommended, especially a variable choice with an income rider that was not required. Based on my analysis, this successful earner, saver and investor had enough to meet joint fixed expenses for life based on pension and Social Security optimization alone.

Annuities are usually sold, not planned.

However, in this case a plan was purposely engineered to roll a lump-sum investment into a product that wasn’t needed. No other option for the pension was provided but to roll it over into an annuity without further investigation.

It felt like the plan was patchworked to conclude in a product sale. A variable annuity may have been suitable, but it certainly wasn’t in the highest and best or fiduciary interest of the prospective investor. Be careful out there. Get a second opinion from a registered investment adviser who offers a fiduciary level of care.

Mistake #3 – Beware of the inflation-scare method 

At Clarity we provide countless second opinions on financial plans; a trend that consistently emerges is the omnipotent annual 3% inflation rate. Regardless of the expense goal, even medical (which should be higher), the 3% blanket annual inflation rate in my opinion is left in as the default selection that never gets updated perhaps as a method to scare investors into managed product and possibly overweight stocks. Candidly, many financial professionals do not understand inflation.

When having a financial plan completed, consumers must be smarter about inflation rates and make sure their planners are knowledgeable when it comes tying applicable rates of inflation to each goal.

Keep in mind – inflation is personal to and differs for every household.

My household’s inflation rate differs from yours.

Thanks to an inflation project undertaken by the Federal Reserve Bank of Atlanta, there’s now a method to calculate a personal inflation rate. A smart idea is to compare the results of their analysis to the inflation factor your financial professional employs in retirement and financial planning. Instruct your adviser to complete an additional planning scenario which incorporates your personalized consumer price index and see how it affects your end results or outcomes.

The bank has undertaken a massive project to break down and study the elements of inflation along with the creation of a myCPI tool which captures the uniqueness of goods that individuals purchase.

Researchers estimate average expenditures using a calculation which incorporates various cross-demographic information including sex, age, income, education and housing status. The result is 144 different market baskets that may reflect a closer approximation to household’s personal cost of living vs. the average consumer. It’s easy to use and sign up for updates. Try it!

My personal CPI peaked in July 2008 at an annualized rate of 5.2%. Currently, it’s closer to 1.2%. For retirement planning income purposes, I use the average over the last decade which comes in at 2.3%.

The tool can help users become less emotional and gain rational perspective about inflation. Inflation tends to be a touchy subject as prices for everything must always go higher (which isn’t the case). I’ve witnessed how as a collective, we experience brain drain when we rationalize how inflation impacts our financial well-being. It’s a challenge to think in real (adjusted for inflation) vs. nominal terms.

I hear investors lament about the “good old days,” often where rates on certificates of deposit paid handsomely. For example, in 1989, the year I started in financial services, a one-year CD yield averaged 7.95%. Inflation at the time was 5.39%. After taxes, investors barely earned anything, but boy, those good old days were really somethin’ weren’t they?

We’re so-called inflation experts because it co-exists with us. It’s an insidious financial shadow. It follows us everywhere. We just lose perspective at times as the shadow ebbs and flows, shrinks and expands depending on our spending behavior. Interestingly, as humans, we tend to anchor to times when inflation hit us the hardest.

Worried about inflation in retirement? Let’s whittle down this myth of massive inflation in retirement. Decreased spending in retirement offsets price increases based on conclusions of multiple studies. For example, according to David Blanchett, CFA, CFP® Head of Retirement Research at Morningstar in his Working Paper titled “Estimating the True Cost of Retirement,”  the following holds true:

“While a replacement rate between 70% and 80% may be a reasonable starting place for many households, when we modeled actual spending patterns over a couple’s life expectancy, rather than a fixed 30-year period, the data shows that many retirees may need approximately 20% less in savings than the common assumptions would indicate.

Real retiree expenditures don’t rise (or fall) in nominal terms simply as a function of broad-based inflation or expected health care inflation. The retirement consumption path, or “spending curve,” will be a function of the household-specific consumption basket as well as total consumption and funding levels.

When correctly modeled, the true cost of retirement is highly personalized based on each household’s unique facts and circumstances.”

A generic inflation rate used by most planners overstates the inflation risk most retirees will experience.

While at Clarity we use a 1.7% inflation rate in planning for most needs (except certain categories of healthcare, higher education and long-term care costs which we increase at 4.5% annually), a personalized rate for those who go through the myCPI is highly recommended.

According to an insightful myth-busting analysis by John Kador for www.wealthmanagement.com, prices don’t inflate equally. Now if more financial professionals would get the picture and use the information for accurate planning purposes (let’s not hold our breaths).

Mistake #4 – Market return projections only for vampires

I am 100% confident that stocks always move higher in the long run.

I know for certain the Dow will reach 60,000. I probably won’t be alive to witness it, but I know it’s going to happen. I do. Markets are infinite. Unfortunately, humans are finite. Unless you’re a vampire, there are going to be times when you’ll battle through return headwinds or glide easy thanks to tailwinds. There will be extended periods (hopefully not yours), when dollar-cost averaging will seem like treading wealth through thick sludge. Other times, it’ll feel like your money is lithe and positive returns occur with minimal or zero effort.

As Lance Roberts states:

“The most obvious is that investors do NOT have 118 years to invest. Given that most investors do not start seriously saving for retirement until the age of 35, or older, most investors have just one market cycle to reach their goals. If that cycle happens to include a 10-15 year period in which total returns are flat, the odds of achieving their savings goals are massively diminished. If an investor’s 30-year investment cycle happens to end with a major market crash, the result was devastating. Time, duration and ending dates are crucially important to expected investor outcomes.”

What if you’re in retirement and distribution mode? Market headwinds can be devastating.

James B. Sandidge, JD in his study “Adaptive Distribution Theory,” for the Investments Wealth Institute, provides several eye-opening examples of drawdown risk. As we monitor portfolio distributions over rolling three-year periods, Clarity is prepared to have retirees make changes to withdrawal rates or dollars as they cannot count on time to breakeven from combined market and portfolio distribution erosion. What does matter is the timing of returns, especially losses.

Whether you retire in a market head or tailwind is good or bad luck.

If recently retired, we believe at RIA that you’re going to expect overall market headwinds over the next 10 years (sorry) and must prepare to reduce portfolio distributions.

I’m sorry. Again, it’s just a drawing of the straws. Nothing personal.

James includes several effective charts and tables in his work. Table 4 hits home for me.

An investor in a 60/40 portfolio who retired at the end of February 2008 suffered a 26.8% loss in the first 12 months of retirement. A 5% withdrawal was recommended for living expenses through that period. This hits home for me personally because I witnessed financial professionals suggesting 4-5% withdrawals that year and recite the “stocks always move higher in the long run,” mantra. It was almost like these pros wouldn’t believe what was happening and couldn’t help retirees adjust their spending expectations. The triple deadly combo of market loss, unrealistic withdrawal rate and investment managements fees lead to a first-year devastating principal erosion of 32.8%!

In 2010, the new retiree is probably anxious to return to the workforce. Subsequently, with a smaller asset base of $672,000, a 5% withdrawal is no longer $50,000. It’s $33,600. What a horrific life-changing experience. I never want to be the adviser on the other side of the desk delivering this bad news.

James outlines – “

Thus the “risk three-step” – a rapid reduction of principal, followed by a reduction in cash flow, followed by investor panic. Many retires can tolerate gradual principal erosion, but many fewer would find a 33-percent drop in principal and cash flow acceptable after one year of retirement.”

Lance Roberts and I had to adjust down our return estimates for every asset class in our planning software; international and emerging markets have the greatest opportunities for long-term asset class returns, however they’re adjusted lower, too. If we model higher returns, the risk to get those returns increases thus putting clients in danger of not reaching their financial goals unless they increase their savings rates, reduce debts/expenses or work longer than anticipated.

Most likely, your plan investment return estimates are too optimistic. Again – Designed more for blood suckers. Not people.

To a broker, flat or bear market cycles don’t exist. Realistically, the dogma is false narrative. If you fall for it, you may wind up spending an investment life making up for losses or breaking even.

Most financial planning software generates outcomes based on something called “Monte Carlo” simulation. It’s as close as planners get to represent the variability of market returns over time.

Monte Carlo generates randomness to a portfolio and simulates, perhaps thousands of times, around an average rate of return. Unfortunately, asset-class returns most Monte Carlo tools incorporate tend to be optimistic.

In addition, even though Monte Carlo simulates volatility of returns, it does a very poor job representing sequence of returns which I think of as a tethered rope of successive poor or rich returns.

Per friend and mentor Jim Otar, a financial planner, speaker and writer in Canada:

“Markets are random in the short term, cyclical in the medium term, and trending in the long term. They are neither random, nor average, nor trending in all time frames. Secular trends can last as long as 20 years (up down or sideways). The randomness of the markets are piggybacked onto these secular trends. Assuming an average growth and adding randomness to it does not provide a good model for the market behavior over the long term and it makes the model to “forget” the black swan events.” 

It’s why at Clarity, as a backstop, we employ various planning methodologies which incorporate how market cycles operate and where your goals may fall within them.

Granted, a comprehensive plan experience won’t be the talk of your next cocktail party. However, it just may allow you the freedom and peace of mind to enjoy the benchmarks you work hard every day to reach.

Last, the only person who will succumb to the hidden dangers in financial plans, is you. However, you’re now aware of the financial minefields that are a ‘must avoid.’

“Dad, that grass looks fake!” – Spring, 2018.

My daughter recalls how she couldn’t determine the difference between the once lush landscape of my front yard and the set for a movie about the aftermath of nuclear blast. The grass was a sea of brown bestrewed by tiny islands of a green Southern lawn fighting for life.

Azaleas once thriving were reduced to long thin brittle branches that resembled skeletal fingers rising from the dust.

One summer of zero care and nurturing destroyed years of prosperous growth.

I’ve given myself credit for being a good saver and respectable steward of money. I better be as financial planner and money manager. Consistent at socking away 30% of my gross income. I’ve been fortunate to earn enough to be in the top 5% U.S. households.

Then life got in the way.

I needed to resign from a long-term employer due to my beliefs that the institution was ethically breached. Subsequently, I got sued and the stress caused permanent breakdown in the function of my right kidney. Oh, and then there was a divorce and the start of a new business. All in my late 40s.

At an age I should have been winding down, thinking of retirement, I was starting up again. My life was wrought through a wash/dry cycle and spinning completely different than originally planned.  My decades of savings began to rapidly dwindle. Divorce, attorney costs, medical costs, and the capital required to grow a business took me back financially to a net worth I haven’t benchmarked since my early 30s. Thankfully, my daughter has a well-funded 529 for college or that would be yet another formidable expense or financial setback.

Great starts to late starts and later finishes. The road of life can deviate far off an anticipated course; even tenured navigators with the most sophisticated of tools can lose their way.  Like riding out a storm, you get through it with what you got then assess the aftermath. For me personally, the irony wasn’t lost. Here I was assisting others financially map out imperfect retirements. Little did I realize that I too was about to embark on an all-too-similar journey.

Care and nurturing encouraged by a healthy dose of current reality, forced me settle in, get comfortable in a thinner fiscal skin. I began to reevaluate an imperfect retirement plan. One that was very different than what began twenty years ago. Thankfully, the money I accumulated over the years was sufficient to make it through the shocks. However, when it came to my retirement goal, I was back in the first inning, batting for the minors. A financial landscape that once thrived was as unhealthy as my lawn. I decided to get to work. It all began with the basics, breaking my situation down to the foundation. I had to rewind. Start digging. And it was deep in the soil that I learned how far I was willing to go to get back on track.

First step: A holistic, micro-assessment of what makes me, ‘me,’ or: Do I have the stamina to rebuild?

I had to emotionally prepare to move forward. The bucolic retirement I originally designed was postponed indefinitely. The past as a weight on me had to be lifted. As Ramit Sethi author of the New York Times’ best seller “I Will Teach You To Be Rich,” says – “To launch a rich life you must first acknowledge where you are, then trust it’s the start.” Easier said than done. The truth in the statement motivated me to realize that the game wasn’t over. I made the decision to hit the restart button and acknowledge. No. Enthusiastically embrace where I was now.

I began to painfully and objectively question each potential obstacle to rebuilding wealth. I had to be tough. There was little room for compromise. From a thorough assessment of the new money management firm’s lofty goals and formal business plan progress (ahead of schedule; good to begin on a positive note), downsizing my primary residence which meant returning to a modest home in the ‘burbs that served as a rental property (formerly occupied by a responsible young couple who didn’t know much about landscape care), to my overall physical condition which included a dramatic change/improvement in my diet and exercise regimen that impressed my physicians, I was beginning the journey of the care and nurturing of an imperfect retirement.

It’s well-documented how healthcare has the potential to be an eternal cash-outflow concern in retirement, especially as life expectancies increase. Fidelity estimates that a healthy 65-year-old couple retiring today will require $280,000 to cover healthcare costs in retirement. Of course, this isn’t a lump sum a retiree needs to shell out. However, I think seeing costs in total is an effective “scared straight” tactic; it hits one in the face with reality that being unhealthy in retirement can a formidable, ongoing expense. Keep in mind, this is Fidelity Investment’s assessment of AVERAGE healthcare costs which include premiums for Medicare Part B and D. It doesn’t include the cost of long-term care.

The analysis assumes retirees are healthy. Based on my analysis of retirement distribution plans over two decades, poor health in retirement increases Fidelity’s total by 30%. Flip your mindset: Consider lifestyle changes such as regular workouts, diet improvements and annual checkups complete with full diagnostics, as investments. For example, when clients look to cut expenses, the gym membership is one of the first on the chopping block. It’s the one expense I urge them to continue. Consider every workout, each diet change, as dollars added to a future retirement investment bucket or as less distribution dollars spent on health and more on bucket list activities.

Medicare Part B, D, and supplemental medical (Medigap) premiums allow planners like me to better estimate healthcare costs for retirees. It’s important for future retirees to understand and account for the impact of inflation on these expenses. As a rule of thumb, consider healthcare inflation at double the current U.S. annual inflation rate of 2.36% (as of March 2018), in your planning.

The Kaiser Foundation estimated using the 2016 Consumer Expenditure Survey from the Bureau of Labor Statistics, that the share of average total household spending on health-related expenses was more than twice as large for Medicare households than for non-Medicare households in 2016. Middle-income Medicare households allocated a greater share of their household spending to health-related expenses than either the lowest or highest-income Medicare households.

You got me. Consider this my attempt at a “scare straight” moment. It scared me. A future retiree cannot avoid the inflation in Medicare premiums. However, a healthy individual can look to work longer, retire later, and save more to minimize the pain of the annual growth in Medicare beneficiary costs which leads in to my next personal hurdle.

Second step: I hit turbo-drive on savings and investment contributions combined with working longer.

Along with the big hit to the net worth, my savings rate went on hiatus. Well, actually, it hit ground zero. Goose egg. For three years. Downsizing the primary residence, cutting the mortgage payment by 70% combined with expense reduction has provided an opportunity to turbocharge my savings rate to 40% of annual gross income that I’ll need to accomplish consistently over the next decade. Working until 70 is now a reality because I love what I do; I’ll find a way to add flexibility into my schedule over the years. The life blood of a successful retirement plan is income. Pre-retirees who boost their savings rate and work on average an additional two years beyond a planned retirement date can dramatically increase retirement plan positive outcomes.

Third step: Mitigate potentially devastating financial risks & let an insurance company take the hit.

Three out of every five financial plans I create reflect deficiencies to meet long-term care expenses. If my health continues to fire on all cylinders, then it’s likely I’ve added years to my life and will require assistance with activities of daily living. Medical insurance like Medicare does not cover long-term care expenses – a common misperception.

The Genworth Cost of Care Survey has been tracking long-term care costs across 440 regions across the United States since 2004.

Genworth’s results assume an annual 3% inflation rate. In today’s dollars a home-health aide who assists with cleaning, cooking, and other responsibilities for those who seek to age in place or require temporary assistance with activities of daily living, can cost over $45,000 a year in the Houston area where I reside. On average, these services may be required for 3 years – a hefty sum of $137,000. We use a 4.25-4.5% inflation rate for financial planning purposes to reflect recent median annual costs for assisted living and nursing home care.

Long-term care insurance is becoming cost prohibitive. Not only is insurance underwriting to qualify draconian to say the least, insurers are increasing annual premiums at alarming rates. In some cases, by more than 90% ostensibly forcing seniors to drop coverage or find part-time work to pay premiums.

In addition, the number of insurers available is dwindling. Today there are less than 12 major insurers when at one time there were 106.

As I examine policies issued recently vs. those 10 years or later, it’s glaringly obvious that coverage isn’t as comprehensive and costs more prohibitive. The long-term care crisis is rarely addressed by the media; there isn’t a governmental solution to the growing needs of an aging population. Unfortunately, the majority of those who require assistance will place the burden on ill-prepared family member caretakers or need to undertake drastic measures to liquidate assets. According to Genworth, roughly 70% of people over 65 will require long-term care at some point in their lives.

So, what to do?

One option is to consider a reverse mortgage. The horror stories about these products are way overblown. The most astute of planners and academics study and understand how for those who seek to age in place, incorporating the equity from a primary residence in a retirement income strategy or as a method to meet long-term care costs can no longer be ignored. Those who talk down these products are speaking out of lack of knowledge and falling easily for overblown, pervasive false narratives.

Reverse mortgages have several layers of costs (nothing like they were in the past), and it pays for consumers to shop around for the best deals. Understand to qualify for a reverse mortgage, the homeowner must be 62, the home must be a primary residence and the debt limited to mortgage debt. There are several ways to receive payouts.

One of the smartest strategies is to establish a reverse mortgage line of credit at age 62, leave it untapped and allowed to grow along with the value of the home. The line may be tapped for long-term care expenses if needed or to mitigate sequence of poor return risk in portfolios. Simply, in years where portfolios are down, the reverse mortgage line can be used for income thus buying time for the portfolio to recover. Once assets do recover, rebalancing proceeds or gains may be used to pay back the reverse mortgage loan consequently restoring the line of credit.

Our planning software allows our team to consider a reverse mortgage in the analysis. Those plans have a high probability of success. We explain that income is as necessary as water when it comes to retirement. For many retirees, converting the glacier of a home into the water of income using a reverse mortgage is going to be required for retirement survival and especially long-term care expenses.

American College Professor Wade Pfau along with Bob French, CFA are thought leaders on reverse mortgage education and have created the best reverse mortgage calculator I’ve studied. To access the calculator and invaluable analysis of reverse mortgages click here.

Insurance companies are currently creating products that have similar benefits of current long-term care policies along with features that allow beneficiaries to receive a policy’s full death benefit equal to or greater than the premiums paid. The long-term care coverage which is linked to a fixed-premium universal life policy, allows for payments to informal caregivers such as family or friends, does not require you to submit monthly bills and receipts, have less stringent underwriting criteria and allow an option to recover premiums paid if services are not rendered (after a specified period).

Unfortunately, to purchase these policies you’ll need to come up with a policy premium of $50,000 either in a lump sum or paid over five to ten years. However, for example, paying monthly for 10 years can be more cost effective than traditional long-term care policies, payments remain fixed throughout the period (a big plus), and there’s an opportunity to have premiums returned to you if long-term care isn’t necessary (usually five years from the time your $50,000 premium is paid in full). Benefit periods can range from 3-7 years and provide two to five times worth of premium paid for qualified long-term care expenses. As a benchmark, keep in mind the average nursing home stay is three years.

I decided on this hybrid strategy. For a total of $60,000 in premium, I purchased six years of coverage, indexed for inflation, for a total benefit of close to $190,000 in future dollars.

It’s crucial to complete a comprehensive financial plan before investigating available long-term care products. A plan will help quantify how much coverage is necessary. In other words, your long-term care plan can be subsidized by a reverse mortgage or liquidation of assets. From there, a financial and insurance professional educated in long-term care can assist with the proper amount of coverage required.

Fourth step: Annuitize a portion of my future income and maximize Social Security retirement benefits.

Do not underestimate the lifetime income that Social Security can provide. After generating hundreds of Social Security benefits payout scenarios it’s rare I recommend future recipients claim benefits before age 70 especially if I must consider survivor benefits for a younger, lower-earning spouse.

According to a The Nationwide Retirement Institute® Consumer Social Security PR Study conducted by Harris Poll, it’s not surprising to discover than ½ of a retiree’s fixed expenses are covered by Social Security benefits.

Per the study, surprisingly few retirees have a financial advisor who provides advice on Social Security strategies. The total incidence of having a financial advisor who provided Social Security advice was a dismal 11%.

A 2015 study by the Consumer Financial Protection Bureau indicates that more than 2 million consumers choose when to begin collecting Social Security retirement benefits. Many make the decision based on limited or incorrect information.

Of those given Social Security advice by their advisors, roughly half or more had to initiate the discussion themselves.

Now with pensions all but gone, Social Security is the only guaranteed monthly income for roughly 69% of older Americans.

Unfortunately, in 2013, 75% of retirees chose to start collecting before full retirement age which results in a permanent reduction in lifetime benefits. This may be a very shortsighted decision.

As Wade Pfau, Ph.D., CFA and professor at the American College outlines in the 2^nd edition of his Retirement Researcher’s Guide to Reverse Mortgages:

“Delaying Social Security is a form of insurance that helps to support the increasing costs associated with living a long life. It provides inflation-adjusted lifetime benefits for a retiree and surviving spouse, and those lifetime benefits will be 76 percent larger in inflation-adjusted terms for those who claim at seventy instead of sixty-two.”

According to Social Security expert Elaine Floyd, ignorance is the primary reason. The CFPB report outlines studies that represent how much people don’t know about claiming. One study for example outlined that only 12% of pre-retirees knew how benefits differed if benefits were claimed before, at, or after full retirement age.

If you’re having a difficult time finding the help required, it’s worth the investment in a comprehensive Social Security analysis tool. The one I suggest was created by Laurence Kotlikoff, Professor of Economics at Boston University and available at www.maximizemysocialsecurity.com. The tool will guide you to the highest benefit you or you and a spouse may receive from Social Security.  It will assess thousands of strategies before it suggests the one that maximizes lifetime benefits. The output is easy to interpret. There’s the ability to run “what if” scenarios, too.

The $40 annual license for a household is good for a year and worth the cost.

Respected Professor Emeritus of Finance at the Yale School of Management and Chairman, Chief Investment Officer for Zebra Capital Management, LLC Roger G. Ibbotson, PhD, in a comprehensive white paper released recently, outlined how fixed indexed annuities which provide upside market participation and zero downside impact may be attractive alternatives to traditional fixed income like bonds.

In an environment where forecasted stock market returns may be muted due to rich valuations and bond yields still at historic lows, FIAs eliminate downside stock market risk and offer the prospect of higher returns than traditional asset classes.

Per Roger Ibbotson:

“Generic FIA using a large cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, allowing for equity upside participation. For these reasons, an FIA may be an attractive alternative to (long-term government bonds) to consider.”

In financial services, Ibbotson is a god. Brokers and advisors have been misrepresenting to consumers his seminal chart of 100-year stock market returns for as long as I’ve been in the business. The chart outlines how domestic large and small company stocks compound at 10-12% and beat the heck out of bonds, bills and inflation; financial professionals showcase the lofty past returns and convince customers that without buying and holding stocks for the long term (whatever that is), they’ll succumb to the vagaries of inflation. Adhere to the chart and your portfolio will have it made in the shade! (if invested in stocks for 100 years plus).

In all fairness to Roger Ibbotson, it’s not his fault that his data and graphics have been used to seduce investors to bet their hard-earned wealth on investment fantasy. He’s been in favor of annuities in retirement portfolios and in accumulation portfolios leading up to retirement for years.

I found his study compelling enough to allocate 30% of my investment dollars to a fixed index annuity.

So, what are fixed indexed annuities?

First, they are not products that invest directly in stock markets. They are insurance vehicles that provide the potential for interest to be credited based on performance of specific market indexes. Selections within these fixed annuities allow owners to participate in a fixed percentage of the upside of a market index or earn a maximum rate of interest that’s based on the percentage change in an index from one anniversary date (effective date of ownership), to the next. A strategy identified as “point-to-point.”

Second, fixed indexed annuities are characterized by a ‘zero floor,’ which simply means there’s no risk of market downside. Owners may get a goose-egg of a return for a year, that’s true. However, there’s no need to make up for market losses, either.

As stated in the academic research published by Mr. Ibbotson:

“This downside protection is very powerful and attractive to many individuals planning for retirement. In exchange for giving up some upside performance (the 60% participation rate), the insurance company bears the risk of the price index falling below 0%. The floor is one way to mitigate financial market risk, but also gain exposure to potentially higher equity performance than traditional fixed income investments.”

Third, Roger Ibbotson and his team analyzed fixed index annuities performance compared to periods of outperformance and underperformance for long-term government bonds. They isolated 15 three-year periods where bonds performed below the median like above, where the average 3-year annualized return was 1.87% compared to the FIA average of 4.42%. Through fifteen 3-year timeframes where bonds performed above median, returns for bonds and fixed index annuities averaged 9% and 7.55%, respectively.

Last, the research is limited to a simulation of the net performance of a fixed index annuity tied to a large cap equity index with uncapped participation rates. A participation index rate strategy is mostly effective under strong stock market conditions as interest credited is a predetermined percentage multiplied by the annual increase in a market index’s return. For example, a fixed indexed annuity offers an uncapped point-to-point option with a 40% participation rate. If the chosen market index the participation rate is connected to increases by 10%, your return for the year will be 4%. The participation percentage may be changed annually.

A “point-to-point” cap index strategy incorporates a ceiling on the upside and will not perform as well during periods when stocks are characterized by strong performance. The point-to-point cap index choice is best when markets are expected to provide limited growth potential and provides 100% participation up to the annual cap set by the insurance company. Let’s say a fixed indexed annuity has a 3% index cap rate and is tied to the performance of the S&P 500. For the year, the S&P 500 returns 2%. The interest credited to your account would be 2%, which is under the 3% cap. Under the participation index rate strategy outlined above, interest credited would be less at 40% of the S&P return, or .8%.

Since credited interest increases the original investment and downside protection is provided, money compounds in the true sense of the definition since compounding works only when there is NO CHANCE of principal loss.

I’m assured with a fixed indexed annuity as part of my overall portfolio that may be converted to an income stream I cannot outlive, to not suffer downside risk; along the way perhaps I’ll earn better returns than a traditional stock and bond allocation to top it off.

Fifth step: Reduce portfolio risk due to below average estimated future returns.

I’m bracing for a future of low returns for risk assets like stocks and bonds. You should too. Despite the unprecedented stock market volatility so far this year, the Shiller P/E, a measure of inflation-adjusted earnings over rolling prior ten-year periods at 32.34X, has not worked off excess valuations.

The Shiller P/E is a poor predictor of short-term market performance; over long periods, lofty valuations today portend lower future returns. Displayed below is our analysis of the growth of $1,000 over 30 years when the Shiller PE is at 20X or higher.

I’m preparing for a minimum of one decade of investment-return stagnation; therefore, I reduced my asset allocation to stocks last year from 70% to 40%. In our firm’s planning software, we reduced return estimates for every domestic asset class, with the greatest long-term return potential coming from international investments including emerging markets (where valuations are attractive compared to the United States). Shorter-term, we don’t see a reason to enter developed international and emerging markets. However, we monitor daily; Lance Roberts informs clients and newsletter readers of our asset allocation changes on a regular basis.

When creating comprehensive financial plans for clients, we explain and show through in-house analysis, how going forward until valuations normalize, greater risk will not lead to a commensurate increase in return. In fact, all additional risk is going to do is add risk and dampen returns.

Today, my front lawn is the finest in the neighborhood.

Two years later after care and nurturing of the soil, the grass is as robust and greener than it has ever been. So green that it compelled my daughter to do a double-take as she remembered how hopeless the situation appeared back then.

The creation of an imperfect retirement can require tough decisions, hard work and discipline, but the results can be magnificent.

We wonder how they do it.

Those who make handling money look effortless.

I have documented and monitored the money habits of fiscally-fit people for years.

The following ten appear prominently on the list.

1 – The fiscally-fit crowd considers “paying yourself first” sacrosanct.

They passionately believe that saving is equally as important as paying fixed expenses like rents or mortgages. This rule has been a part of their lives early on. Back to their youth. They never compromise this habit.

The “pay yourself” mindset is the foundation to their overall financial success. Whether a specific dollar amount or a percentage of income is directed monthly into savings or investments, the action is as important as the money itself. It represents a display of control which in turn enhances confidence.

2 – Thinking in monthly payments is detrimental to long-term financial health.

The fiscally-fit are not compelled to take on recurring obligations because they can afford the payments. The long-term financial impact of the liability is a deciding factor. For example, a $30,000 auto loan at 3% interest for 3 years results in a monthly outlay of $872.44. A 5 year loan calculates to $539.06. Many consumers gravitate towards lower payments. This crowd is motivated to pay less in total interest charges. With a saving of $937 over the life of the loan, the 3-year obligation is favored.

3 – Money is a consistent and healthy “worry.”

Like a low hum in the background of their lives, worry is a factor that resonates throughout the minds of the fiscally fit. A dose of worry is perceived as healthy since it fosters discipline, encourages patience and prevents this group from becoming complacent when it comes to monitoring financial progress. Professionals who preach a “don’t sweat it I’ll make the investment decisions,” mantra and come across as overconfident are dismissed. Financial advisors especially are sought as partners and sounding boards. Decisions are not made in haste.

4 – Unforeseen risk is right around the corner.

These individuals anxiously plan for risks that can hurt their financial standing no matter how remote the possibilities. They perceive disabilities, accidents or deaths as foreseeable threats. They prepare through formal insurance planning, usually in partnership with an objective financial professional. Insurance benefits available at work are maximized first. From there, additional coverage is purchased to cover spouses and fill in gaps that employer benefits do not. Term and permanent life insurance options are popular.

5 – Credit card debt is anathema.

Credit cards are popular to gain rewards and perks. Although having access to credit is important, debt is paid in full monthly to avoid usurious interest rate charges. Travel benefits are especially attractive. NerdWallet has identified the best travel cards. At the end of the year, credit card statements which consolidate expenditures and organize them by categories are utilized as a self-check on spending patterns and areas of overspending are target for correction.

6 – Planning especially for retirement, strengthens financial success.

Formal planning validates good habits, uncovers weaknesses and outlines actionable steps to meet goals. There’s no fear or denial when it comes to facing money truths that emerge when a written plan is developed. A clear plan should prioritize financial life goals that motivate the fiscally fit to achieve results based on personalized return benchmarks and not some comparison to an arbitrary stock index.

There’s little discouragement when monetary changes occur as a good plan allows flexibility for various outcomes. Occasionally, expectations need to be tempered as progress doesn’t meet expectations. I’ve known members of this set who have taken radical steps to secure a strong financial future including massive shifts in spending and impressive downsizing in lifestyles.

7 – Paying retail is not an option.  

They’re not cheap, just savvy shoppers. There’s no such thing as immediate gratification when it comes to purchasing goods and services like autos, appliances and furniture. Even organizing vacations is an assignment in frugality. This group does their homework and are endless seekers of deals. They favor used and are known to scoop up floor models. Even “lightly damaged” items are not out of the question. Blemishes are usually cosmetic in nature and prices too attractive to pass up on washers, dryers, refrigerators and other durables. They do not fall for long-term “no-interest” offers unless the debt can be paid off before interest charges are applied.

8 – Money mistakes are forever lessons.

Financial mishaps are never forgotten. The fiscally-fit do not languish in the past. They take responsibility for mistakes and never repeat them. Whether it’s an investment “too good to be true” that busted or lending money to friends or family that was never paid back, they are not afraid to say no, mark financial boundaries and move on without guilt.

9 – Emergency reserves are a priority.

There’s a passion, a slight paranoia, to preserve capital for emergency spending. Anywhere from three to six months of fixed living expenses is optimum. If reserves fall, resources are re-directed even if it means postponing retirement funding until replenished. Online banks are increasingly popular compared to brick-and-mortar options due to higher yields, no monthly fees and surprisingly easy access to funds when needed. Want to run with this elite financial pack? Examine NerdWallet’s list of top high yield online savings accounts.

10 – A 401(k) isn’t all that.

The fiscally fit use several investment vehicles that complement tax-deferred accounts like 401(k) plans. This provides flexibility when distributions are required at retirement. Having various buckets that allow retirees to blend tax free, capital gain and ordinary income results in greater tax control and can make a difference to how much Social Security is taxed.

Financial success comes down to good habits.

These habits are common sense forged to simple actions applied long term.

However, simple is never as easy as it sounds, is it?

Don’t fret.

Small improvements lead to big results over time.

Written By Byron Kidder and Richard Rosso, CFP.

“Let me introduce an entity called You, Inc. This is a small, tightly controlled, privately-held company with the bulk of its productive assets invested in nontraded units of your future salary and wages. Your objective as CEO, CFO, and chairman of the board is to maximize shareholder value of You, Inc. while minimizing the financial risks faced by the corporation.” – Moshe A. Milevsky, Ph.D. – Author of “Are You A Stock Or A Bond?”

We get so tied up in our work and performing that we forget or (worse) put off the Human Capital Investment until we have time between projects.  It drops on our priority list because there is never any “left over” time available after our commitments are finished.

The human capital investment means YOU are your greatest investment.  A lifetime money-making powerhouse.  You need to be higher on the priority list.

Rosso’s Input:

The top .01% of American households have ruled the roost, foremost since the Great Recession where stocks and real estate have been blessed with turbo tailwinds to returns (thank central banks and low/manipulated rates for much of the windfall).

Ostensibly, owners of capital have seen their wealth move far ahead since the 1970s. Those who build wealth through household income and rely on wages haven’t been so fortunate as the annual percentage change of real hourly wages for the bottom 80% of workers have been on a steady downward slope, especially since the onset of the financial crisis.

Those in the bottom 90% of household wealth held 35% of the nation’s wealth in the mid-1980s. Three decades later, the percentage has fallen 12 points or exactly as much as the wealth of the .01 percent rose according to Matthew Stewart in an enlightening and thorough analysis titled “The 9.9 Percent Is the New American Aristocracy,” where he describes the 9.9% as meritocratic winners who left the 90% or “middle class,” in the dust. They are the professionals – lawyers, doctors, dentists, mid-level investment bankers, MBAs. You get the picture.

Per Stewart’s analysis, as of 2016 it took $1.2 million in net worth to make it into the 9.9 percent, $2.4 million to reach the group’s median and $10 million to get into the top .9 percent.

What am I getting at with all this data? Do you perceive opportunity or discouragement?

An investment in YOU, education, mastering a technical skill that’s in demand, increases the odds of escaping the bottom 90%, especially if synergized by likeability. In fact, likeability can get you hired. A field study by Chad A. Higgins & Timothy A. Judge in the Journal of Applied Psychology outlines how ingratiation (likeability), wins over self-promotion when it comes recruiter perception of fit.

In the popular book “The Science Of Likeability” by Patrick King, likeability is the ability to be more human, to appear genuinely approachable and relatable which could be a challenge in the age of electronic communication such as e-mail and text.

Back to Byron Kidder:

We have become desensitized to the fundamental skills necessary for social and business interactions in our quest for improving efficiency and productivity.  My book, “It’s All About Everything,” is an easy to read step-by-step guide that refreshes these skills while simultaneously awakens your sought-after desire to reconnect with your passion, re-engage with those around you, and produce your vision of success.

Fundamentally, people want to be around and associated with people they like but far too many have difficulty in this area.  They may have picked up bad habits or felt like being likable contrasted with being successful.  Being likable will positively affect your growth, promotions, relationships, etc.  You don’t need to sacrifice being likable to being successful.  It is not a tradeoff.  The great news is that likability can be learned!

Rule 7: Being likable.

Being likable is high on the list since it is Rule 7 of my book and let me assure you that it is in your power to raise your overall likability.  How many times have you worked with somebody who is not likable?

They may have been arrogant, abusive, braggart, inattentive, malicious, or lacked integrity.  After you have worked with them, do you choose to be around them again?  Realistically, you would avoid working with them in the future if possible even if it means a cut to your bottom line.  If you are like me, you remember unlikable people as well as the likable people, just for all the wrong reasons.

Being unlikable is not a career-ending move nor does it mean you should succumb to fate that comes with it.  Few people start out unlikable but end up stuck in a set of patterns that turns into second nature.  Bad habits can be ingrained just as well as good habits.  You may be in a stressful situation, so you start getting grumpier as an attempt to cope.  You may have in your mind a certain personality that is required to do your job, which dictates you need to behave a certain way, but it isn’t part of your natural personality and you are tired of pretending to be something you’re not.

Likeability encompasses a myriad of actions or attitudes that can be learned and changed.  The goal is to increase the positive traits that compliment your integrity.  If you have some set value system in place that dictates how you respond, interact, or live when nobody is watching, then you have a foundation that all scenarios can be measured against and dealt with accordingly.

Ever notice that negative people tend to attract each other?  The same is true for those with integrity.  Your reputation is bolstered by the company you keep.  In my experience, integrity is everything and is the foundation of my book.  I don’t want to have to think about somebody’s motives.  Start small and add likable traits over time.  Rome wasn’t built in a day.  If you act with integrity, your positive energy will draw people to you.  This leads to being consistently inspirational, which is a likable trait.

As with most things in life, there are a few traits that can be implemented for a quick reward and ROI.  Try these first and expand your repertoire over a span of weeks to months.  This includes being:

• Attentive and focused.
• Sincere and authentic.
• Intellectually curious and anxious to learn.

Being attentive to those you work with – a client, colleague, or vendor, will help you provide best in class service.  You would not be successful if it were not for people choosing to do business with you.  Because of this, never let appreciation for your clients go unsaid.  I regularly share with clients that I enjoy working with them and value their relationships.

Get to know internal and external clients.  Internal clients include colleagues, bosses, receptionists – everybody you encounter should have a positive impression of you.  Small tokens of appreciation can simply come down to remembering birthdays or favorite hobbies.

Inform clients how you will be there. Provide several points of contact including a cell phone number. Accept calls above and beyond normal business hours. Back up words with actions.  How many times have people told you they’ll be there if you need anything but disappear or disappoint when needed the most?  Being present when things go wrong will boost reliability and reputation.  When the inevitable happens and mistakes are made, face them head on, never make excuses.  Own up to them. Then propose a corrective plan of action. You’ve now forged a relationship, made a client for life. Based on your reputation for follow-up and follow-through, odds are your chance of promotion will increase, too.

Etiquette cannot be emphasized enough because it shows empathy and inherently directs your focus on serving others. An action as simple as smiling when talking on the phone can make your voice sound more pleasant and confident.

Respond to inquiries quickly and professionally, even if to say you will follow up within the next few hours.  You know the golden rule – treat others as you expect to be treated.

Sincerity and Authenticity Leads to Stronger Relationships.

Focus on client needs is valuable and produces amazing results only if you are sincere and authentic.  Otherwise, you run the risk of coming across as fake or shady.  When positive and focused on others, the energy is contagious.  You are essentially creating a positive feedback loop.  As my buddy Richard Rosso, says, “You know within 3 minutes if someone is genuine or not.”  Likability inherently means you exhibit a certain amount of vulnerability when you are authentic.

Face-to-face meetings with clients are important to building likeability.  You are showing them that you will always be there in a reliable fashion while adding value to the relationship.  Only time can reinforce that you are walking the walk. Trust is the end result of consistently showing attention, care, and appreciation.  Being likable helps get you the time and interactions necessary to build trust.

Trust is built over time, maintained through a myriad of actions and is a big component of likability.  Don’t be afraid to show vulnerability (it’s human!)  Richard has pointed out that “this adds to your memorability.”  He is right.  Likability will be one reason you’re remembered and called upon for repeat business or to handle an important task for superiors.

Intellectually curious and anxious to learn.

Likeability and genuine curiosity are linked. To be curious about other’s interests, family, hobbies, and concerns allows people to open up, share their stories. Taking the time to learn about the people you interact with exhibits care and authenticity.  Focus allows you to understand a client’s unique situation so that solutions may be recommended. Working for a company? Be a detective and learn as much as possible. Study the annual report, learn the mission statement, ask questions to display genuine interest and likeability may gain you a mentor in influential places!

Being likable is a habit; habits are formed through routine and consistency.  Self-assessment and objective discovery are crucial. What are those traits that make you likeable?  Which skills seem foreign but worthwhile to learn?  Taking an internal inventory will allow you to prioritize areas of improvement. Likeable people aren’t afraid or hesitant to ask for help or ask questions to gain understanding, either.

What if you feel overwhelmed and struggle to remain motivated? It’s easy to grow discouraged as wage growth has remained stagnant; most likely you’ll be expected to accomplish tasks that years ago were delegated to two employees. Listen, you’re human. You’re going to feel frustrated. It’s important to remain centered on the positive. For example, a morning ritual of gratefulness, catching and stopping yourself from complaining and focusing on the bigger picture of serving others will help work through tough periods.

Bottom line? People want to work with people they like.  Likability is one part innate, another part learned behavior. Control over your attitude will boost likability. There are going to be times you won’t care about being likeable.  We all have rough days. The goal is to prevent a string of bad days from changing your personality. Negativity spreads quickly. Likeability and negativity do not mix.

The rules listed in my book, “It’s All About Everything,” will help you raise the bar on likability.  Be yourself, be vulnerable; focus on others and watch the positive energy returned to you.

Have fun with it.  You’ve got this.

You’re on the right path to master likeability!

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.  – John Maynard Keynes

It’s time we expose a few of the greatest financial mismatches in history. At the top of my mind, due to a myriad of behavioral and cognitive hiccups, are select retail investors (you know who you are), who must come to grips with how they’re handling current stock market volatility.

It’s a moment of truth

Too many investors possess a hook-up mentality with stocks. Holding periods are at historic lows. According to the New York Stock Exchange’s extensive database, the average holding period for stocks in 1960 was 8 years, 4 months.

As of December 2016, it was 8.3 months.

Last year’s unprecedented stock market performance for the S&P 500 was the worst event for investor psyche.

I’ll explain.

No doubt, it was a magical year. The market closed higher every month (first time in history). The Sharpe Ratio, or returns on the S&P relative to the risk-free (Treasury Bills) and volatility was 3.7. Since volatility was non-existent last year, risk-adjusted returns for the market were among the best I ever lived through; at least the highest in over 50 years.

Think of it like dating the most popular girl (or guy), in high school. In the beginning, you wonder how the heck it happened. Such luck! Eventually, you believe you’re entitled to dating prom kings and queens in perpetuity. The problem is ego. You convince yourself the perfect prom date is the norm and begin to compare every date after to “the one.” What a great way to set yourself up for failure, missed opportunities and myopia that slaughters portfolio returns (and possibly, relationships!)

In 2017, equity investors witnessed a storybook investment scenario. This year so far? Reality bites. It’s not that your adviser doesn’t know what he or she is doing; it’s not the market doing anything out of the ordinary, either. The nature of the market is volatility, jagged edges and fractals. The sojourn, the Sunday drive in perfect weather with the top down on a newly-paved road in 2017, was an outlier. The environment you’re investing through today is the norm; therefore, the problem must be the driver, the investor who doesn’t realize the road conditions are back to resembling 5pm rush-hour in a downpour.

Do you experience frustration with a purchase your adviser implements or recommends if the price doesn’t quickly move in your favor? Do you question every move (or lack thereof), a financial partner makes?

How often do you say to yourself – “She didn’t take enough profit. Why did he buy that dog? Why isn’t he or she doing anything? (Sometimes doing nothing is the best strategy, btw).

Do you constantly compare portfolio performance every quarter with a stock market index that has nothing to do with returns required to meet a personalized benchmark or long-term goal like retirement?

Ostensibly, the ugly truth is there may be a mismatch between your brain and your brain on investments. Listen, stocks aren’t for everyone. Bonds can be your worst enemy. Even the highest quality bond fluctuates and can be sold at a loss before maturity. This is the year as an investor you’re going to need to accept that volatility is the entrance fee to play this investment game.

According to Crestmont Research, volatility for the S&P 500 tends to average near 15%. However, volatile is well, volatile. Most periods generally fall within a band of 10% to 20% volatility with pockets of unusually high and low periods.

The space between gray lines represents four-year periods. Observe how volatility collapsed in 2017, lower than it’s been in this decades-long series.

Per Crestmont:

“High or rising volatility often corresponds to declining markets; low or falling volatility is associated with good markets. Periods of low volatility are reflections of a good market, not a predictor of good markets in the future.”

So, as an investor, what are the greatest financial mismatches you’ll face today?

Recency Bias

Recency bias or “the imprint,” as I call it, is a cognitive affliction that convinces me the trade I made last Thursday should work like it did when I placed a trade on a Thursday in 2017 when the highway was glazed smooth for max-market performance velocity. This cognitive hiccup deep in my brain makes me predisposed to recall and be seduced by incidents I’ve observed in the recent past.

The imprint of recent events falsely forms the foundation of everything that will occur in the present and future (at least in my head). Recency bias is a mental master and we are slaves to it. It’s human. It’s the habit we can’t break (hey, it works for me). In my opinion, recency bias is what separates traders from long-term owners of risk assets.

When you allow volatility to deviate you from rules or a process of investing, think about Silly Putty. Remember Silly Putty? Your brain on recency bias operates much like this clammy mysterious goo.

Consider the market conditions. The brain attaches to recent news, preconceived notions or the financial pundit commentary comic-of-the-day and believes these conditions will not change. To sidestep this bias, at Clarity and RIA we adhere to rules, a process to add or subtract portfolio positions.

Unfortunately, rules do not prevent market losses. Rules are there to manage risk in long-term portfolio allocations.

Losses are to be minimized but if you’re in the stock market you’re gonna experience losses. They are inevitable. It’s what you do (or don’t do), in the face of those losses that define you. And if you’re making those decisions based on imprinting or Silly Putty thinking, you are not cognitively equipped to own stocks.

Hindsight Bias

When you question your adviser’s every trade or the big ones you personally missed, you’re suffering from hindsight bias. Hindsight bias is deception. You falsely believe the actual outcome had to be the only outcome when in fact an infinite number of outcomes had as equal a chance. It’s the ego run amok. An overestimation of an ability to predict the future.

The market in the short-term is full of surprises. A financial partner doesn’t possess a crystal ball. For example, to keep my own hindsight bias under control, I never take credit for an investment that works gainfully for a client. The market must be respected. Investors, pros or not, must remain humble and in infinite awe of Mr. Market. A winning trade in the short term is luck or good timing. Nothing more.

With that being said, stock investing is difficult. Unlike the pervasive, cancerous dogma communicated by money managers like Ken Fisher who boldly states that in the long-run, stocks are safer than cash, stocks are not less risky the longer you hold them. Unfortunately, academic research that contradicts the Wall Street machine rarely filters down to retail investors. One such analysis is entitled “On The Risk Of Stocks In The Long Run,” by prolific author Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University.

I had a once-in-a-lifetime opportunity to break bread with Dr. Bodie recently in Nashville and spend quality time picking his brain. I’m grateful for his thoughts. He expressed lightheartedly how his retail books don’t get much attention although the textbook Financial Economics co-written with Robert C. Merton and David L. Cleeton is the one of choice in many university programs.

In a joking manner, he calls Wharton School professor and author of the seminal tome “Stocks for the Long Run,” Jeremy Siegel his “nemesis.” He mentions his goal is to help “everyday” people invest, understand personal finance and be wary of the financial industry’s entrenched stories about long-term stock performance. He’s a man after my own heart. He’ll be interviewed on the Real Investment Hour in early June.

In the study, he busts the conventional wisdom that riskiness of stocks diminishes with the length of one’s time horizon. The basis of Wall Street’s counter-argument is the observation that the longer the time horizon, the smaller the probability of a shortfall. Therefore, stocks are less risky the longer they’re held. In Ken Fisher’s opinion, stocks are less risky than the risk-free rate of interest (or cash) in the long run. Well, then it should be plausible for the cost of insuring against earning less than the risk-free rate of interest to decline as the length of the investment horizon increases.

Dr. Bodie contends the probability of a shortfall is a flawed measure of risk because it completely ignores how large the potential shortfall might be. Sound familiar? It should. We write of this dilemma frequently here on the blog. Using the probability of a shortfall as the measure of risk, no distinction is made between a loss of 20% or a loss of 99%.

If it were true that stocks are less risky in the long run, it should portend to a lower cost to insure against that risk the longer the holding period. The opposite is true. Dr. Bodie uses modern option pricing methodology i.e., put options to validate the truth.

Using a simplified form of the Black-Scholes formula, he outlines how the cost of insurance rises with time. For a one-year horizon, the cost is 8% of the investment. For a 10-year horizon it is 25%, for a 50-year time frame, the cost is 52%.

As the length of horizon increases without limit, the cost of insuring against loss approaches 100% of the investment. The longer you hold stocks the greater a chance of encountering tail risk. That’s the bottom line (or your bottom is eventually on the line).

Short-term, emotions can destroy portfolios; long term, it’s the ever-present possibility of tail risks or “Black Swans.” I know. Tail risks like market bubbles and financial crises don’t come along often. However, only one is required to blow financial plans out of the water.

An investor (if he or she decides to take on the responsibility), must follow rules to manage risk of long-term positions that include taking profits or an outright reduction to stock allocations. It’s never an “all-or-none” premise. Those who wholesale enter and exit markets based on “gut” feelings or are convinced the stocks have reached a top or bottom and act upon those convictions are best to avoid the stock market altogether.

Are you prepared?

Most important: Are you aware? Aware of the common mishaps and misperceptions that may curtail a happy & healthy retirement?

The Real Investment Advice and Clarity Financial pre-retirement preparation checklist can help identify potential mistakes and navigate a smooth transition to a revitalized and fulfilling retirement.

Body:

Do you maintain an exercise regimen that includes activities such as yoga, Pilates, weight training, walking and other types of aerobic activities for at least 30 minutes a day?  Y / N

Leisure-time physical activity is associated with longer life expectancy, even at relatively low levels of activity and regardless of body weight, according to a study by a team of researchers led by the National Cancer Institute (NCI), part of the National Institutes of Health.  The study, which found that people who engaged in leisure-time physical activity had life expectancy gains of as much as 4.5 years.

Do long life expectancies run in your family?  Y / N

Your parents may largely dictate how long you’re going to live. And your mom appears to have most of the control over your “aging gene.”

Do you smoke or a regular user of nicotine products?  Y / N

Cigarette smoking causes more than 480,000 deaths each year in the United States. This is nearly one in five deaths.

Do you consume alcohol more than twice a week?  Y / N

Alcohol use is related to a wide variety of negative health outcomes including morbidity, mortality, and disability. Research on alcohol–related morbidity and mortality takes into account the varying effects of overall alcohol consumption and drinking patterns. Alcohol use increases the risk for many chronic health consequences (e.g., diseases) and acute consequences (e.g., traffic crashes), but a certain pattern of regular light–to–moderate drinking may have beneficial effects on coronary heart disease.

Have you taken advantage of a life-expectancy calculator to better plan for the length of portfolio withdrawals needed in retirement?  Y / N

The Living to 100 Life Expectancy Calculator uses the most current and carefully researched medical and scientific data in order to estimate how old you will live to be. Most people score in their late eighties… how about you? Check it out at www.livingto100.com.

Medical costs affect retirees differently. Unfortunately, it’s tough as we age to avoid healthcare costs and the onerous inflation attached to them. Thankfully, proper Medicare planning is a measurable financial plan expense as a majority of a retiree’s healthcare costs will be covered by Medicare along with Medigap or supplemental coverage.

At Clarity, we use an annual inflation factor of 4.5% for additional medical expenses (depending on current health of the client), and the cost of long-term care.

Good health is a significant contributor to financial and physical wellness in retirement. 

In a report from Healthview Services, a provider of cost-projections software, healthcare costs in retirement are rising twice as fast as the typical annual increase in Social Security benefits.

Latest estimates outline total out-of-pocket spending for an average 65-year old couple retiring today could exceed $400,000 when Medicare premiums, supplemental insurance and deductibles are included. Keep in mind that cost-of-living adjustments for Social Security are overwhelmed by the rising costs of Medicare Part B premiums.

Healthview Services projects a 5.5% annual increase in healthcare costs over the next decade.

Per Medicare Trustees as reported by Savvy Medicare, a training program for financial planners, Part B and Part D insurance costs have averaged an annual increase of 5.6% and 7.7% respectively, over the last 5 years and are expected to grow by 6.9% and 10.6% over the next five years.

Preventative actions such as regular workout regimens, eating properly and healthy sleep habits can work to reduce the financial stress of the most significant costs retirees face.

Spirit:

Are you prepared for the emotional transition to retirement?  Y / N

There exists a level of anxiety for new retirees even though we as professionals feel a sense of accomplishment. Years ago, I deemed this discomfort as “crossover risk.” Clients who told me they were going to “retire,” were back at work a year later and the opposite occurred too.

Eventually, crossover risk lessens. However, the first year of retirement, the bridge, has become increasingly stressful. Enough to where I now call the first year: “The Black Hole”

Have you given thought to your social networks or activities you’ll partake in during retirement?  Y / N

The closer retirement gets, the nearer the exit sign, the stronger your commitment to go through a return-on-life exercise should become. A successful evolution occurs when new retirees redefine success on their own terms.

Transition steps that I’ve seen initiated successfully: Working part-time to ease into a retirement mindset, giving of time to a favorite charity, family vacations especially with grandkids, a new pet, a house renovation project, courses on photography and cooking, and rigorous physical endeavors like yoga and aerobics.

Money:

Have you undertaken comprehensive financial planning to determine whether you’re on track?  Y / N

A plan that assesses income, medical and housing needs along with wishes and wants can crystallize actions that need to be taken to succeed, validate current habits and expose financial vulnerabilities. A holistic plan encompasses all assets, liabilities, insurance, savings, investments and employs realistic rates of returns for risk assets like stocks and bonds.

Financial planning is far from perfect. After all, working with projected returns on risk assets like stocks, estimating how long a person may live and where inflation may be at the time of retirement, is an intelligent guessing game at best.

Consider the plan a snapshot of your progress toward financial life benchmarks. Where you are, outlined direction of where you need to go. Are you on track to meet your needs, wants and wishes? A plan is a diagnostic; the exercise is one of financial awareness.

Studies show that people who follow a retirement plan are more successful than those who don’t. But know the common pitfalls you’ll face, depending on the professional who creates the plan and where his or her loyalties lie.

Unfortunately, most planning systems as well as planners tend to provide overly-optimistic outcomes with asset return projections and life expectancies that may be far from what you’ll experience living in real world.

Why?

Most financial plans are created to push product. They’re a means to a lucrative end for brokers. An afterthought.

When in fact, a comprehensive financial plan should stand alone as a roadmap to financial success, and that includes recognition of how stock markets flow through cycles – bull, bear, flat and realistic assessments of inflation and life expectancies.

Consider a second opinion of a completed plan if your first was generated by an employee of a big box financial retailer. Always seek a Certified Financial Planner who acts as fiduciary.

Have you considered a formal retirement income strategy?  Y/N

To re-create a paycheck in retirement, you’ll seek to prepare for a steady, middle lane approach to an income stream. In other words, a withdrawal rate that meets requirements to meet fixed expenses and reasonable discretionary spending, then tested through a simulation of real market returns over decades.

Unfortunately, when traveling retirement road there will always be unforeseen curves throughout the journey.

We believe at Real Investment Advice and Clarity Financial, that distribution portfolios may be in for an extended period of a sequence of low or flat returns for stocks and bonds. This will require a right lane shift to less income or a lower portfolio distribution rate for a sustained period. At the minimum, distribution portfolios will require ambitious monitoring.

Wade D. Pfau, Ph.D., CFA and professor of Retirement Income at The American College in a study titled Capital Market Expectations and Monte Carlo Simulations for the Journal of Financial Planning, outlines how sequence-of-returns risk can send your financial car into a ditch. He writes–

“…with less time and flexibility to make adjustments to their financial plans, portfolio losses can have a bigger impact on remaining lifetime standards of living once retirees have left the workforce.”

It’s recommended to assess withdrawal rates and spending habits over rolling three-year periods. This ongoing exercise helps to identify cyclical trends and whether adjustments need to be made.

Have you incorporated Social Security and Medicare planning into your analysis?  Y / N

Social Security is an inflation-adjusted income you cannot outlive. Make sure pre-conceived notions aren’t part of your strategy. Read: The One Social Security Myth.

The correct Medicare strategies can save thousands of dollars in lifetime penalties. Read: 4 Ways To Plan For The Retirement Apocalypse.

These topics are uncomfortable for many financial professionals. The wrong decisions may cost you thousands of dollars in retirement. At Clarity, we are trained and well-versed in Social Security and Medicare planning strategies.

This checklist isn’t intended as a pass/fail. It should be perceived as a wake-up call.

Retirement just doesn’t happen. There’s work to be done. Small improvements like cutting expenses and working two years longer than originally planned can add exponential positive impact.

The latest confusion front-and-center in financial industry news is how the SEC is seeking to define how the brokerage business should consider clients’ interests first.

The latest attempt to create an “advice rule” by the SEC (Release No. 34-83062; File No. S7-07-18), is a 900+ page alt-fiduciary universe. This best interest of clients/brokerage combo doesn’t mix easy. It clashes. The ethos of brokerage is to sell products. A fiduciary standard and the brokerage industry get along like the silver balls and bumpers in a pinball machine.

What the SEC’s “Advice Rule,” or a “Regulation Best Interest,” (you can’t make this stuff up,) may do is confuse consumers more than ever. For the life of me, I can’t split the hare’s hair to decipher the difference between a Registered Investment Adviser’s fiduciary role vs. a broker-dealer’s “Best Interest” standard. I don’t see any changes to the dog; the SEC just added another flea to it.

At the end of all this is a proposed 4-page handout for customers or a “Disclosure Form CRS,” that every brokerage financial representative or Registered Investment Adviser would be obligated to provide clients and prospects. There are 8 sections to the disclosure that appear to read like an investor “how-to” or educational guide to brokerage and/or investment advisory services, fees and costs, conflicts of interest and account types. Surprisingly, the disclosure documentation appears to be decent financial education material if only clients and prospects will study it. Hey, some people require a product solution to fill a need and thus a transactional relationship works and still must exist. Others require ongoing, holistic financial advice that a fiduciary can provide. The disclosure helps consumers better understand the differences.

I have no clue what the final SEC rule is going to be. In my albeit naïve opinion, until the industry guard dogs discourage endless sales quotas and helps retrain front-line representatives to focus on customer best interests over the fear of failure (and possible job loss), to meet senior management initiatives, I don’t expect much change to current operating procedures.

I’ve observed and been told by investors (including family members), that several brokerage organizations are ‘politely nudging’ or downright threatening (“you won’t be able to work with me if to don’t do this,”) clients to transfer their assets to accounts under a ‘Fiduciary Standard’ which generate fees for the firm and appear to include an immoderate allocation to proprietary products.

So, clients who weren’t paying ongoing fees previously are now doing so. They’re also getting sold out of investments they’ve held for years to be positioned into an asset allocation in a box. Financial big-box retailer compliance departments are going to make sure a Fiduciary or Best Interests Rule is primarily followed to protect the firms they serve. Financial retailers are going to make it their business to morph  any rule into an incredibly profitable venture for their organizations.

I’m glad there’s attention. In some cases, there’s a firestorm around doing what’s highest and best for clients. Even the CFP Board is jumping on the bandwagon. Under a new rule and revised ethics standards that become effective on October 1, 2019, a Certified Financial Planner® mark holder who is employed by a brokerage firm must disclose and manage conflicts of interest and act in a client’s best interest. Listen, this is a big deal.

Many CFPs employed by brokerage firms use the marks to gain credibility with prospects and grease the wheels of the selling process. I mean, if a CFP recommends a product it must be in a client’s best interest, correct? Not necessarily.

Today, CFP Standards include what I perceive as an ‘out-clause’ which outlines expected loyalty to an employer. Ostensibly, the CFP marks aren’t attached to any kind of fiduciary responsibility to the client first unless the scope of the engagement is financial planning.

The revised CFP Board standard doesn’t appear to be going over well with the broker-dealer industry; I find their discourse encouraging. Don’t be surprised to see less Certified Financial Planners employed by brokerage firms over the next few years. Nor will obtaining the marks be paid for or encouraged by these organizations. Frankly, it’s a proper and very bold move by the CFP Board and it makes me proud to maintain the certification.

Bottom line: Should it be so difficult to do what’s in the best interest of the client and still make a respectable living? Common sense portends that doing right by the client should lead to more clients and increased profits. 

Currently, there are multiple bureaucratic hands taking shots at crystalizing or postponing fiduciary or “fiduciary-like” standard initiatives. On a positive note, at least the discussions continue.

Investors must be vocal about what they expect from their financial professionals. They must gain confidence to know what they want, what they expect to foster trust, write it out and share those expectations.

Here are several ways, as an investor, you may forge a path and form a PFS, a “Personal Fiduciary Standard.”

The journey starts with asking yourself tough, self-reflective questions that delve into personal motivations, fears which place you in the shoes of an adviser who you hope would connect with you on a higher, perhaps emotional level. Keep in mind, your needs and concerns are fiduciary in nature. Unless, you don’t want the highest and best for you and your family. Highly unlikely.

For example, I’ve always followed my own ethical compass when it came to directions I’ve taken for clients and their money. I envisioned “what would clients ask for from me?” and then wrote down my thoughts.

I listen to my gut. After more than two decades in the business, I trust my gut to alert me to ethical boundaries crossed.  I made a promise to myself that even if the ethical breach emanated from an employer, I’d still do what I needed to do for clients. Clearly, I was willing to breach the loyalty to a firm over loyalty to a client. I just believed it would never happen. That I’d never need to worry about it. Until I did. I then followed through on my personal promise. You know what I learned? If a broker seeks to take on a fiduciary mentality, his or her career will be in great danger.

Here are several questions I ask(ed) myself. I created them after my first experience at a brokerage firm. My first job in finance as a broker. I was sponsored for my industry licenses by an organization named J.T. Moran, after its founder. The company was the inspiration for the 2000 theatrical movie “Boiler Room,” which starred Vin Diesel in his first major film role.  Little did I know what I was walking into. An unscrupulous penny-stock peddler. A den of thieves. The questions I created for myself back then still work. They’re as effective now as they ever were. They motivated me to flee from that environment in the late 80s. Literally. I walked in early one work day, threw the stuff off my desk into a waste basket and fled out the back of the Garden City, Long Island facility.

1. Would I personally own or purchase for people I love the same investment or product I suggest to clients?
2. Would I sell an investment an employer suggested I hold for clients?
3. Could I represent an employer that expected or allowed every client to own the flavor of the month?
4. Will I earn more compensation if I offer a specific product or investment over another? How will it affect my judgment?

As an investor and consumer, you require insightful questions which define your expectations from a fiduciary or a professional who has your highest and best interest in mind. Just a few examples to kick-start your process. Consider the series of queries the spirit of the knowledge you wish to gain.

After all, how in heck do you expect regulatory bodies to define “highest and best” if you can’t? The industry can’t seem to pin it all down. So, you must as a client or prospective consumer of financial products. I’m sorry, but this falls responsibility falls on all of us who partner with financial professionals to meet our goals.

1. Is my financial professional paid more for product A over product B. Why?
2. Does my financial partner own what is recommended?
3. Will he or she liquidate or move me away from an investment that no longer serves our needs due to a material change to that investment or our situation, even if it means giving up income?

Investors must perceive themselves as ultimately responsible for the growth and safeguarding of their wealth. Empowerment comes from asking financial partners tough questions and trusting your gut to walk if you don’t like the answers received.

I’ve outlined crucial questions to ask.

“Suitability” guides a broker to recommend an investment that is appropriates for your situation, is not held to the same standard. A broker is required to know your risk tolerance, tax bracket, and time frame for the money you seek to invest. All skeletal in nature. Yet legitimate. Well, it’s suitable. This may be fine for what you require. If there’s a financial product you’re looking to purchase, then suitability is well, suitable for your needs. If there’s something more required like a holistic, ongoing relationship. Think fiduciary over suitability.

Are you a fiduciary? Yes or no?

The Fiduciary Standard is a high calling. It’s there to position the client front and center in the financial advice model, as it should be for every professional who assists consumers with their financial decisions.

How much will I/we pay for your services?

Simple question deserves a simple answer. Unfortunately, not so simple. People share with me their frustration as they’re unclear how their current financial professionals get paid or are compensated for selling investment products.

It’s especially perplexing for mutual fund investors sold multiple share classes and perpetually unclear of how charges are incurred. A clear comprehension of the class share alphabet (A, B, C), is as thick and jumbled as the inside of Campbell’s Soup can. B &C share classes are popular selections on the product-push list. They represent the finest alchemy in financial marketing.

 As consumers are generally hesitant to pay up-front sales loads like in the case of A shares (even though when taking into account all internal fees and expenses, they’re the most cost-effective choice for long-term investors,) B & C shares were created to mollify the behavioral waters.

To avoid having a difficult conversation or facing reluctance about opening your wallet and shelling out 1-4% in front-end charges that reduce the principal amount invested, the path of least resistance is to offer share classes with internal fees, marketing charges and deferred sales charges. Either way you pay.

With B & C shares generally, you pay more. However, big fees reduce returns, they’re stealth. Thus, they feel less painful to invest in (even though they’re not). A financial professional may be compensated hourly, by annual flat fee, a percentage based on assets under management, commissions or perhaps a combination.

Regardless, to make an informed decision, you must understand how your adviser puts food on the table. If you can, get it in writing. There’s no ‘right way’ to be compensated as long as it’s fair and reasonable for services rendered. You also want to understand what motivates your broker or adviser to recommend investment vehicles.

How do you incorporate my spouse, life partner and children when it comes to planning?

You don’t exist in a vacuum. An adviser should maintain a holistic approach to financial planning and that includes communicating with loved ones and teaching children how to be strong stewards of money. The meetings, communication must be ongoing. At least semi-annually.

Why did you select financial services as a career?

This question should be used to gauge a perspective financial partner’s penchant for helping others and passion for his or her role as a mission, not a job. How do you know whether a professional sincerely cares about your financial situation and goals? You’ll know it, intuitively.

What are your outside interests?

A successful life is about balance. This question gets to the weekend and evening person behind the financial professional you observe from behind a desk, charts, book, and computers. You may discover activities you have in common and develop rapport on a personal level, possibly for decades. To gain a complete picture of the kind of person you’re entrusting with your investments is a crucial element of your interviewing process. By the way, it’s not prying. It’s curiosity. Ostensibly, you should like the individual you and your family may be working with, possibly for decades.

Please tell me about your firm’s service standards.

You want to know how many times a year you’ll be meeting with your financial partner whether in person (preferably), over the phone or web meeting like Go-To-Meeting®. Is it quarterly? Every six months? How would you like to communicate as a client? What are your preferences? Will I be receiving calls and e-mails throughout the year about topics important to your financial situation like the market, economic conditions, financial planning, and fiscal changes that may affect us/me?

What is your personal investment philosophy?

You seek to discover whether an individual is towing the employer’s line or does outside research and shares his or her personal opinion based on independent research and study. In other words, does your prospective partner have a passion for ongoing education and learning?

How do you manage for portfolio and investment risks?

Markets can’t be timed. That’s true. However, risk management is about controlling downside risk which can be devastating compared to possible gains. Your broker or adviser should have a strategy you believe in to guard against market storms. Whether it’s a conservative asset allocation right from the beginning, or a specific sell and re-entry discipline to minimize portfolio damage, a risk-management strategy is crucial. Academics and influential financial service providers are on the band wagon when it comes to sell disciplines. Whether it’s Dalbar, the nation’s leading financial services market research firm, or MIT Professor of Finance Andrew Lo, there’s a growing body of work that shows how investors spend most of their investment life (20-30 years), making up for losses, playing catch up. Losses are inevitable. Significant losses must be avoided.

How often do you review my accounts and investments?

With this question you’re attempting to gain understanding of a financial partner’s workload and number of families served. There’s no ‘right’ answer. It’s based on how comfortable you feel with the response. Monthly, quarterly schedules are generally acceptable. Weekly, even better. Now, that doesn’t mean changes will be made. The query is about engagement with and monitoring of investment selections.

How do I/we have access to you and your team?

A caring pro will make sure you possess the ability to text, access to a cell phone number, phone contacts and e-mails of support staff and make you feel comfortable to reach out at any time. You should also expect a prompt response to voice mails – usually within 24 hours or less.

I have no idea when or how all this fiduciary regulatory scramble settles out. I do know however, that the definition of fiduciary begins with you: The client, the customer, the investor.

Questions will help you to define what you want and subsequently find a financial professional you’re comfortable with.

Questions are an integral part of any relationship.

You’re not being nosy.

You’re seeking information to make an informed decision regarding a topic close to your heart: Financial well-being.

No questions asked.

For a PDF copy of these questions along with adequate space to document responses, please click here and download for free, the “The BS (Broker Survival) Guide” or any of the several other guides located there to help you as well. 

Admittedly, she was a seductress.

Who could blame him for falling in love?

I still remember how she glistened in the summer sun.

Hot to the touch.

I was as enamored as he was.

I was young, yet I remember like it was yesterday: “Her” name was “Tammy.”

Heck, I named everything “Tammy.” I had a mad crush on my babysitter.

However, this “Tammy” was a 1969 Mercury Cougar convertible – a black-glazed exterior elegance with cool white leather underneath a rag top.

Great lines and tough to ignore.

Years later, I learned the source of the money to purchase the sporty model was set aside by my mother’s hard-working father who came from Italy and lived in two rooms above a Mulberry Street, New York grocer – also his employer.

I can’t imagine how long it took papa to save $4,000. I’m sure his entire life –a respectable nest egg on his measly wages. I still admire his strong saving discipline.

Before he died, Giuseppe Zappello instructed his daughter:

“This money I leave behind is to be used for Richard’s college education only.”

He wrote his last instructions on crumpled note paper and gave it to mom shortly before his death from pancreatic cancer.

For Grandpa Joe, it was important that I further my education; it was his only request. I know he wasn’t enamored with my father and felt it important to outline how he wanted the money utilized.

Shortly after his death she decided to hand over the money for the purchase of an automobile, taking an action grandpa would have hated.

I’m being kind here. I believe mom probably caused Papa Joe to roll over in his grave.

For years, it bothered me she made this decision; it was troublesome that dad was short-sighted, too. I can’t imagine blowing my daughter’s education fund on a car.

Bad money decisions tied to financial infidelity are not new. Family members can be affected by them for generations; money mindsets forever forged by them.

The National Endowment for Financial Education® (NEFE®) has been tracking financial infidelity for over a decade and the problem continues to be formidable.

The latest findings from a biennial survey conducted by Harris Poll on behalf of NEFE finds two in five (41 percent) of American adults who combine finances with a partner or spouse, admit to committing financial deceptions against their loved one. The survey also finds that three quarters (75 percent) of adults say financial deceit has affected their relationships in some way – Source: www.nefe.org.

From their latest survey:

Among the reasons survey respondents say they committed financial deceptions in their current or past relationships, over one third (36 percent) say they believe some aspects of their finances should remain private, even from their spouse/partner; a quarter (26 percent) said they had discussed finances with their spouse/partner and they knew they would disapprove; almost one in five (18 percent) were embarrassed/fearful about their finances and didn’t want their spouse/partner to find out; and 16 percent said that while they hadn’t discussed finances with their spouse/partner they feared they would disapprove.

I too have been negligent in the past about following fidelity rules when it comes to sharing my financial decisions with others. To be clear: I will share information however, I’m going to move forward on my decisions as long as no one is hurt financially, and it’s for the good of people I love.

I admit – my money “imprint” is based on mom’s willingness to turn over my college fund to dad just so he can purchase a depreciating asset. Even financial advisers have faulty money scripts. What’s a money script? It’s your financial bloodline, a heated mixture of observation, experience, perception, memory, subconsciously put to action. Occasionally, with negative financial consequences.

I ask:

Why is the definition of financial infidelity so narrow? Why can’t it occur between a parent and a child, friends, an individual’s actions vs. original intentions? Mom failed to follow through on grandpa’s last request. She gave away blood money for a want, not a need which makes it more painful for me to understand. She wasn’t strong enough to say “no” to my father.

Although, I believe a measured dose of financial infidelity can be healthy.

For example, what if mom never told dad about the money earmarked for me? I figured the $4,000 she gave willingly could have been conservatively worth $8,000 by the time I needed it for college. Not a fortune, but it would have helped.

What can you do to avoid money temptation and financial infidelity?

Broaden, outline and then communicate your definition of financial infidelity.

Before marriage, make sure you communicate (write out and share) with your future partner specific actions you would classify as money cheating. I met with a couple recently where the man thought it was money infidelity for his fiancé to pay more than $20 for lunch without communicating with him first. In this case, the couple decided not to wed.

Consider broadening your definition to include those you care about including children. For example, I have clearly explained to my daughter how her college funds are for her, nobody else. Her mom is in agreement with this, too. If your definitions conflict or financial rules established are too restrictive at least it’s all out in the open for discussion.

Keep separate.

It’s important that separate property remain separate property. Assets held in trust should remain separate per the instructions of the grantor. Document each asset you plan to maintain apart from a future spouse. Communicate your intentions but don’t cross boundaries. These assets are yours. Don’t be talked into sharing.

Money earned before marriage should be maintained separately. If single, direct all your earnings into an individual account since wages, salaries and self-employment income will be considered community property in Texas (and other states) once you’re married. At that point, you should halt transfers of money into the account and maintain it as separate property going forward.

Inheritances need to be separate. It’s in your control to share. Or not. Your choice. Consider carefully whether or not sharing an asset with a spouse or future partner was truly the intention of the provider. In other words, think twice. Then think again. If you do decide to share, document the specific assets in question and sign along with the other receiving party.

Segment the cash you require to make daily purchases like lunches, nights out with friends, and clothes. I know a married couple who have agreed-upon “allowances” they direct automatically to separate accounts monthly from their joint account to cover personal expenses.

If additional money is required, they communicate and then jointly approve or disapprove the requests. I found this method effective for record keeping and accountability. It’s also useful to early detect wayward spending patterns.

 Keep together. 

Property purchased during the marriage may be held in joint ownership. A bank, investment account, real estate held jointly is common and advisable if you intend to leave the asset to a spouse upon death. Depending on the size of your joint estate ($5.6 million or more), it’s advisable to seek an estate planning attorney to create trusts that will preserve estate-tax exemptions and outline your intentions for beneficiary distributions years after your death.

 Keep away.

If you establish a custodial account for your child keep in mind that the money placed into it is considered an irrevocable gift. In other words, at age 21, the custodian (you) must turn over the asset to the former minor regardless of how uncertain you are of your child’s maturity level at the time of the transfer.

Custodial accounts are easy to establish which is a reason why they’re appealing. However, once money is deposited, it’s no longer yours. There have been cases where former minors have sued parents when custodial assets haven’t been turned over in a timely basis or were not notified of the accounts.

The lesson here is that assets earmarked for children and other loved ones should be considered solely for their current or future benefit.

Keep your discipline. Strong mental boundaries should be maintained.

Make sure your intentions to keep away are clear to others.

And perhaps you’ll avoid being seduced by Cougars or other large purchases that drive across your path.

An article, a reflection of his childhood, The Financial Times’ Berlin Correspondent Tobias Buck recently wrote of Germany’s immutable obsession with saving money. His behind-the-scenes account of piggy banks and children’s decorated money boxes (some, 400 years old), stored in a back shelf of the German Historical Museum stirred the memory dust for some guy in Texas. Me!

The recollection of a husky awkward second-grader at Morris H. Weiss School P.S. 215 in Gravesend, Brooklyn who couldn’t wait until (every) Thursday when a representative from Brooklyn Savings Bank came to collect coin and dollars for FDIC-insured coffers. His name I can’t recall; I do remember feeling the excitement of having my blue-pleather passbook savings book marked by another financial milestone. Stamped with the date and a new (higher) balance. It made me happy.

As a society, we made kids excited about saving money, once. Sure, we spent. When I was a kid I drove my mother crazy because I was only interested in popular name brands of food. I was a sucker for television advertising. For example, I would only eat the bacon with the Indian head profile complete with full headdress, on the front of the package – can’t recall the name now. Of course, it was the most expensive and as a single parent household, mom was on a tight budget.

I still remember catching her placing a less popular bacon in an old package of the brand I liked.  Come to think of it, I think she did this often. I recall on occasion my Lucky Charms not having as many marshmallows. As I age I realize I’m fine with tricking children. Buy the Frosted Flakes, keep the box and replace with the generic brand to save money. Today, less expensive brands are tough to tell apart from the premium ones, anyway. Try it.

But I digress…

Throughout the financial crisis, nations threw fiscal stones at Germany for guarding their budget surpluses like Indiana Jones cradling the Holy Grail. The world demanded Germany spend, spend, spend – get all Keynesian, purchase imports from beleaguered brethren, get their citizens to purchase junk they don’t need. C’mon Germany, we’ll be your best friend if you give Greece a free pass.

Before the Great Recession the sovereign was a magnificent fiscal vacuum. Still is. A juggernaut of an export-oriented economy sucking in the bucks from European nations. Even today, Germany can’t catch a break for their ingrained (it’s in the blood), austerity. Donald Trump, the European Commission, IMF Chief Christine Lagarde beat up on Merkel for her nation’s trade surplus. Recently, Lagarde urged Berlin to increase domestic spending and boost imports, lamenting over the burgeoning account surpluses she claims are partly responsible for the rise of protectionism. Yep. Believe that? Most of the world abhors savers and adores spenders.

On the government and household level, Germany maintains a pristine track record of achieving and maintaining budget surpluses. It’s an obsession to be a saver on the Rhine. No debt on the Danube. Saving money, avoiding debt doesn’t merely affect German pockets, it touches their souls. It exists at the center of who they are. Germans are proud savers.

Per Tobias Buck’s article, the German Historical Museum is hosting a new exhibition called Saving – History of a German Virtue. I mean, how serious can you get? Saving =Virtue. Stock markets are frowned upon, perceived as gambling (they are – sorry, but they are). German savings banks are legally mandated to promote savings especially among children in conjunction with support of local school authorities. Banks provide play money and expose kids early to personal finance basics.

It motivates me to ask: What happened to us in America? When did consumption, especially of things we don’t need, gain sustained importance over saving for tomorrow? Instant gratification is a deep, dangerous affliction. Call it a disease.

In Germany, they’re all about delayed gratification; we’re all about the right now. Is there a middle ground we can agree upon? Where are the passbook savings accounts and the weekly elementary school visits to collect deposits? I remember how the girls back then safety-pinned their filled brown bank-deposit envelopes to their outer garments and dresses. Imagine? I’m dating myself. I get it. Hey, we perceive through personal prisms; who we are, is through experience. What kind of experience about saving are we providing for our children when it comes to saving?

As wage growth deteriorated, seemingly our ability to adjust to the adverse structural condition did, too. After all, those ethereal wage increases were “right around the corner,” until we ran out of corners but decided we were still entitled to maintain a standard of living through credit. Tough decisions needed to be made, especially by Baby Boomers in the early 80s. If they were made, they weren’t passed down effectively.

My belief is Germans from the top down, from government desk to kitchen table, would have acted with alacrity and made uncomfortable decisions to adjust the slightest of imbalance. Perhaps downsizing, or a fiscal priority on increasing the skills of the labor force. Anything but cutting the saving rate. German households save 10% of their disposable income, twice as much the average across the globe, writes Mr. Buck. Amazingly, their saving rate has been stable and unaffected by economic crises and changes in interest rates.

In contrast, in the U.S.

On a somewhat positive note, the U.S. personal saving rate has ticked up to 3.4% as of February. Makes you all warm and fuzzy, doesn’t it?

We are at a crisis level in America. Real (inflation-adjusted) incomes, the personal saving rate and debt are no longer funding basic living standards. It’s time for us to “German up” a bit and take control, make tough decisions within our own households to ‘mind the gap.’

There are pervasive macro-economic charts created by the Fed, posted on their regional websites and plastered all over social media which display how Americans carry less debt than they did a decade ago; how wages are beginning to bust out of a long-term malaise. I’m happy about that. The micro story differs, however as income growth for the bottom 80% of Americans has been left in the dust. The top 20% however, are thriving. Unfortunately, it’s the masses who still need to make massive adjustments to bolster savings.

Per Bankrate’s latest financial security index survey, a majority of Americans can’t raise $1,000 for unexpected expenses (is my German friend Alda, reading? I may need to hit him up for a loan).

From the study:

“A sizable chunk of consumers seemingly haven’t seriously considered what they’d do in case of a crisis. One in 8 would count on reducing spending from other parts of their budget, 6 percent would resort to something else and 4 percent simply don’t know.”

It’s a disparate tale I write – one of virtue overseas, another of domestic heartache.

So, what can we do to become savers?

Begin with the following 5 questions. Write them by hand. Answer them in pen. Go back to them. Be thoughtful and truthful with responses:

1. What is the motivation for spending on wants vs. needs? Needs are rent, lights, food. You get it. It’s about survival.
2. How can you go from Needs Squared to Needs Basic? Needs on credit vs. needs paid from household net income. Tough, life-changing decisions required, perhaps. What would the Germans do?
3. What statement can you create and repeat that will eventually link saving to virtue?
4. Think Gross Personal Product. Most metrics of economic health are based on consumption; personal consumption comprises 70% of America’s Gross Domestic Product. Through the 60s and 70s, the U.S. personal saving rate rarely fell below 10%. Our ensemble culture or the culture overall has become obsessed with owning more, status through the acquisition of goods and services. In your household, it must be different. The movement must be grassroots, the individual one by one, taking action to shore up their personal and family household balance sheets. Think GPP, not GDP. Nobody is going to bail you out when the economy cycles in reverse. As a matter of fact, when our economy falls into the abyss, it’s we the taxpayers who bear the brunt of the costly, ineffective patchwork that fiscally duct-tapes systems back together.
5. How can you get the family involved in the creation of “financial virtue-isms?” For example, what mutually agreed upon boundaries can be initiated around spending? How as a family unit, can saving become a virtuous activity? As a parent, I made a big deal of my daughter’s ability to save, even when it came down to three coins in her piggy bank.

• Saving is ethos for an honorable life.
• Saving isn’t a chore, it’s part of who you are. Deep. In the soul kind of deep.
• A living standard stretched by credit will eventually catch up, set you back.
• Living on household cash flow alone is an honorable goal.
• Wealth on credit is “Instagram Currency” – Social media appearance fodder, ‘living large,’ for image. “Likes” aren’t gonna pay the bills.
• No increase in spending without the wages or bonuses to back it up.
• The errant spending behavior of your parents does not define you.

So, I shared my personal philosophies around saving and spending to get you started.

“Austerity is an integral part of the image that Germans have of themselves – And a characteristic they feel sets them apart from other nations. There’s a deeply ingrained conviction that saving money and avoiding debt is not just a prudent approach to managing your income, but of something deeper.”

– Tobias Buck. The Financial Times.

Americans were savers once.

It’s not too late for our government, corporations and households to embrace similar lessons.

“Think of income annuities as the term insurance of the annuity world.” – Professor of Retirement Income Wade Pfau of The American College in an article for Forbes – August 27, 2015.

As I outlined in Part I, fixed-rate and fixed indexed annuities can be utilized as a sleeve in an asset allocation program to minimize overall portfolio volatility. Fixed annuities are not subject to downside risk, and in the case of FIAs, allow partial participation in the upside of major stock indexes like the S&P 500.

Income riders or addendums may be added to FIAs to convert them to income annuities deferred to some period in the future, usually ten years or longer.

As referenced in Part I, riders add ongoing annual costs to annuities; formal financial planning should be completed before guaranteed income riders are considered to determine whether there’s a household retirement funding shortfall. In other words, if your investment portfolio has a greater than 30% probability of depletion in retirement before you and your spouse run out of time on the planet, annuitizing a portion of retirement assets should be considered along with a plan to maximize Social Security benefits.

A method to accomplish this is to add a rider to convert the fixed annuity into a future stream of income. Another idea is to purchase an income annuity indexed to inflation early in retirement.

Income annuities are solely designed to provide a stream of income now or later that recipients cannot outlive. These annuities are simple to understand and are generally lower cost when compared to their variable and indexed brethren.

Deferred income products where owners and/or annuitants can wait at least 5 years before withdrawals, may participate in market index gains (subject to caps) and have an opportunity to receive higher non-guaranteed annual income withdrawals depending on market performance. Withdrawals can never be less than the guaranteed withdrawal benefit established by the insurance company but may be higher depending on annual market returns. As with all annuities, there is never market downside risk. Details about deferred income annuities will be outlined in Part III. Here, I focus on the purest form of annuity: The SPIA. It’s the “Ivory Soap” of insurance products.

Single Premium Immediate Annuities – “The Pension Replacement.”

SPIAs are splendidly simple – Provide a life insurance company a lump sum and they pay you or you and a spouse for life. That’s it. I consider SPIAs the best replacement for the pension your company no longer provides. You as an employee, must create a pension on your own.

There are several valid reasons to allocate a portion of an investment portfolio to an income annuity. I’ll list them in the order of importance:

1. Above average life expectancies. On average, American males live to 76.1 years, females add 5 years to 81.1. If you or you and a spouse have a family history of longevity and enjoy excellent health along with life-prolonging habits like exercise and healthy diet, a SPIA may be a viable addition to a traditional stock and bond portfolio.
2. Retirement plan survival deficiency. Life has a way of altering good financial intentions. If lucky, you have a solid 20 years to save uninterrupted. Along that path may come unexpected life changes like divorce, major illness, job loss, and let’s not forget the portfolio-busting bear markets or worse. If working longer, saving more, part-time employment in retirement and smart Social Security decisions don’t dramatically improve the probability of financial plan success, then a SPIA can be purchased to make sure along with Social Security, your household never runs out of money.
3. A legacy intent. Studies indicate that purchasing an inflation-indexed SPIA at retirement reduces portfolio depletion and allows for a larger inheritance for those who believe leaving a legacy to children and grandchildren is an important goal.

Although SPIAs are simple in theory, consumers have a difficult time grasping how they provide return or yield. Prospective SPIA owners should swap the word “return” for the concept of payout. Let’s take an example: An investor purchases a high-quality $100,000 bond for five years that pays 2.25% on an annual basis. Easy, right? The bond purchaser earns $2,250 every year for five years, then at the end of the period or upon maturity, $100,000 is returned. Obviously, the return is the interest earned.

Consider now $100,000 in a SPIA. Not so easy. A couple provides $100,000 to an insurance company and expects payments to begin the following month. Here, there’s no return per se, there’s a payout rate which distributes principal and interest. From there, the internal rate of return can be calculated. Not to be morbid, however the best that can happen for the insurance company is income recipients pass early or within age ranges the life insurance actuaries expect. The worst that can occur for the organization is that income recipients live long lives. Way beyond years the mathematics dictate. SPIAs are primarily designed to manage or hedge longevity risk.

Back to my example: A 65-year-old male and his 62-year-old spouse invest $100,000 in a non-qualified (after-tax,) SPIA with an increasing payout option (indexed for inflation at 3% per annum) and will receive every month beginning next month, $291.01. The taxable portion of each payment (interest) will be $80.61, the remainder – return of principal. Thus, the tax exclusion ratio is 72.3%.

The 12-month income figure is $3,492.12 which makes the annuity payout rate 3.49%. The internal rate of return or IRR after 21 years is .012%, after 25 years – 1.722%, 30 years – 3.101%. You get the picture. The longer you live, the greater the “return” on a SPIA. The IRR here is negative for 20 year and shorter timeframes.

The SPIA along with Social Security generates a combined lifetime income stream which should permit a lower withdrawal rate from a stock and bond portfolio especially through sequences of low or poor market returns, thus reducing risk of portfolio depletion. The use of a SPIA affords retirees an opportunity to increase stock allocations, especially if capital isn’t required to be distributed during corrections and bear markets due to the guaranteed income the SPIA provides.

Gary Mettler author of the book “Always Keep Your Hands Up!” exclusively about SPIAs, shared his 35-years “in the SPIA business,” perspective:

“SPIAs exist to keep you from going broke. While going broke may happen towards the end of life at age 85+, it can happen very early on too.  Adverse changes in mental health, business collapse, marriage failure, unreimbursed casualty losses, medical/care costs, litigation expense, etc. you want to make sure you continue to receive an uninterrupted flow of retirement income.  After all, at age 60+, you no longer have time to make up for portfolio losses.”

RIA and Clarity’s Rules or Financial Guardrails for the Purchase of SPIAs:

1. Nothing happens without comprehensive planning as a first step. A financial plan will expose portfolio longevity concerns that may require the use of income annuities. Working longer, part-time employment through retirement, downsizing, boosting savings and maximizing Social Security may be sufficient to improve portfolio survivability. If not, annuitizing a portion of a portfolio will at least ensure lifetime income. If there’s a 30% or greater probability of outliving retirement assets, purchasing a SPIA at retirement should be explored.
2. Think of SPIAs primarily as “longevity insurance.” Per the example above, it can take many years, possibly decades, to jump the hurdle to positive numbers or those which exceed your original investment in a SPIA. Living a very long life, 35 years or longer through retirement, makes SPIAs a smart choice. Put your life expectancy to the test at livingto100.com. The Living to 100 Life Expectancy Calculator uses the most current medical and scientific data to estimate how old you’ll live to be. There are 40 questions that span health and family history. Thomas Perls, MD, M.P.H. created the calculator. He’s the founder and director of the New England Centenarian Study, the largest study of centenarians and their families in the world.
3. Inflation-adjusted SPIAs vs. fixed SPIAs – When to choose. Fixed SPIAs are not adjusted for inflation. Income remains the same throughout the payout period. So, why would I choose a fixed SPIA over one that accounts for inflation? At a 3% inflation rate, the fixed SPIA provides a 45% larger initial retirement date payout than the inflation-adjusted selection for my retiring couple. In other words, with the fixed SPIA, there’s a greater chance of recovering and exceeding their $100,000 investment in a shorter timeframe when compared to the 21 years required for the inflation-adjusted alternative. Your choice would depend on your: 1). Personal expectations of inflation throughout retirement, 2). Life expectancy assessment. The longer your life expectancy, the greater the benefits of an inflation-adjusted option. Professor Wade Pfau provides back-up to this analysis in his blog post “Efficient Frontiers: Inflation Assumptions, Fixed SPIAs, & Inflation-Adjusted SPIAs.”

Are SPIAs the right choice for you?

We hope the guidelines provided will help you understand when and how single-premium immediate annuities may be incorporated into a holistic retirement income strategy.

The stock market’s positive tone quickly evaporated after the expected quarter-point hike in the Fed Funds rate on March 21st.  Markets love certainty; the latest rate increase was the sixth since the FOMC started raising rates in December 2015 and baked into the market cake. As such, a short relief rally ensued. With certainty past, focus shifted to Jay Powell’s first press conference as Fed Chairman.

Powell’s message wasn’t as dovish as markets hoped. A fourth rate hike was too close a consideration for this year. Projections for three rate hikes, more aggressive than expected for 2019, sent the averages negative for the day.

President Trump’s proposed protectionist policies along with a hawkish Fed proved too much, a one-two punch for markets. The S&P 500 after last Friday’s routing sat slightly above long-term support – the 200-day moving average. On Monday, markets closed improved. However, there’s still substantial follow-through required before sounding an all clear. Next test is the 100-day moving average. Can it provide support for the S&P 500?

As we mentioned at RIA last year, 2018 would be a year of volatility. Combined political and monetary-policy risks have created big moves in market volatility so far in 2018. The VIX has  experienced seven sessions of one-day moves of 20% which already rivals the full calendar year of 2014. Don’t rule out the Facebook debacle’s contribution to volatility; the stock is one of the pillars of this late-cycle bull market. The tech sector is 25% of the S&P 500 and a formidable contributor to market momentum and animal spirits.

Similar to Yellen’s optimistic stance back in December 2015 about the U.S. economic growth trajectory (which ostensibly proved false), Powell is convinced the U.S. economy is poised to require and handily absorb a faster pace of interest rate normalization.

The data screams he’s incorrect.

First quarter estimates of real GDP have fallen sharply; in synch with economic reality. The reality where prolific indebtedness burdens governments, corporations, consumers and acts as a formidable headwind to economic momentum.

My impression is that Powell is expecting ‘escape velocity’ or acceleration in growth, productivity and wages, much like Yellen did. Odds are he’s going to be disappointed and need to ratchet down lofty rate hike expectations. Tremendous hope exists that the U.S. economy is going to take off. Not a strong possibility, at least in the near term when only the top 20% of the economy enjoys wage growth and corporations deem shareholders the big winners of tax reform. According to Birinyi Associates, stock share buybacks are on fire – $171 billion of buyback announcements this year so far. A record high for this point of the year, more than double the $76 billion Corporate America disclosed at the same point of 2017.

At the press conference, Powell wasn’t concerned about the impact of an inverted yield curve. Just the opposite. His objective instead is to temper the economy without pushing it into recession (good luck); an inverted yield curve this go around would not hold the same relevance as it did in the past. A plausible theory is Powell is pushing normalization of interest rates so there’s something to work with (cut) in case of slowdown or recession.

Powell gave the impression that a recession followed by an inverted yield curve would be unlikely during his tenure. In my opinion, it was a disturbing “it’s different this time,” moment for the new Fed head honcho. I hope he’s correct. I have my doubts.

So, what’s this inverted yield curve, why is it important? What does it mean to you?

An inverted yield curve occurs when short-term rates exceed long-term rates. During economic expansions the Fed tightens monetary policy or increases short-term rates. Currently, we’re ‘normalizing’ as rates have been historically low. In contrast, longer-term rates are driven by economic growth, wages and increasing demand for capital (not the Fed).

As the economy peaks and the outlook begins to temper or grow pessimistic, long-term rates stall out; short-term rates begin to exceed, thus creating a negative term spread (the difference between long and short-term interest rates). These term spreads are measured by the difference between two and ten-year Treasury yields.

At .54 as of March 16, the positive spread between the two and ten year is at a level not witnessed since October 2007.

Jay Powell should consider the Federal Reserve Bank of San Francisco’s March Economic Letter. Michael D. Bauer and Thomas M. Mertens outline how the connection between an inverted yield curve and recession remains viable; claims by observers that hikes in historically-low short-term rates will not have the same dampening effect on economic activity as they did in prior rate-tightening cycles, are not substantiated by statistical analysis.

Per the paper, the delay between the negative term spread and beginning of recession has ranged between 6 and 24 months. Since 1955, negative term spreads have correctly signaled all nine recessions.

Judge for yourself:

Except for the one false positive in the mid-1960s when inversion was followed by slowdown, not official recession, negative term spreads have an impressive record of foreshadowing recessions.

At Real Investment Advice, we believe Bauer and Mertens’ research is relevant. Recently, contributor Jesse Columbo undertook a deep-dive analysis into the yield curve here.

An inverted yield curve is characteristic of a late-stage economic cycle. Unfortunately, there’s no such thing as perfect timing between the genesis of negative term spreads and official recessions. The rule of thumb is two years on average.

As I shared with financial journalist Simon Constable for a recent article, investors should adjust their portfolio holdings if the yield curve inverts. High-quality (not junk), short-duration fixed income would offer attractive yields over long-term debt instruments. In response to an economic slowdown, one of the Fed’s responses would be to reduce short-term rates; consequently, existing holders of short-duration should experience capital appreciation as new investors look to pay up for higher yields.

Equity investors should favor defensive sectors such as consumer staples. Think food and beverage companies. Sectors that offer attractive dividend yields like utilities may also be considered.

Certainly, Jay Powell can believe it may be different this time. As investors, we cannot afford to ignore the inverted yield curve as one of the most reliable predictors of future economic activity.

Annuity.

Say the word and watch facial expressions.

They range from fear, disgust, confusion.

Billionaire money manager and financial pitchman Ken Fisher appears as the senior version of Eddie Munster in television ads for his firm.

He stares. Deep eyes ablaze with intensity. The tight camera shot. A dramatic pause, then solemnly he delivers the line:

“I hate annuities. I’d rather go to hell then sell annuities.”

Which obviously means you should too. The financial professional with a net worth of 500,000 Americans put together doesn’t need to worry much about lifetime income or portfolio principal loss. Obviously, he doesn’t believe you need to, either.

No offense but…

Let’s face it.

Ken Fisher is a master marketer. There’s no doubt of his prowess to pitch his wares. He’s raised megabucks for his firm. However, what he knows academically about annuities and how they mitigate life expectancy risk can fit in to a dollhouse thimble. And that’s fair because he doesn’t need to worry about running out of wealth. You most likely do.

Based on past comments he made in print about the financial planning industry, deeming it ‘unnecessary,’ I understand why he isn’t a fan of anything or anyone but himself. If you’re close to retirement or in retirement income distribution mode, you will pay for his overconfidence.

Unfortunately, what Ken Munster (I kid), is correct about is you as a consumer and investor must be skeptical of annuities as they are customarily offered. As they ‘sold first and planned for later.’

An annuity solution shouldn’t be on the radar until holistic financial planning is completed to determine whether there’s longevity risk – a strong probability of an investor outliving a nest egg. Annuities, especially deferred and immediate income structures, take the stress off a portfolio to generate lifetime income and places that risk with insurance companies. Fixed annuities that allow owners to participate in the upside of broad stock market indexes can be used as bond replacements.

Respected Professor Emeritus of Finance at the Yale School of Management and Chairman, Chief Investment Officer for Zebra Capital Management, LLC Roger G. Ibbotson, PhD, in a comprehensive white paper released last week, outlined how fixed indexed annuities which provide upside market participation and zero downside impact may be attractive alternatives to traditional fixed income like bonds.

In an environment where forecasted stock market returns may be muted due to rich valuations and bond yields still at historic lows, FIAs eliminate downside stock market risk and offer the prospect of higher returns than traditional asset classes. Ironically, at our Clarity investment committee two weeks ago, one of our partners, Connie Mack showcased a similar strategy based on our organization’s lowered return projections for traditional stock and bond portfolios.

Per Roger Ibbotson:

“Generic FIA using a large cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, allowing for equity upside participation. For these reasons, an FIA may be an attractive alternative to (long-term government bonds) to consider.”

In financial services, Ibbotson is a god. Brokers and advisors have been misrepresenting to consumers his seminal chart of 100-year stock market returns for as long as I’ve been in the business. The chart outlines how domestic large and small company stocks compound at 10-12% and beat the heck out of bonds, bills and inflation; financial professionals showcase the lofty past returns and convince customers that without buying and holding stocks for the long term (whatever that is), they’ll succumb to the vagaries of inflation. Adhere to the chart and your portfolio will have it made in the shade! (if invested in stocks for 100 years plus).

In all fairness to Roger Ibbotson, it’s not his fault that his data and graphics have been used to seduce investors to bet their hard-earned wealth on investment fantasy. He’s been in favor of annuities in retirement portfolios and in accumulation portfolios leading up to retirement for a long time.

Investment fantasy:

Investor reality:

It took nearly 14-years just to break even and 18-years to generate a 2.93% compounded annual rate of return since 2000. (If you back out dividends, it was virtually zero.) This is a far cry from the 6-8% annualized return assumptions promised to “buy and hold” investors and the 10-12% promised by financial pros who misrepresent Ibbotson’s work.

Investors if lucky, have 20 years to save interrupted. As labor economist and nationally-recognized expert in retirement security professor Teresa Ghilarducci shared with us recently on the Real Investment Hour – “Life has a way of getting in the way.”

I have yet in my 28 years in the business to meet a Main Street investor who’s achieved or achieving the long-term returns displayed in Ibbotson’s chart. The information is correct; how it’s used to sucker investors into “buy & forget” portfolios regardless of valuations and market cycles is unfortunate.

It’s time to provide the real story about annuities – the most popular types available, financial guardrails or rules to consider before annuities are purchased, what consumers should look for in a product and most important, what should be avoided.

Not every annuity product is ‘the devil.’

Unfortunately, all annuity types get lumped together and blanketed by the same sordid reputation.  Those who push annuities to collect attractive commissions ostensibly leave buyers confused (annuities by nature are complex), and regretful; these products are not explained well upfront and once the sale is complete, the consumer is usually left to figure out alone the intricacies of the contract.

Sales people tend to attach expensive riders (add-ons), to annuities that consumers may or may not need. Overall, the process is not a positive experience. Bad press and poor sales practices make annuities one of the most misunderstood products out there.  It’s a shame because annuities can help mitigate longevity risk and increase the survival rate of traditional stock and bond retirement portfolios.

Good-intentioned and knowledgeable financial professionals are not inured against falling for pervasive horror stories when in fact they could be doing their clients a disservice by ignoring benefits annuities can bring to the table for those who have high probabilities of outliving assets that generate income in retirement.

So, let’s get basic. Ground floor.

What is an annuity, anyway?

An annuity is a sum of money, generally paid in installments over a contract owner’s lifetime or that of the owner and a spouse or a beneficiary. Annuities are insurance products that guarantee a lifetime income stream. Pensions are considered annuities. Yes, Social Security is an annuity (guaranteed by the Federal Government).

For years, several well-known money managers and syndicated financial superstars have overwhelmed social, television and weekend radio media with negative information about annuities.

Several types of annuities can be incorporated into a holistic financial plan.

It’s time Real Investment Advice readers understand the truth.

Here’s real investment advice lessons for three of the most popular annuity structures:

Variable Annuities: “The Black Sheep.”

Variable annuities are a hybrid. A blend of mutual funds and insurance. Guarantees come in the form of death benefits to beneficiaries or payouts for life if annuitized which means the investment is converted by the respective insurance company into a series of periodic payments over the life of annuitant or owner of the contract. Variable annuities are ground zero for negative press as they can be expensive and generate big commissions for brokers.

Earnings are tax deferred and taxed as ordinary income upon withdrawal. Investments in variable annuities are best outside of tax-sheltered accounts like IRAs which are already tax deferred. Investment choices are plentiful. There are various riders that may be attached. The most common is the GLWB or Guaranteed Lifetime Withdrawal Benefit rider which guarantees a lifetime income withdrawal percentage on the principal invested or the account value, whichever is greater. Owners barely understand how variable annuities operate; many don’t realize their contracts contain riders, how much they cost, or what they do. I frequently deal with the frustration people feel.

Candidly, I cannot consider a valid reason for consumers to purchase variable annuities. In its purest form, an annuity should provide lifetime income, increase retirement portfolio longevity and possess zero downside risk to principal. Most investors possess exposure to variable assets such as stocks and bonds through company retirement plans already. I see little rationale to mix financial oil and water through variable annuities that combine insurance and mutual funds. The marriage of these two appears to be nothing more than a mission to generate revenue for the respective industries.

If you own a variable annuity within an IRA, consider liquidating it and transferring to a traditional IRA, preferably at a discount brokerage firm. Be wary of surrender charges that may occur upon liquidation. Non-qualified or variable annuities purchased with after-tax dollars can be liquidated however, taxes and withdrawal penalties may apply. It’s best to sit with a fiduciary who is proficient with annuities to assist with a strategy to unwind from this product.

Fixed Annuities. “The Quiet Ones.”

Fixed annuities or “multi-year guaranteed” annuities or MYGAs are essentially CD-like investments issued by insurance companies. They pay fixed rates of interest in many cases higher than bank certificates of deposit over similar periods.

An important difference is while CDs are FDIC-insured, fixed annuities are only as secure as the insurance companies that issue them; financial strength of the organizations considered, is paramount.  A.M. Best is the rating service most cited. Search the rating service website for the insurance company under consideration here. There are six secure ratings issued by Best. Consider exclusively companies rated A (Excellent) to A++ (superior). For ratings of B, B- (Fair), understand thoroughly your state’s coverage limits. Avoid C++ and poorer rated companies altogether.

Fixed annuities in the case of insurance company insolvency, are backed by the National Organization of Life & Health Insurance Guarantee Associations and each state has a level of protection. For example, in Texas, the annuity benefit protection is $250,000 per life.

The predictability of a set payout and limited risk to principal make MYGAs a popular option for retirees who seek competitive fixed rates of interest.

Fixed Indexed Annuities – “A Cake & Eat Some Too.”

Fixed indexed annuities get under the skin of one financial superstar asset allocator who dismisses stock market losses as no big deal (I mean markets rebound eventually, correct?). Losses don’t appear to be a big concern for him or his clients.

As the granddaddy of financial radio personalities, the gentleman relishes the calls in to his radio show that express concerns about annuities, especially fixed indexed annuities as he gets another opportunity to proudly remind his national audience – “so, with these products, you don’t get all the market upside!” Believe me, he’s all about the upside because markets only move in one direction from where he sits. From where you sit and what Roger Ibbotson believes, there’s a strong probability ahead for lower returns on traditional asset classes which include long-term bonds.

So, what are fixed indexed annuities?

First, they are not products that invest directly in stock markets. They are insurance vehicles that provide the potential for interest to be credited based on performance of specific market indexes. Selections within these fixed annuities allow owners to participate in a fixed percentage of the upside of a market index or earn a maximum rate of interest that’s based on the percentage change in an index from one anniversary date (effective date of ownership), to the next. A strategy identified as “point-to-point.”

Second, fixed indexed annuities are characterized by a ‘zero floor,’ which simply means there’s no risk of market downside. Owners may get a goose-egg of a return for a year, that’s true. However, there’s no need to make up for market losses, either.

As stated in the academic research published by Mr. Ibbotson:

“This downside protection is very powerful and attractive to many individuals planning for retirement. In exchange for giving up some upside performance (the 60% participation rate), the insurance company bears the risk of the price index falling below 0%. The floor is one way to mitigate financial market risk, but also gain exposure to potentially higher equity performance than traditional fixed income investments.”

Third, Roger Ibbotson and his team analyzed fixed index annuities performance compared to periods of outperformance and underperformance for long-term government bonds. They isolated 15 three-year periods where bonds performed below the median like above, where the average 3-year annualized return was 1.87% compared to the FIA average of 4.42%. Through fifteen 3-year timeframes where bonds performed above median, returns for bonds and fixed index annuities averaged 9% and 7.55%, respectively.

Last, the research is limited to a simulation of the net performance of a fixed index annuity tied to a large cap equity index with uncapped participation rates. A participation index rate strategy is mostly effective under strong stock market conditions as interest credited is a predetermined percentage multiplied by the annual increase in a market index’s return. For example, a fixed indexed annuity offers an uncapped point-to-point option with a 40% participation rate. If the chosen market index the participation rate is connected to increases by 10%, your return for the year will be 4%. The participation percentage may be changed annually.

A “point-to-point” cap index strategy incorporates a ceiling on the upside and will not perform as well during periods when stocks are characterized by strong performance. The point-to-point cap index choice is best when markets are expected to provide limited growth potential and provides 100% participation up to the annual cap set by the insurance company. Let’s say a fixed indexed annuity has a 3% index cap rate and is tied to the performance of the S&P 500. For the year, the S&P 500 returns 2%. The interest credited to your account would be 2%, which is under the 3% cap. Under the participation index rate strategy outlined above, interest credited would be less at 40% of the S&P return, or .8%.

Since credited interest increases the original investment and downside protection is provided, your money compounds in the true sense of the definition. As we’ve written previously at Real Investment Advice – compounding works only when there is NO CHANCE of principal loss.

Fixed indexed annuities offer a fixed interest rate sleeve in addition to stock market participation options. There’s the choice to select multiple strategies (to equal 100%) and change allocations every year on your anniversary or annuity effective date.

Generally, annuities are immediate or deferred as well as fixed and variable as described above. Deferred annuities are designed for saving and interest accumulation over long periods, usually 5-10 years. They most popular are outlined here in Part 1. Immediate and guaranteed income annuities which I’ll cover in Part 2, are designed to provide lifetime income and longevity insurance for consumers who are concerned about outliving their retirement investments.

Below are Real Investment Advice and Clarity’s financial guardrails or rules to consider before the purchase of accumulation and income annuities:

1. Annuities tend to get sold, not planned. Annuities are primarily product-sales driven. Comprehensive financial planning which includes your current asset allocation, ongoing savings and investing habits, anticipated income needs in retirement and survivability of investment assets based on estimated life expectancies either for you or you and a spouse, should be a mandatory first step. Most annuity salespeople are not going to undertake a holistic planning approach before an annuity solution is offered; it’s important to partner with a Certified Financial Planner who is also a fiduciary to complete a financial plan before you commit resources to annuities. A plan can determine whether an annuity improves retirement income sustainability and specifically, how much investment to commit. If your plan reflects the probability of meeting your retirement goals at 85% or greater, forgo the annuity and create an action plan to bolster savings, reduce debt or work a year or two longer.
2. Consider fixed indexed annuities as intermediate to long-term bond replacements. Or to improve risk-adjusted portfolio returns during market cycles of extended stock valuations and/or less potential for appreciation in bond prices (like we’re in now). Roger Ibbotson estimated that a 60% stock, 20% traditional bond, 20% fixed indexed annuity allocation returned 8.12% from 1927-2016 in periods where bond returns were below median, compared to a traditional 60/40 portfolio which returned 7.6%. If future returns for traditional risk assets will be muted due to rich stock valuations and lower capital appreciation for bonds (which we believe is the case), a fixed indexed annuity may be employed to replace up to 20% of a total fixed income allocation. A FIA may provide attractive returns compared to stocks and bonds combined with zero downside risk.
3. Avoid or minimize exposure to variable annuities. Variable annuities do not appear worthy of investment in our opinion. Meet with a financial professional, preferably a fiduciary, to create and implement a liquidation or transfer plan.
4. Understand surrender charges, costs, tax and withdrawal penalty implications. Annuities must be considered long-term products designed solely to meet retirement goals. Deferred annuities will include a hefty 5-10 year decreasing annual percentage charge to discourage liquidations. There will be ordinary income taxes incurred and possibly penalties (if younger than 59 ½), upon withdrawals. Charges are incurred for commissions and cost of insurance, too. Most annuities will permit up to 10% annual withdrawals free of surrender charges. It’s important to understand how to withdraw as a last resort if a financial emergency arises.
5. Slow your riders. Riders are supplementary features and benefits that can add anywhere from .35 to 1.50% in additional costs per year. Available riders range from enhanced liquidity benefits (ELBs) which allow surrender-charge free return of premiums in the second year, ADL (activities of daily living such as bathing & dressing), or custodial care withdrawals that provide access to up to 100% of accumulation value without surrender charges, to the most popular – GLWBs or Guaranteed Living Withdrawal Benefits for one life or for you and a spouse. Lifetime income is guaranteed even if the accumulation value of the annuity falls to zero. I have yet to encounter an annuity owner who can explain to me why they purchase riders or how they’re supposed to work. Unless a comprehensive financial plan indicates a 25% or greater probability of outliving your retirement savings (75% success rate), and expected single or joint life expectancies are age 95 or older, paying 1-1.5% a year for a living withdrawal benefits rider seems excessive. If outliving your investment source of retirement income is a concern, there are deferred and immediate income annuities on the market that can fill the gap along with other solutions like reverse mortgages.
6. Seek a second opinion. An annuity is a long-term financial commitment. Before purchase, due diligence is mandatory. A fiduciary professional can outline the pros and cons of your prospective purchase. A deliberate, well-researched decision will minimize regret, later. Contact us for objective guidance.

See? Annuity is not such a scary word. In some cases, it’s the difference between a secure retirement or not. Along with a strategy backed by a comprehensive plan, fixed indexed annuities can be employed to minimize losses or enhance portfolio returns.

Indeed, annuities are complicated. There’s no getting around that obstacle. However, I hope our guardrails will help you gain perspective.

Annuity means ‘check for life,’ and who is against that?

The billionaire Ken Fisher. That’s who.

You may need to think differently.

Are you a pre-retiree ready for the right-lane switch?

There are a group of pre-retirees who become masters of the “right lane.” They’re at a life’s bend point (as I call it), where the exit from current career paths are easily visualized. Simply, their retirement body clocks are beginning to ring and they’re listening and preparing accordingly. At Clarity, we believe if you’re 3-5 years from rebirth, reinvention, reignition, then congratulations! You’re a pre-retiree.

At our Clarity Right Lane to Retirement Workshops, in face-to-face meetings, and questions that come in through Real Investment Advice, we address financial pitfalls that have potential to veer investors off course. A comprehensive plan at this juncture exposes financial vulnerabilities that may require a pre-retiree to remain in the workforce 2 to 4 years longer than expected. Several pitfalls we observe often are misallocated portfolio allocations, long-term care insurance coverage shortfalls, misconceptions about Social Security and cost-prohibitive healthcare expenses pre and post-Medicare enrollment.

Warning to pre-retirees: Multiple headwinds have arrived; if you haven’t done so, please prepare accordingly. A strong bull market in stocks, especially since the presidential election has fostered overconfidence and complacency, especially when it comes to expectations for future portfolio returns.

It’s time to face reality.

The winds, they are a shiftin.’

Larry Swedroe a principal and director of research for Buckingham Strategic Wealth, penned a strong piece for Advisor Perspectives titled “The Four Horsemen of the Retirement Apocalypse,”  which was expanded upon for a Real Investment Report,  by RIA team member, and analyst, John Coumarianos.

If you can envision a right-lane switch, then it’s time to change-up your thinking, make some adjustments then hit the turn signal.

I’ve corralled these horsemen into four broad categories – Portfolio allocation, healthcare, retirement income, and long-term care.

From a planning perspective, pre-retirees should consider:

1. A portfolio asset allocation re-shuffle:

Think conservative. Don’t fret over missing out on the possibility of future portfolio gains. Focus on potential losses that can postpone retirement plans. If it reduces FOMO (fear of missing out), consider how rich stock valuations are today as measured by the average of 5 and 10-year inflation-adjusted earnings.

With the current Shiller P/E at 33x and other market valuation metrics at stretching points, those who are 5 years or less from retirement should take action today to reduce portfolio risk.

Our CAPE-5, a more-sensitive adjunct compared to the Shiller P/E, correlates highly with movements in the S&P 500.

There is a positive correlation between the CAPE-5 and the real (inflation-adjusted) price of the S&P 500. Before 1950, the CAPE and the index closely tracked each other. Eventually, the CAPE began to lead price. The current deviation of 63.23% above the long-term five-year CAPE ratio has occurred only three times in the last 118 years.

Unfortunately, valuation metrics such as cyclically-adjusted price earnings ratios are extremely poor at pinpointing turning points in markets. However, they are relevant predictors of the probability of future returns. Hey it’s math. Math eventually wins. Rich valuations are always worked off through reversion to averages.  Based on current levels, the most likely outcome is stock returns that average low single figures or negative (yes, negative). Three to five years before retirement as well as through the initial phase of a distribution or retirement income cycle (3-5 years), the primary focus should be on risk reduction and how withdrawals affect portfolio longevity.

Unfortunately, where you retire in a market cycle is primarily a spin of the roulette wheel. Basically, luck. If you’re retiring today, welcome to the headwind. Adjust accordingly.

However, one truth remains – when attempting to produce a steady stream of retirement income from variable assets like stocks and to some extent bonds, then distributions must be consistently monitored and possibly adjusted depending on market head or tailwinds.

If I had to go out on a limb using current valuations as a guide, I am confident that those close to retirement or just beginning the journey are going to face greater obstacles to future returns.

Ignore market experts who appear knowledgeable and push self-serving narratives to validate overinflated stock prices. As we’ve witnessed in the past, faith in financial media darlings doesn’t end well for investors. After all, these pundits are rarely called out. Unfortunately, if you fall for their sound bites, you’re going to pay the price. Your plans will be ruined.

Generally, a stock allocation that doesn’t exceed 30% should be considered. If greater, a sell discipline must be employed to minimize losses. There’s nothing wrong with maintaining two to three years of estimated future living expenses (or needs), laddered in short-term bonds or certificates of deposit that are staggered in maturities from six months to three years.

I’ve recognized how brokers do a great job at selling product but are overwhelming deficient with helping clients rebalance portfolios. Most likely your allocation to stocks is too aggressive for an investor so close to a retirement date.

There should be a sense of urgency to meet with a financial professional, preferably a fiduciary, who can assist with portfolio rebalancing suggestions.

Think virtual. Brick & mortar banks are late to the game to raise rates on savings. Consider FDIC-insured online banks right now. For example, www.synchronybank.com as of March 6, has a rate of 1.55% on high-yield savings.

2. Don’t mess up Medicare enrollment periods or it’ll cost you.

Unless you have a working spouse with employer-covered health insurance that is eligible to cover you as well, or fortunate enough to have healthcare benefits as part of a corporate retirement package, purchasing healthcare insurance or ‘bridge coverage’ before Medicare benefits begin is going to be cost prohibitive in most cases.

If you’ve decided to postpone Social Security benefits to take advantage of the annual 8% delayed retirement credit that accrues after full retirement age up until age 70, you’ll need to proactively sign up for Part A and B coverages during the initial enrollment period which begins the first day of the third month before your 65^th birthday and extends for seven months. Part A or hospital coverage has been paid through payroll taxes. Part B requires ongoing monthly premiums. The standard Part B premium is $134 per recipient and may be higher depending on income. If your modified adjusted gross income is above specific thresholds then you’ll pay the standard premium plus an “Income Related Monthly Adjustment Amount.”

Part B (inpatient/medical coverage) enrollment can be tricky. For example, if covered by a qualified employer plan that covers 20 or more employees during the initial enrollment period, then you may postpone signing up until you leave employment or group coverage is terminated, whichever occurs first. Now, this special enrollment period goes out eight months from the first day of the month employment ends. However, it’s best not to wait. Sign up for Medicare before group coverage ends to prevent a lapse of healthcare coverage.

The problem I witness often is when Medicare Part B special enrollment intersects with COBRA which is a temporary continuation of former employer group health insurance coverage. Those who utilize it are under the misperception that COBRA is employer coverage thus it qualifies for the Medicare special enrollment period. COBRA may be continued as secondary coverage for expenses Medicare doesn’t cover; however missing special enrollment may result in a permanent late enrollment period penalty of 10% for each year (12-month period), missed.

There exist multiple enrollment windows and open enrollment periods for Medicare coverages – Prescription Drug Coverage (D), Medicare Advantage, Medigap or supplemental coverage. It can easily get confusing which makes it important to work with a financial adviser who is well versed in Medicare planning.

Make sure your financial plan accounts for healthcare expenses which thank goodness can be quantifiable due to Medicare which is comprehensive in nature.

3. Retirement Income: Be smart about Social Security maximization strategies.

We teach attendees at our workshops – “Your Social Security claiming decision is a family decision,” as the decisions made by retirement beneficiaries can also affect spousal and survivor benefits.

Do not underestimate the lifetime income that Social Security can provide. Future recipients should begin the integration of Social Security into their retirement planning as part of a right lane to exit mindset.

According to a The Nationwide Retirement Institute® Consumer Social Security PR Study conducted by Harris Poll, it’s not surprising to discover than ½ of a retiree’s fixed expenses are covered by Social Security benefits.

Per the study, surprisingly few retirees have a financial advisor who provides advice on Social Security strategies. The total incidence of having a financial advisor who provided Social Security advice was a dismal 11%.

A 2015 study by the Consumer Financial Protection Bureau indicates that more than 2 million consumers choose when to begin collecting Social Security retirement benefits. Many make the decision based on limited or incorrect information.

Of those given Social Security advice by their advisors, roughly half or more had to initiate the discussion themselves.

Now with pensions all but gone, Social Security is the only guaranteed monthly income for roughly 69% of older Americans.

Unfortunately, in 2013, 75% of retirees chose to start collecting before full retirement age which results in a permanent reduction in lifetime benefits. This may be a very shortsighted decision.

Read: The One Social Security Myth.

As Wade Pfau, Ph.D., CFA and professor at the American College outlines in the 2^nd edition of his Retirement Researcher’s Guide to Reverse Mortgages:

“Delaying Social Security is a form of insurance that helps to support the increasing costs associated with living a long life. It provides inflation-adjusted lifetime benefits for a retiree and surviving spouse, and those lifetime benefits will be 76 percent larger in inflation-adjusted terms for those who claim at seventy instead of sixty-two.”

According to Social Security expert Elaine Floyd, ignorance is the primary reason. The CFPB report outlines studies that represent how much people don’t know about claiming. One study for example outlined that only 12% of pre-retirees knew how benefits differed if benefits were claimed before, at, or after full retirement age.

If you’re having a difficult time finding the help required, it’s worth the investment in a comprehensive Social Security analysis tool. The one I suggest was created by Laurence Kotlikoff, Professor of Economics at Boston University and available at www.maximizemysocialsecurity.com. The tool will guide you to the highest benefit you or you and a spouse may receive from Social Security.  It will assess thousands of strategies before it suggests the one that maximizes lifetime benefits. The output is easy to interpret. There’s the ability to run “what if” scenarios, too.

The $40 annual license for a household is good for a year and worth the cost.

4. Long-term care. The financially-devastating elephant in the room.

Three out of every five financial plans we generate reflect deficiencies to fully meet long-term care expenses.

The Genworth Cost of Care Survey has been tracking long-term care costs across 440 regions across the United States since 2004.

Below as of June 2017, are the median monthly costs of the four levels of care from home health to nursing home:

Genworth’s results assume an annual 3% inflation rate. In today’s dollars a home-health aide who assists with cleaning, cooking, and other responsibilities for those who seek to age in place or require temporary assistance with activities of daily living, can cost over $45,000 a year in the Houston area. On average, these services may be required for 3 years – a hefty sum of $137,000. We use a 4.25-4.5% inflation rate for financial planning purposes to reflect recent median annual costs for assisted living and nursing home care.

Long-term care insurance is becoming cost prohibitive. Not only is insurance underwriting to qualify draconian to say the least, insurers are increasing annual premiums at alarming rates. In some cases, by more than 90% ostensibly forcing seniors to drop coverage or find part-time work to pay premiums.

In addition, the number of insurers available is dwindling. Today there are less than 12 major insurers when at one time there were 106.

As I examine policies issued recently vs. those 10 years or later, it’s glaringly obvious that coverage isn’t as comprehensive and costs more prohibitive. The long-term care crisis is rarely addressed by the media; there isn’t a governmental solution to the growing needs of an aging population. Unfortunately, the majority of those who require assistance will place the burden on ill-prepared family member caretakers or need to undertake drastic measures to liquidate assets. According to Genworth, roughly 70% of people over 65 will require long-term care at some point in their lives.

So, what to do?

One option is to consider a reverse mortgage. The horror stories about these products are way overblown. The most astute of planners and academics study and understand how for those who seek to age in place, incorporating the equity from a primary residence in a retirement income strategy or as a method to meet long-term care costs can no longer be ignored. Those who talk down these products are speaking out of lack of knowledge and falling easily for overblown, pervasive false narratives.

Reverse mortgages have several layers of costs (nothing like they were in the past), and it pays for consumers to shop around for the best deals. Understand to qualify for a reverse mortgage, the homeowner must be 62, the home must be a primary residence and the debt limited to mortgage debt. There are several ways to receive payouts. One of the smartest strategies is to establish a reverse mortgage line of credit at age 62, leave it untapped and allowed to grow along with the value of the home. The line may be tapped for long-term care expenses if needed or to mitigate sequence of poor return risk in portfolios. Simply, in years where portfolios are down, the reverse mortgage line can be used for income thus buying time for the portfolio to recover. Once assets do recover, rebalancing proceeds or gains may be used to pay back the reverse mortgage loan consequently restoring the line of credit.

Our planning software allows our team to consider a reverse mortgage in the analysis. Those plans have a high probability of success. We explain that income is as necessary as water when it comes to retirement. For many retirees, converting the glacier of a home into the water of income using a reverse mortgage is going to be required for retirement survival and especially long-term care expenses.

American College Professor Wade Pfau along with Bob French, CFA are thought leaders on reverse mortgage education and have created the best reverse mortgage calculator I’ve studied. To access the calculator and invaluable analysis of reverse mortgages click here. Also, read my RIA commentary on reverse mortgages here.

Insurance companies are currently creating products that have similar benefits of current long-term care policies along with features that allow beneficiaries to receive a policy’s full death benefit equal to or greater than the premiums paid. The long-term care coverage which is linked to a fixed-premium universal life policy, allows for payments to informal caregivers such as family or friends, does not require you to submit monthly bills and receipts, have less stringent underwriting criteria and allow an option to recover premiums paid if services are not rendered (after a specified period).

Unfortunately, to purchase these policies you’ll need to come up with a policy premium of $50,000 either in a lump sum or paid over five to ten years. However, for example, paying monthly for 10 years can be more cost effective than traditional long-term care policies, payments remain fixed throughout the period (a big plus), and there’s an opportunity to have premiums returned to you if long-term care isn’t necessary (usually five years from the time your $50,000 premium is paid in full). Benefit periods can range from 3-7 years and provide two to five times worth of premium paid for qualified long-term care expenses. As a benchmark, keep in mind the average nursing home stay is three years.

It’s crucial to complete a comprehensive financial plan before investigating available long-term care products. A plan will help quantify how much coverage is necessary. In other words, your long-term care plan can be subsidized by a reverse mortgage or liquidation of assets. From there, a financial and insurance professional educated in long-term care can assist with the proper amount of coverage required.

The four horsemen of the retirement apocalypse are real. They must be taken seriously. For pre-retirees, there’s time to heed their warnings and adjust. For current retirees, it’s a wake-up call to re-assess portfolio withdrawal rates, spending habits, think outside the box with reverse mortgages and rebalance their allocations.

WalletHub’s 2018’s Best & Worst Cities at Money Management is out!

WalletHub, a comprehensive internet source of personal finance data, ranked 2,500 cities based on their financial acumen. Ten key indicators of money management including median credit scores, debt-to-income ratios and average number of late payments were calculated and ranked. Cities in California grabbed the top 3 spots. Texas doesn’t make the cut until #46 with Southlake falling within the 98^th percentile.

Houston, unfortunately, is one of the worst on the list.

How do you compare in your own household?

Here are Clarity Financial’s and Real Investment Advice’s debt guardrails to consider:

Mortgage Debt-to-Income Ratio:

There’s that rule you’ve heard about how much to spend on an engagement ring based on three months’ salary. I’ve created a threshold that’s worked for me and clients for years. Feel free to enhance it to relate to your personal situation.

       House Mortgage = 2X Gross Salary or 200%.

It’s simple. To the point. It gets to the heart of my comfort factor. It separates emotion from the decision.

For example, per the boundary, if you earn $50,000 a year, a mortgage obligation should not exceed $100,000. To be clear, this isn’t the house purchase price, it’s the mortgage or debt on the property. For most, it’s going to mean a reset of expectations, a greater down payment or a smaller abode. I would stray from the rule at great risk to your long-term financial health.

Student Loan Debt-to-Income Ratio:

Keep loans limited to one year’s worth of total expense, tuition, room & board, everything.

You can divide the money across the full experience, 4-5 years, or all at once. However, no more than a year’s worth of expenses should be taken in the form of student loans. I’ll probably catch slack for this, but so be it. All I seek to do is get you thinking boundaries.

Student Loan = 1X 1 year’s college expense or 25%.

Credit Card Debt-to-Income Ratio:

Today, credit cards are used for various reasons – convenience, cash back, travel reward points and the most unfortunate, to meet ongoing living expenses in the face of structural wage stagnation.

Credit Card Debt = No greater than 4% of monthly gross income.

If your household gross income is $50,000 then credit card debt shouldn’t exceed $2,000. Per WalletHub’s study, Texas ranks 46 with $2,848 in average credit card debt.

Car Loan Debt-to-Income Ratio:

Cars are required like breathing here in Houston and Texas, overall. However, they are not investments. They do not appreciate in value. If anything, auto values decrease as soon as you drive away from the dealership.

Car Loan Obligation = No greater than 25% of monthly gross income.

For example, a household bringing in $60,000 a year shouldn’t have more than $15,000 in outstanding auto loan debt. In my household, the ratio is 18%.

So, what do you think?

What rules regarding debt do you follow in your household? I’d love to hear them and share on the radio.

Send me an e-mail

“It’s too fast, Sam. Feels all wrong.”

The tempo, the rhythm of steady bass guitar strings was too quick, diluted the impact of the lyrics and the solemn promise behind the words.

Sun Records’ productions customarily sought a fast pace between the grooves. After all, these weren’t mama’s kind of melodies. Producer Sam Phillips knew what he was doing, what he wanted, what 1950s teen girl fans hungered for. The man was a master of tapping into the heartbeat of America’s youth and Johnny Cash’s deliberate, heart-mourning delivery at Sun Studios that afternoon in the spring of 1956 was captivating, but sluggish. The beat of the song’s first cut was not fast enough for an audience that hungered for edgy guitar licks and vocals that flipped them frantic when a new artist was introduced by the Memphis house of Sun.

The producer had a gift for discovering and developing talent; what he observed in a young Johnny Cash was smoldering raw potential – A voice deep with a syrupy resonance connected to messages embedded in lyrics that echoed of old souls tormented by social strife so beautifully captured by then-tenured folk artists like Woody Guthrie.  Along with rockabilly guitarist Luther Perkins and bassist Marshall Grant, the trio known as Johnny Cash and the Tennessee Two, forged a unique sound. The sharp edge of a buzzy razor connected to the undertone of an addictive to the ear clickity-clack bass which mirrored the beat of an articulated locomotive’s driving wheels as they chugged along at steady cadence.

“I keep a close watch on this heart of mine, I keep my eyes wide-open all the time, I keep an eye out for the tie that binds, because you’re mine, I walk the line.”

Can you hear the chug-chug of the locomotive?

For large brokerage firms, each investor’s contribution to profit is calculated down to the penny. The goal is to maximize your account’s invested asset influence on a firm’s bottom line. Nothing unethical about profit. However, “walking the line,” or staying true to a discipline that places your interest first is a challenge unless you’re a hardcore do-it-yourselfer kind of investor. Heck, if that’s the case, the financial world is your oyster. There are plenty of low cost, commission-free exchange traded funds to own or trade. Tremendous research is available at the fingertips for those who are motivated to do their own homework. However, when it comes to financial advice or guidance? Caveat emptor is warranted.

Example:

“Investors who seek advice from discount brokerage firms might assume the counsel they get is impartial, given how these firms have rejected the old Wall Street model of working on commissions.

In fact, advisers at some of the biggest discount brokerage firms make more money if they steer clients toward more-expensive products, according to disclosures from the firms and people who used to work at them. That means customers could end up with investment products and services that are costlier than they need.” – Jason Zweig & Anne Tergesen for The Wall Street Journal, January 10, 2018.

Unfortunately, I am personally acquainted with these motives. Even the afterlife doesn’t prevent an investor from being a profit center. On the contrary. Allegedly, after an investor dies, beneficiaries, heirs, trustees, consolidate and cement additional assets at the brokerage firm the deceased patronized. I became aware of this interesting yet disturbing tidbit at my arbitration hearing with former employer Charles Schwab. One of their bean counters on payroll from San Francisco made a case that profits from deceased investor assets are near eternal. So, it shouldn’t be a surprise that financial advice branded as helpful is suspect enough for you to keep a close watch on that potential margin of yours.

If the motivation is to financially “walk the line,” remain focused, you’re in for a challenge; the temptation to stray from disciplined approaches to portfolio management and fall recklessly for stories perpetuated by brokerage in-house “strategists,” is formidable, especially as market volatility blossoms.

Here’s a couple of ways to keep your eyes open all the time.

1. Step away from popular media narratives about markets and personal finance.

The national media market gurus and superstar personal finance pundits regurgitate information that’s not constructive to building wealth or capital preservation. They’re confident they’ll rarely be held accountable for what they say.  Frankly, the retail public doesn’t possess the confidence nor in some cases, financial literacy to question the guidance. National media spreads the messages, professionals who applaud the stories are mostly employed by the gatekeepers and earn better than average livings through the support of narratives that mostly come down to “set a portfolio and forget it.”

While these so-called words of wisdom sound good, they do little to help you achieve financial goals.

Financial planning A-lister Suze Orman was recently plastered all over www.cnbc.com with the following insight shared in an interview:

Excerpt:

“Orman explained that if a 25-year-old puts $100 into a Roth IRA each month, they could have $1 million by retirement.” 

While I wholeheartedly agree with a monthly investing or saving discipline spouted here, especially into a Roth IRA where earnings grow tax-deferred and withdrawn tax-free at retirement, I had a dilemma making her retirement numbers work.

As outlined in the chart above, on an inflation-adjusted basis, achieving a million-buck balance in 40 years by dollar-cost averaging $100 a month, requires a surreal 11.25% annual return. In the real world (not the superstar pundit realm), a blind follower of Suze’s advice would experience a whopping retirement funding gap of $695,254.68.

I don’t know about you, to me this is a Grand Canyon expectation vs. reality-sized unwelcomed surprise.

On a positive note, investing on a disciplined basis for 40 years still results in a retirement account balance most Americans nearing retirement would envy. However, it’s far from a million as touted so effervescently by Ms. Orman.

Here’s another statement of wisdom that will have you stumble, not walk a line.

“Stocks average 10% a year if you just hold on.”

A popular roboadviser called WealthFront which is an electronic portfolio asset allocator, regularly shares a chart alone and within blog posts. It outlines how the growth of a dollar invested in the stock market appreciates to roughly $34,000 if invested from 1871 through 2015.

1871.

The president of the United States was Ulysses S. Grant.

Orville Wright of the Wright Brothers was born in August of that year.

Is 10% completely false. No.

Misleading, yes.

Is it realistic to base return assumptions for retirement planning on numbers many pundits share in the national media?

No.

From 1871 to present the total nominal return was 8.08% versus just 6.86% on a “real” adjusted for inflation basis. While the percentages may not seem like much, over such a long period the ending value of the original $1000 investment was lower by an astounding $270 million dollars.

Since 1900, stock market appreciation plus dividends has provided investors with an average return of roughly 10% per year. Historically, 4%, or 40% of the total return, came from dividends. The remaining return (60%), came from capital appreciation that averaged 6%.

There are several fallacies with the notion that the markets long-term compound at 10% annually.

The market does not return 10% every year. There are many years where market returns have been sharply higher, significantly lower or flat lined.

The analysis does not include the real-world effects of inflation, taxes, fees, and other expenses that subtract from total returns.

SHOCKER – You don’t have 146 years to invest. Using ‘perpetual’ holdings periods for something as finite as a human life is plain irresponsible.

Also, it’s a warm and fuzzy idea, perhaps a bit Pollyannaish, to believe an individual can begin saving and investing at age 23 and remain consistent for 45 years to capture those appetizing long-term equity returns. I applaud those who have or can. However, with that pesky thing called life (strife), that Johnny Cash wrote so much about, it’s near impossible for a majority of Americans to accomplish this fiscal feat. I’d say people have a good 20 years of savings potential in them. Max.

Consider the reasons why saving and investing for four decades isn’t realistic. I bet you can rattle two or three off the top of your head. Here are a few.

Crippling student loan debt: Per a study by the Brookings Institute, student loan borrowers who left school owing at least $50,000 in student loans 2010 had failed to pay down any of the debt four years later. There are approximately 5 million borrowers affected out of a total of 44 million Americans saddled with student loan obligations. The most recent overall loan delinquency rate stands at 11.2% and the median monthly student loan payment is $203 per one of my favorite internet hubs of information – www.studentloanhero.com.

Very little financial cushion: According to Bankrate.com survey, 57% of Americans don’t have access to $500 to cover unexpected expenses.

A downright embarrassing personal savings rate, overall:

As of December 2017, the personal U.S. saving rate fell to 2.4%. You need to return to the summer of 2005 to get close to an equally dismal percentage.

Unless I’m missing something, with close to 80% of full-time working Americans living paycheck-to-paycheck and utilizing debt to fuel consumption, it’s rare to have the ability to invest and save long enough to achieve average annual 10% stock market returns. More likely, an average bear market (-37%), will inflict enough damage to wipe out half your long-term portfolio. No wonder retail investors spend a good part of their investment lives striving to break even.

It’s fine to watch financial programming, peruse what financial journalists are putting out there. I have my favorite writers, television personalities just like you probably do. Occasionally, there’s a tidbit of wisdom that captures my attention and warrants further investigation. I begin the day at 3:30am with Real Investment Advice, CNBC, The Financial Times, The Wall Street Journal, Bloomberg, The Street.com and various blogs (whew). It gives me a chance to take in top of mind topics. However, after 25 years plus in this industry, I’m also able to isolate the noise from what’s relevant.

Want to walk the line? Place boundaries around the time you spend taking in what mainstream financial personalities put out there. At the least, consider information you believe relevant as topics for discussion with your adviser.

2. Bonds are dead.

Not trying to be a wet blanket here, but c’mon. Again? Maybe the line I’m walkin’ needs to be crossed. Too early to say. The pros in this business who believe the 10-year Treasury yield must breach 3% have converged on one side of the boat.

The contrarian in me along with several data points compel me to maintain a preference to remain on the lonely side of the ship. These points include: Current consensus estimates of GDP (2.5% – not too hot, not too cold), over indebtedness of governments, corporations, individuals, and inflation as measured by the Fed’s preferred price index, the PCE (see below), expected to remain contained and not meet the Fed’s 2% target until mid-2019.

Don’t forget demographics. The U.S. population is aging which puts a lid on how high inflation-adjusted interest rates can go.

Per recent research by the Federal Reserve Bank Of San Francisco:

•  Changing demographics can affect the natural real rate of interest, r-star; the inflation-adjusted interest rate that is consistent with steady inflation at the Fed’s target and the economy growing at its potential. Demographic trends affect the equilibrium rate by changing incentives to save and consume. Lengthier retirement periods may raise some households’ desire to save rather than consume, lowering r-star. At the same time, declining population growth increases the share of older households in the economy, who generally have higher marginal propensities to consume, raising consumption and r-star.
• As population growth declines, it could also reduce real GDP growth and productivity, thereby putting downward pressure on r-star.

• In the United States, these demographic changes have already put significant downward pressure on interest rates between 1990 and 2017. As demographic movements tend to be long-lasting, the effects on interest rates may be ongoing. A lower equilibrium rate has the potential to limit the scope for the Federal Reserve to cut interest rates in response to future recessionary shocks.

Usually, as the chart below indicates, when the 10-year Treasury gets extremely oversold as it is currently, the yield has at the least, topped out or pulled back.

For investors who remain concerned about an increase in rates, a chance to control interest risk by shortening duration (think ultra-short or short-term bond funds), is at hand. If yields retrace and bond prices commensurately increase, it should provide a window of opportunity to swap longer duration positions with shorter duration alternatives.

Or, ask your broker for the latest rates on certificates of deposit. Yes, your broker should have access to CDs from major financial institutions, so no need to spend lots of time shopping around. For example, I discovered one-year CDs paying 1.9%, 2.4% for two years. At the end of the terms, principal is returned. These vehicles are FDIC-insured and pay interest monthly, semi-annually, or at maturity.

Bonds may have lost their mojo as far as noticeable price appreciation. I’ll concede that point. However, they’re far from dead. Generally, the income and diversification from high-quality and Treasury bonds act as buffers to portfolio volatility, especially through periods of significant corrections or bear markets in stocks.

Walking the line, keeping a cool head, as central banks sever the cheap money pipeline for markets, isn’t easy. I’ll understand if you stray.

Heck, even Johnny Cash didn’t stay true to the inspiration for his iconic song – his first wife Vivian.

Interesting facts about “I Walk The Line,” I bet you didn’t know:

1. Carl Perkins encouraged the song title. One of Johnny’s ideas was to call it “I’m Still Being True.”
2. The song was featured in the 1970 theatrical movie “I Walk The Line,” starring Gregory Peck, Tuesday Weld & Estelle Parsons.
3. Johnny Cash preferred a slower version of his tune which didn’t pass muster with Mr. Phillips – Listen here:

“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” 

Franklin D. Roosevelt, Statement on the signing of the Social Security Act, August 14, 1935.

Social Security wins the award for the most misunderstood Federal program.

At Clarity, we conduct Saturday morning Social Security and retirement preparation “breakfast & learn-shops.” Per feedback received, I’m surprised to discover that future and current retirees who attend these gatherings are more knowledgeable about Social Security than their financial advisers. Comments range from “the topic is glossed over,” to “I was provided misinformation.”

A thorough understanding of Social Security has never been so important to current and future recipients of benefits. According to the U.S. Census Bureau that derives estimates based on tax receipts, only about a third of workers are saving in a 401(k) or other types of employer-sponsored retirement plans. A majority of those who do contribute bear the risk of not saving enough, stock market instability, high fees, inadequate choices and a lack of stable, lifetime income alternatives.

Social Security is no longer just a measure of protection for the average citizen as stated by FDR. It’s become the primary pension albeit an insufficient one to overcome longevity risk. Those who earn above the U.S. median income of $59,039, especially six figures, have done a better job saving for retirement, yet even they suffer by not having a permanent income option or pension.

But Rich, there are defined contribution plans like 401(k)s, right? Well, yea, but I believe they’re not the best alternatives nor were 401(k) plans intended to replace pensions.

As I wrote in January 2017:

Let’s return to September 1980 when an unknown workplace benefits consultant for a mid-sized company based out of suburban Philadelphia, stumbled upon a sub-section of the U.S. tax code – 401(k) that was designed primarily to replace or limit the use of executive cash-deferred plans and thought it could benefit employees and their companies.

Why not replace a limited corporate tax-sheltered saving plan with a vehicle which would allow a majority of employees to save more than they could in traditional IRAs and at the same time, employers would save Social Security and other payroll taxes by creating and contributing? Win-win.

You see, Ted Benna had a noble intent. He had a vision to help American workers EXPAND the limited retirement savings vehicles available to SUPPLEMENT pensions. You see that? SUPPLEMENT pensions.

Mr. Benna figured the costs of converting old savings plans were marginal, partially offset by payroll tax savings and employees would be provided an another saving and investment alternative.

At the time, Mr. Benna’s company became record keepers (for a nominal fee) for organizations converting to 401(k) plans. He was ahead of his time as he suggested his employer, The Johnson Companies, outsource investment responsibilities to a company still in its infancy – the Vanguard Group.

According to Mr. Benna in an interview from 2011, he began to think 401(k)s may not be the right thing and lamented how he created a monster that should be “blown up.” He felt his original concept had deviated from its intention and had become proficient at enriching the financial services industry and not the savers.

Again, I’m not an advocate for 401(k) plans as primary retirement savings vehicles for reasons identified here. However, I do believe an auto-form of deferred payroll savings and investment strategy is critical to long-term financial success. Social Security is an iteration of such a plan for as it’s funded through payroll taxes (sort of an auto-deduction, correct?). Those who work for 40 quarters and have paid in to the system through payroll or self-employment taxes qualify for benefits.

Social Security utilizes the average of the highest 35 years of earnings to calculate benefits. For 2018, to earn the maximum retirement benefit of $2,788 at full retirement age, recipients would need to have exceeded Social Security’s annual earning ceiling every year for their 35 highest earnings years. In 2018, that earnings cap subject to payroll taxes for Social Security is $128,400.

Candidly, I’m tired of Social Security classified as an entitlement; the 1935 Social Security Act signed into law by Franklin D. Roosevelt, has become a critical income replacement program paid in for and by workers with earned income. It’s not an entitlement anymore. It’s a necessity. Without this social safety net, many Americans would be out on the street. This isn’t a startling assessment by any degree.

According to the Social Security Administration, among elderly Social Security beneficiaries, 50% of married couples and 71% of unmarried persons receive 50% or more of their income from Social Security. Once envisioned as a safety net, Social Security has become a lifeline for wage earners, especially those who fall below the current median income threshold.

The great failure of Social Security was to impossibly anticipate that corporations would place the risk of retirement savings squarely on the employees’ shoulders and decide that speculating in stock markets as opposed to the safety of defined benefits was the best option for retirement security.

It would be a challenge to change my mind about how strongly I feel about how many corporations have screwed their employees. Why? I see firsthand how pensions positively affect financial plan outcomes. Income is the life-blood of retirement; it’s all about cash flow a retiree can’t outlive.

Without Social Security considered, 1 out of every 6 plans completed are borderline successful or fail. When a retirement contains a pension to supplement Social Security, unsuccessful outcomes are rare. In the face of low-return headwinds for risk assets like stocks (due to extended valuations), Social Security should gain importance when it comes to positive plan results over the next 10 years when compared to the past decade, especially as remaining pension options offered by employers fade away.

According to Willis Towers Watson a global powerhouse of workplace analysis, employees look to their employers for support in improving their health, well-being, and becoming more financially secure.  Boy, employees may be in for a rude awakening. In a comprehensive global benefits attitude study, WTW’s concern is widespread about whether employees are saving enough for retirement, especially in a defined contribution world. Lifetime income alternatives or pensions have never been so important and so missed. Making the most of Social Security is the best we have available to us for now.

I greatly encourage RIA readers to purchase the new book “Rescuing Retirement – A Plan To Guarantee Retirement Security For All Americans,” written by Teresa Ghilarducci and Tony James. It outlines the downright scary retirement crisis facing America. The authors offer a viable solution called a Guaranteed Retirement Account which is a federal revenue-neutral hybrid defined-benefit plan with flexible options, full portability and a guaranteed monthly income for the life of a worker and spouse.

The GRA is designed to supplement Social Security and defined contribution plans and close the widening shortfall between savings and income required to survive retirement. In other words, it takes the place of pensions that corporations were happy to do away with. It’s a solution I support wholeheartedly.

The GRA is not a government entitlement. It’s mutually funded by employers and employees for a total of 3% of gross income. This program would provide all workers through mandatory payroll deductions, a much-needed lifetime income solution.

Unfortunately, this amazing program fails to exist; so, let’s make the most of Social Security by avoiding the following myth, ok?

Social Security is going broke, so I must take it before full retirement age!

I hear this statement way too often.

No, no, no.

Taking Social Security early can be a big mistake for you and loved ones. Full retirement age is older than age 66 (if born after 1954).

Every year the Social Security Board of Trustees releases a status of the Social Security Trust Funds. Funds are slated to be depleted by 2034 whereby at the time, 77% of benefits will be payable. Keep in mind, although this sounds dire, the payroll taxes of current workers can keep the program running.

In addition, it wouldn’t take much to make up for the imminent deficit if Congress initiated a small increase to payroll taxes or adjusted retirement ages to reflect current, not 1935’s reality. People are living and working longer.  A 1983 amendment allowed for the full retirement age to be gradually raised to 67. It’s time to revisit life expectancies and again raise the full retirement age bar.

Per the report (from www.savvysocialsecurity.com):

• The asset reserves of the combined OASDI Trust Funds increased by $35 billion in 2016 to a total of $2.85 trillion.
• The combined trust fund reserves are still growing and will continue to do so through 2021. Beginning in 2022, the total annual cost of the program is projected to exceed income.
• The year when the combined trust fund reserves are projected to become depleted, if Congress does not act before then, is 2034, which is the same as projected last year. At that time, there will be sufficient income coming in to pay 77% of benefits.

Are there reasons to take Social Security before full retirement age? Sure. They may include:

1. Simply – you require the income to survive. I get it. You’re in a stressful job situation, or ill, and the early lifetime income choice is required to keep the lights on and food on the table. Make sure to consider a comprehensive retirement plan first as your retirement benefit will be reduced by 25% over your lifetime. A hefty sum. A plan can bring to the surface the overall impact to household cash flow.
2. You don’t have a dependent or younger spouse to consider. If you claim at age 62, spousal retirement benefits which are usually ½ of a working spouse’s primary insurance amount, will be reduced by 25%. A spouse can be negatively impacted as a survivor since benefits would be reduced accordingly. Keep in mind, a widow(ers) benefit is based on 100% of the decedent’s Social Security benefit if benefits have started. As an example, Richard is 59 with a PIA at full retirement age of $2,797. If Richard begins taking Social Security at age 62, his monthly benefit drops to $2,098. If Richard dies, his wife Kim’s benefit would also be reduced to $2,098. If Richard doesn’t claim his benefit at age 62 and passes away, Kim is eligible to receive his full retirement benefit of $2,797. Kim should wait until her full retirement age if possible, to claim Richard’s full retirement benefit.
3. You go for the reduced amount and invest it. Back in the early 90s, it was common for advisers to suggest clients take Social Security early and invest the difference as the great bull market allowed for growth opportunities. In 2002, I thought it best for new retirees to tap their IRAs and tax-deferred retirement plans first if necessary and wait until full retirement age to take Social Security. I believed then that stock returns would face a formidable headwind over the next decade. Today, I feel the same. I prefer in most cases that clients, especially those who consistently meet or exceed the Social Security earnings ceiling, delay benefits until age 70 to take advantage of the annual 8% Delayed Retirement Credit that applies to benefits from full retirement age to age 70. Based on the current CAPE ratio of 32.22, valuations portend lower returns ahead so 8% a year and robust monthly payments for life is a no-brainer. I don’t consider taking Social Security before full retirement age and investing it in risk assets like stocks an optimum financial decision unless valuations were to get more in line with the median Shiller PE which is roughly 16X. Even then, it would be a challenge to convince me that this is a smart strategy. Variable assets such as stocks are not designed to provide lifetime, safe income as much as you’re told by the financial services industry that they are!

It can be tempting to take the Social Security cash early and run. Please don’t. Step back and consider how others may be affected by the decision.

Work closely with a financial adviser who understands how Social Security operates and can complete an analysis to show you how much you’re leaving on the table over a lifetime.

Let’s have a chat about a topic that feels foreign to us.

Since the election it’s been off the radar.

It’s ok to keep the lights on when discussing this subject.

Come closer.

Let me whisper:

“Markets can be volatile.”

I know.

It’s been a while.

Take a deep breath. There are rules to buy and disciplines to sell. We write of them ad nauseam at Real Investment Advice. We stressed in 2017 that investors should have been taking profits,

To help readers understand I thought it would be helpful to add perspective (tagging on to the context already provided on our blog and in the recent Real Investment Report):

“If the initial hint of a pullback in prices from an unprecedented market extension has you anxious to flee for an exit, then candidly, stocks are not a suitable long-term investment. You should seek to meet with a financial professional and restructure your portfolio conservatively on a reflexive bounce.”

In other words, if you can’t handle the first sign of heat, get out of the kitchen. Volatility, pullbacks and corrections are par for the course. Unfortunately, it’s been so long since markets have experienced a hiccup or retracement; whether deep or shallow (too early to call), it’s going to feel extremely uncomfortable. Five-percent is going to feel like 10 percent, 10 like 20. You get the picture.

I mean, this market has rocketed above its 50-day moving average. A correction back to the average (as of this writing), would be 6 percent. I’m sorry. Five to six percent pullbacks were considered market noise in the past; in the present, this noise is gonna hurt, emotionally.

Novice investors may be surprised or grow disappointed if markets return to how they have historically behaved. Per J.P Morgan’s Guide to the Markets®, it’s unusual for stocks not to suffer multiple 5% pullbacks in a year.

I know it sounds cliché, but corrections and pullbacks are healthy, allows for weak hands to exit and ultimately creates opportunities to add to stock allocations.

Per Lance Roberts, Clarity Financial’s Chief Investment Strategist:

This is what we are looking for to drive our next set of portfolio actions:

• If the market rallies back and sets a new closing high, the bullish trend will be confirmed and equity allocations will remain at target levels and hedges removed.
• If the market rallies back BUT FAILS to set a new high, a series of actions will take place.
  • At the point of rally failure, portfolio hedges will be modestly increased.
  • If the subsequent decline breaks the previous low, the hedges will be further increased and tactical trading long positions will be reduced.”

Currently, as a rules-based investor, you should be in observation mode, not blow-up-your-asset-allocation mode.

You don’t want to get emotional over your money, especially as volatility returns. But…

All through December we discussed on the Real Investment Hour, that volatility would return in 2018.

Boy, has it.

It’s smart to be concerned. Yellow lights are flashing. If the market is too volatile for your emotional makeup even in the face of a market that’s doing what markets usually do (you just may not be in long enough to understand), then you may require a new game plan.

If you believe you must sell because your gut requires Pepto, please don’t use a machete and slaughter your portfolio allocation. Be surgical. Calm. Cool. Liquidate the weakest and most volatile positions first then adjust for the long term when conditions are attractive to do so. Come up with a mutually agreed-upon strategy with your financial professional.

I encourage you to call or meet with your adviser. Ask questions. Seek input first.

If you’re advised to do nothing right now, do nothing…for now. That doesn’t mean “do nothing…ever.” 

Here is an overview from ChartLab. Notice how extremely overbought markets were since the beginning of the year (red line). For the “Blindexers,” or those who recently purchased into their full stock allocation without regard to euphoria or heady valuations, well, this is a formidable test of your commitment to buy and hold.

Investors who have been through turbulent market periods, especially since 2000, know that “trees don’t grow to the sky.” They’ve exercised caution to enter markets (partial positions), taken profits consistently, and managed losses on weak positions (as suggested in the blog, newsletter, on the radio show).

If conditions deteriorate per Lance Roberts’ commentary above, then you may grow weary of “doing nothing right now.” The input to your financial professional shouldn’t fall on deaf ears. The more your input is politely ignored, the greater the frequency of phone calls and meetings that result in similar words communicated by your adviser, the stronger the eventual impact, possibly negative it is going to have on your portfolio. All talk no action is not going to help keep your emotions in check. Sometimes, it takes compromise to avoid costly financial decisions.

If markets continue to falter, the longer you are dismissed as being “emotional,” the greater the ultimate explosion of a building mental powder keg is going to be. The result will be an all-or-none decision where you’ll demand all stocks liquidated, most likely at or close to the bottom of a negative cycle.

In other words, if your financial professional listens, I mean actively listens, and initiates with alacrity some disciplined form of risk protection, even if it’s surgically trimming away the investments which are experiencing the most negative impact (possibly cyclical, emerging market stocks), thus raising cash, the greater the odds you’ll stick with an allocation to stocks through the downturn and ostensibly experience the upswing.

I call it selling down to your personal emotional-neutral zone. It may take several surgical strikes depending on the cycle, but hey, that’s better than taking a machete to portfolio positions, selling everything and then ostensibly, never returning to the market.

Be prepared to eventually be on the other side of the desk, listening to the same old advice that cost you to lose a decade of wealth creation.

For now? If you’re in the game for long-term, you shouldn’t make any major portfolio changes. However, it’s perfect while markets are volatile and traders are not yet willing to scoop up shares on the dip, to shake off the complacency witnessed since the election and have a face-to-face with your financial partner.

Why does it feel so bad??

First, remember when I outlined how diversification isn’t risk management? Now you’re witnessing in real time exactly what I was writing about.

The following chart outlines one reason why it feels so bad. Correlations, or the connections among asset classes approached 90% this year. I call it the “maximum feel good.” Currently, asset classes are correlated tightly on the downside leaving few places to hide, thus the “max feel rotten.”

Bond prices moved up along with stocks in 2017 (albeit not at the same pace, but higher just the same), connected and headed lower (prices down, yields rising), with stocks this year. Unless holding cash, a hedge (or short fund), floating-rate bonds, select overseas fixed income funds and Amazon, diversification is not doing a typical stock & bond portfolio any favors, currently.

Mentally, you are not ready for volatility or markets behaving like, well, markets.

Second, please understand that last year’s and January’s market moves were unusual. Investors haven’t experienced a 5% pullback in stocks in TWO YEARS. Now, as intermediate and long-term bond yields move higher at a hastened pace, stocks are finally taking notice.

Perhaps, there’s a point where stock dollars begin to rotate into bonds; especially inviting for a global society that’s aging and requires safety and income. If the ten-year Treasury heads north of 3.25%, I think you’ll see it.

Last, that darn recency bias, a very-human pitfall where we fool ourselves into believing that the trend of recent history (good or bad), will continue, has convinced many that this period of smooth sailing will lead to more of the same. Recency bias has sucked in investors since late 2017 and January 2018. The absence of volatility has made it easy to forget market cycles, assuage fears. Heck, it’s been a fun ride no doubt about it.

We’ve been writing at RIA of lofty valuations and the strange extended lack of volatility to help readers remain grounded.

To battle recency bias, try to focus on long-term personal financial benchmarks so short-term volatility doesn’t compel you to act indiscriminately out of fear. Fight your prehistoric lizard fight-or-flight brain and think it through.

As fiscal policy commandeers the driver’s seat and monetary policy begins to pull the liquidity pillar out from under the market’s foundation, stocks are going to be shaky at times. Inevitably, cracks are going to form. Volatility has returned and that’s not necessarily a bad thing, especially if as an investor, you’re seeking to place capital to work at lower prices.

Remember, what’s good for Main Street or the economy can be anathema for Wall Street. Low interest rates and cheap money are going to be tough addictions to break.

Unfortunately, the central bank detox though necessary, is going to return stock investing to those who are most suited to handle the gyrations.

Fundamentals will again, matter for something.

Consider the latest market moves a wake-up call.

Authored by Byron Kidder and Richard Rosso, CFP

The U.S. personal saving rate has dropped to 2.4%. The lowest since August 2005.

Per the Federal Reserve Bank of New York based on its Quarterly Report on Household Debt and Credit for Q3 (released November 2017), credit card balances increased by $24 billion with the flow into 90+ delinquent for credit card balances increasing notably over one year.

On average, Americans maintain a credit card balance of $6,375, up 3% from last year according to Experian. Several Federal Reserve officials appear antsy to raise short-term interest rates thrice or more this year; the combination of dismal median household income growth (although recently there’s improvement), a Fed with an itchy trigger finger and consumers about to get hit with higher borrowing costs because of it, can mean a formidable headwind to consumer spending for the rest of year.

Unless some company decides to raise the ante on the $1,000 bonus anchor point.

Do I hear $2,000?

$3,000? Anybody?

Wage growth remains disappointing which means to make more money you must stand out!

Forget stocks. The greatest lifetime investment priority is you, your human capital, the contributions which make you invaluable to employers or customers.

The human capital investment is a topic that very few on the front lines of finance wish to tackle.

Thankfully, there is a growing generation of financial professionals who on an hourly or monthly retainer fee basis act as holistic money coaches and are dedicated to partner with young professionals to help formulate and monitor fiscal steps that get them from soil (the basics of debt, saving & investment), to harvest (retirement).

So, what is human capital investment exactly?

The human capital investment is simply, YOU. Yes. YOU are an investment. The greatest investment. A lifetime money-making powerhouse. Earnings if directed wisely, result in long-term financial security and perhaps more important, a career passion that continues up to and far into retirement.

H/T Doug Short and Sentier Research for the following chart:

When adjusted for inflation, wage growth since 1967 has been nothing short of a disgrace. The United States has suffered close to five decades of real wage stagnation.

People, it’s time for a change.

Byron Kidder, an engineer, motivational speaker and author of the book “It’s All About Everything,” helps others focus on amazingly simple actions to improve their lives and wealth.

Sales can be blight or blessing. If we sell to serve others in an ethical and fiduciary fashion, then our household income and wealth conditions will improve. Byron outlines how to perceive and conduct selling in the most positive light.

Sell yourself properly and earn more over a lifetime.

I hope you enjoy this insight from my dear friend, RIA blog and Real Investment Hour contributor Byron Kidder.

Richard Rosso.

Are you daunted at the thought of sales?  Well, you are not alone.

Sometimes your impressions of what a salesperson should be with your experience of being sold to form the foundation of what you might perceive as a successful salesperson.

Hollywood does not help with this perception.  Those that are terrified of selling tend to think of a stereotypical caricature.  You know the type: unethical, sleazy, pressure sales, etc. but don’t let this type of visualization hold you back from getting into sales and reaching what your full potential could be in this arena.

I believe that selling is not forcefully pushing a potential customer to make a purchase on the spot without them being fully vested or without them being able to make a fully informed decision, which means giving them enough time to make that decision.

A great salesperson understands the route of unethical practices may work in the short-term but are not sustainable for a lifetime of business.  Why?  Because sales is based on added value, reputation, repeat business, and overcoming a client’s previous bad experiences.

I can almost hear the thoughts out there from readers.  “I am interested in sales but I am not sure if I could succeed.  I just get too nervous at the thought of selling.  Like a stage fright.  How could I ever be good in sales?”

Relax.  For me, selling has never been about the act of selling itself but rather about the personal one-on-one interaction associated with helping others.  Selling is a holistic approach to helping a “friend” solve a problem.  It is about being you, being natural, and being genuinely honest.  There should not be a conflict with your integrity.  Integrity and reputation are everything and key to selling regardless of your career path.  Don’t do anything you could not live with tomorrow.

Have you ever thought that you ARE selling everyday whether you realize it or not?

First impressions matter and lead to relationships that form the foundation that evolve into lifelong partnerships with clients.  Stop giving your power away by pretending to be what you perceive the perfect salesperson should be, selling your soul to complete a sale, and focusing solely on the product.  I will lead you on the discovery of profound yet simple tools to harness your inherent selling power.

The Power of the 3 Ss

Sell Yourself

Sell yourself first!  Period.

Don’t fall victim to being forced how you think you should act.  If you impose a trait that is not part of your natural personality, it will come across as disingenuous.  People want to work with those that are likable.

Close your eyes and take a moment to imagine the person you enjoy working with…. the one who is your “go-to” person because you trust and enjoy working with them.  The person who always comes through for you.  There may be another person with more experience but you prefer to interact with your favorite person instead.

They have the following traits that when combined translate to being “likable”: fun, smart, reliable, friendly, sincere, honest, trustworthy, and have integrity.

Likeable means approachable.  What makes a person approachable?

• They warmly greet you as a longtime friend.
• They are positive and willing to help.
• They make eye contact, smile, and offer a personalized greeting.
• They follow the golden rule or silver rule.

You know a likeable person cares about you and feel as though you are their most important priority during any conversation.

Body language plays a deep role because we subconsciously determine in seconds if somebody is approachable and honest.  It can take forever to reverse the bad first impression.  Watching your potential client’s body language is imperative to learning how to decipher their needs so you can deliver best in class service.  It’s all about your attention to the details.

Your success rate will expand once you have become approachable and focused on selling yourself first.  An increase in success leads to a surge in confidence, which correlates to your new focus on selling yourself.  You are working with your natural personality instead of fighting it.  People are gravitating towards you because you are fun, inspiring, and delivering amazing solutions.

Sell Your Best in Class Service

Only after mastering selling yourself, can you focus on selling your best in class service.  This is your differentiator from the competition!  It is vital to build and maintain a reputation, trust, reliability, availability, and fastidiousness for impeccable service.

Five of the numerous skills required for selling your service are being likable, communication, fastidiousness, active listening, and providing amazing solutions. It is difficult to nail down a top three list because it is not about a few skill sets. It’s all about everything combined into a cohesive package.

“Fastidiousness” is key and deceptively easy to discuss putting into practice or claim it is being done as course of regular business.  Answering the phone every time you receive a call and responding to emails within seconds will be interpreted by your clients as being extremely reliable.

Your clients should never have to initiate contact with you for a status report or update.  If you commit to provide additional information to a client, follow through with the information as quickly as possible.

If a client asks a tricky question and you do not know the answer, avoid the trap to commit to something or risk overpromising because you risk losing credibility.  They understand you will not always have the answer.  Honestly tell them you do not know but you will find out and get back to them – fast!  Few things feel worse than having to go back to a client and correct an avoidable error.  Overpromising results in unnecessary stress and can damage your reputation over time.  Always be honest with your client and communicate information with them freely.

“Active listening and Communication” are two sides of the same coin.  Our inability to listen intently inhibits our ability to hear.  Take the time to learn about your client’s wants and needs, which can only be accomplished through research and active listening.

What is active listening?

• Ask great questions.
• Focus on picking up on key words or problems (opportunities) clients are having outside of your established job responsibilities.
• Read between the lines. What do they identify as priority items for their company?
• Paraphrase what you hear the client is saying.
• What does your client like? Does not like?

Your job is to find the fundamental problem so you can turn it into an opportunity by providing three solutions, which is impossible without actively listening to your client.  This sets the stage for “opportunity selling,” which we will dive into an upcoming blog.

“Problem solving”.  We know it is valuable but what does that mean?

You must become solution oriented.  I believe that challenges are opportunities in disguise.  Clients want solutions to their problems and seek products and services that fit the bill.  But how do you know if the solution will actually resolve the fundamental issue?

Root cause analysis is the secret to identifying the right problem.  Otherwise, you end up finding a solution for a symptom, which guarantees the problem will resurface down the road.  Clients will begin questioning your competency or your motives if you fail to hit the nail on the head and deliver a phenomenal solution to their problems.

Focusing on solutions will open doors because it moves you one step closer to being a value added team member.  The goal is to find multiple solutions that solve the problem. Numerous opportunities are lost every day because the focus is on products rather than solutions.

Actively listening to your clients translates into your ability to deeply understand their business.  You need to understand your clients’ business so you can recommend solutions that solve their issues and business goals. Understanding your client’s business model requires time, but you can do something that helps expedite it.

Always try to offer 3 solutions for every problem.  Your role is to provide enough data for your client to make an informed decision.  They will pick the one that best fits their needs and will tell you why they chose it. Avoid making assumptions about what they want and how you anticipate they will choose a solution because this will unnecessarily restrict the quality of the solutions you identify.   Most clients will tell you why they reject a solution.  This crucial information tells you what parameters to use when searching for solutions now and in the future.

Provide information in a way that your client prefers and makes it easy for them to understand.  Be responsive, reliable, and build your reputation as a value-adding member of your client’s team.  Clients will have issues (or “opportunities”) that you should help resolve, even if you do not benefit directly through selling your own product and services.   Eventually they will stop seeing you as a one-issue solution but as a vital and irreplaceable team member.

Don’t shy away from or be intimidated by the challenges you face.  Remember they are opportunities. This is where you get to display your grit to succeed.  Grit that screams “I am here for you, the client, and will find a solution no matter what.”

How many of your competitors are offering multiple solutions?  Yes, it may require more work but making it part of your repertoire will differentiate yourself from them.

Providing best in class service means being able to assess the client’s needs, creating a plan that establishes a path forward to accomplish the task, allocating the appropriate resources for the task, and monitoring the activity to ensure continual progress toward completion of the service.

Sell Your Product

You have become a phenom at selling yourself and providing best-in-class service.  Now you should start thinking about how to sell your product with greater effectiveness.  This is the easy part.

• Learn your product inside and out.
• Learn your competitor’s products inside and out.
• Discover what customers think of your product and your competition’s products.

Customers are extremely smart and trying to sell similar products will get you nowhere. They do not care how we fix their issues; as long as it is safe, ethical, cost effective, and fastidious.  Clients choose who provides the best “solution” rather than picking between two nearly identical products.  Focus on selling yourself and your best in class service.

Sales is not only about selling a finite product.  It is about you!  You are an extension of your product. Without you the product does not sell, and your clients would not reach out to you without the product.  Clients connect with you and decide if they want to do business based on their experience with YOU.

You are selling your vision of what the final solution to the problem will be.  The goal is to become an invaluable resource for your customers.  Your personality combined with best in class service translates in to a solid reputation and (over time) strong familial bonds will form with your clients.

There is a saying that somebody with a hammer will see everything as a nail.  Your newfound focus on finding amazing solutions means you will start accessing the entire toolbox of products to use the right tool at the right time. Remember it’s all about everything rather than a specific tool or rule.

We Are All Born Salespeople

We are salespeople every single day.  We all wake up every day with the same or similar goals.  You are selling yourself by pushing strategies to achieve success.  Some days we are demotivated with the events going on in our lives but do not give up.  Use your grit to keep pressing forward and sell using your smile, support, and energy.

Can you be in sales?  You are in sales!  The recipe is not hard. In its simplicity it is being likable, genuinely being able to connect with people, work to deliver amazing solutions, and strive to provide best in class service.  You must learn to sell yourself first.

Can you sell?  Sure you can.

Think about it.

You have been doing it your entire life.

In 1992, those who are DC and Marvel-type Comics fanatics were mourning the death of Superman.

I mean, how the heck can Superman die? The Man of Steel no more?

In an epic clash across the United States, Superman unbelievably meets his match in a supernatural being named Doomsday. Both succumb to their wounds on the battle-worn streets of Metropolis. Superman clad in what remains of his majestic suit and bloody from confrontation, dies quietly in the arms of his love, Lois Lane.

Heartbreaking.

It was an epic funeral, too.

The Justice League was in attendance. Heck, even Bill and Hillary Clinton were there (in comic form).

I mean this was a big deal.

A colored panel of Superman’s tattered cape as it appears to fly majestically above tawny-smoke debris         is an enduring, powerful image of graceful defiance and sacrifice.

It screams – “I’ll be back,” “don’t count me out just yet!”

It’s during the final sprint of a stock market rise that the cyclically adjusted price-to-earnings ratio, also known as the Shiller PE Ratio or PE10, dies a slow, unspectacular death. Dutiful followers like many of the writers for Real Investment Advice, and possibly your financial partner who is unfortunate enough to give street cred to this stock valuation measure, are weary yet indefatigable in their belief in the CAPE.

Eventually, math prevails.

But until then.

The Superman of valuation measures is dead. Another cycle, another CAPE fluttering aimlessly in the winds of euphoria.

The CAPE believers are just a proud bunch of dumbasses who have “been there, done that.” We’re willing to accept that we’re the financial pros babbling gibberish in the corner of a dark room. Crying wolf, causing distress.

Bring it on. We can handle it.

I’m comfortable with the flow outside the mainstream. Through two major stock market bears, I’ve proudly felt stupid while market pundits concomitantly spewed their “this time is different,” commentary.

Both occasions, thanks to the seminal book editions of “Irrational Exuberance,” (on Real Investment Advice’s must-read book list), written by Robert Shiller, I have been able to keep my head and not be seduced by the flavor-of-the-day market narrative.

At this point in the cycle, the creator of the CAPE, Yale professor, Nobel Prize winner Robert Shiller (again), is as popular as Doomsday. Tenured professionals of market analysis like Rob Arnott, the founder and chairman of Research Affiliates who to me has become one of the finest investment voices of our industry, writes repeatedly about how those who minimize the value of the CAPE are destined to eat crow.

Most important, advisers who allow their egos, popular market personalities with clever tweets and employers’ biased research departments, to convince themselves that valuations don’t matter are going to wreak havoc on client time frames and financial goals yet again. Those who believe in the obfuscation embedded within analysts’ shiny forward earnings estimate fairy tales are just as guilty.

As markets continue to melt-up, it’s easy to get swept up in the gale “wind in the sails,” thus casting valuation metrics out as no longer relevant. I’ve witnessed fear of missing out tempt disciplined investors to throw in the towel, take on more risk just at the time when restraint is warranted.

Buy and sell disciplines are cast aside because you know – we’re in a new paradigm (haven’t you heard?), a Goldilocks scenario, or economic escape velocity. Listen, you’re in this business long enough you hear them all, roll your eyes, shake your head and sit back. Envision what the aftermath is going to be like as each market run up and implosion differs.

Pundit sound bites straddle the fence at this juncture in a market’s rise; the bloviators cheerlead the current environment on Monday. Yet on Wednesday the same crowd warns that inevitably bear markets arise but not to sweat them as holding on and waiting years to break even is a smart move or something to be proud of.

Sorry, we are not buying it.

The current narrative is pushed, pulled, yanked until the herd is seduced into the story as truth. I’m sorry, you can’t argue with me on this point. It’s not different now than any other time in market history. Eventually, tides go out.  I don’t care who the president is, how great a tax bill is, what CEOs are saying; the market is one big story-book guessing game.

By the way, there’s nothing wrong with participating in a market that’s trending positively. You don’t require rationalization outside of sheer opportunity to do it. It’s normal to say to yourself – “I want in on this action!” However, unless there’s a hardcore risk minimization strategy you’re willing to adhere to, be prepared to lose precious time, perhaps years, to recover wealth you’ll inevitably lose.

Remember, Wall Street cares nothing about time. Well, your time anyway. It’s a perpetual “hey, a decade later we’re at new highs!” party over there. For you, it’s precious years gone. Many investors we meet with spend at least half their investment lifetime striving to get back to even.

40 years, 15.9 years, 27.5 years, 13.5 years, 21 years. How much time on Earth you got? I mean even Superman died for gosh sakes and he’s the Man of Steel.

Concomitant with a decision to increase market participation (buy high, sell higher), must be an unwavering belief in valuation measures as beacons of rationality. Reversions beyond the averages will occur. The focus on a metric like the CAPE can assuage euphoria and as an investor, keep the seductive pull of animal spirits at a respectable distance.

So, what else should a savvy investor know about the cyclically adjusted price-to-earnings ratio?

It’s a grounding mechanism, not a timing one.

Per Rob Arnott, Vitali Kalesnik PhD, and Jim Masturzo, CFA in a recent research paper “CAPE Fear: Why CAPE Naysayers Are Wrong,” the CAPE is not a market timing tool but is a powerful predictor of future returns.

We agree that the current richness of the CAPE is going to generate headwinds for traditional portfolio allocations of stocks and bonds. That’s why Lance Roberts and I recently adjusted downward future asset class returns especially for domestic stocks and bonds, in our financial planning software programs.

Rob Arnott and crew outline that a reversion to the historical CAPE ratio of 16.6 would result in a loss of -2.8% a year for stocks (net of inflation but including dividends). A return to the median (middle) valuation level since 1990 would take stocks to a real return of close to zero.

Legendary value investor Ben Graham outlined in his writings how the market was a “voting machine” in the short term and a “weighing machine” long term. The phrase remains timeless and relevant.

Markets are emotional orgies of trader and investor limbic cortexes motivated to buy and sell in short, by hope or hopelessness. It’s a manic-depressive commitment (or lack thereof), of capital which seeks to channel current macro-economic events into a future reality that may or may not come to fruition.

In the long run as a weighing machine, valuation measures – sales, earnings, profit margins, take precedent. In other words, the weight of numbers eventually commandeers the driver’s seat.

Just because the CAPE is not applicable to the voting machine mentality doesn’t make it outdated or ineffective. It makes it what it is.

Think of CAPE as a grounding mechanism; it’s a formula of reason that can prevent investors from blowing up their asset allocations with risk assets, motivates them to rebalance and take profits, create and adhere to a sell discipline.

It’s a way to remain humble when the herd is headed to slaughter.

Per Lance Roberts:

“Valuation measures are simply that – a measure of current valuation. If you ‘overpay’ for something today, the future net return will be lower than if you had paid a discount for it.

Valuation models are not, and were never meant to be, ‘market timing indicators.’”

Is there a better way to adjust the CAPE for a faster moving market environment?

We created the CAPE-5 which uses a five year vs. ten-year average. There is a high correlation between the movements of the CAPE-5 and the S&P 500 index. Interestingly, prior to 1950 the movements of valuations were coincident with the overall index as price movement was a primary driver of the valuation metric.

As earnings growth began to advance much more quickly post-1950, price movement became less of a dominating factor. Therefore, you can see that the CAPE-5 ratio began to lead overall price changes and now, the lead is greatly concerning.

A smart investor would “mind the gap” that exists today between the S&P 500 Index and the CAPE-5. In some form, this divide will narrow: Earnings must either increase robustly or stock prices adjust through correction or remain stagnant or sluggish over an extended period. Think Elvis jogging after downing 10 fried peanut butter and jelly sandwiches. Get the picture? We’re talking sluggish, here!

Unfortunately, nobody knows the catalyst to price correction. Personally, based on the dramatic move of the two-year Treasury yield (now higher than its been in a decade), which is perceived as a proxy for Federal Reserve interest rate move expectations, along with recent hawkish comments by Fed officials like Eric Rosengren, I believe the Fed has a good chance of raising rates too often and derailing the positive momentum in stocks. The market has been shrugging off negative commentary about interest rates for now.

A “must follow” on Twitter is Charlie Bilello, the Director of Research at Pension Partners. His recent tweet about the S&P 500 CAPE Ratio at the start of bear markets is worth printing and positioned in a place you see it every day.

I have it attached to the door of my refrigerator. It’s all about that pesky grounding thing.

Except for 1980, CAPE ratios above the median of 16.6 have preceded some bloody bears. Now at 34, the CAPE should remain in the forefront of investor awareness.

I believe in you Robert Shiller!

So, before you contact your broker to add indiscriminately to stocks or complain how your portfolio returns are nowhere near the dizzying highs you’re reading about in the media, I implore you to re-think the decision and understand where valuations are compared to the past. If you relent and feel you must add to stocks, make sure to employ a sell, stop-loss, or stop-limit strategy to protect profits and contain losses.

Keep in mind, I’m (we) are not bearish. We are fully invested at Clarity. We are cautious. The professionals who make portfolio decisions in our shop have lived through multiple cycles.

Back in May 2017 I wrote – “The Genesis of the Bubble’s Bubble.” which outlines why I think this market has a good chance to exceed tech-bubble valuations.

For comic and science-fiction freaks like me, it was a relief when four new “Superman-like” heroes emerged from Superman’s soul (allegedly).  His death wasn’t for nothing. Superman lost his life to save humanity.

Those who believe in the CAPE and other measures of valuation will eventually be vindicated. The pariahs are destined to re-emerge from the rubble of those who mock them.

Market history proves it time and time again.

Unfortunately, portfolios managed by those who ignore valuations won’t be so lucky. They may stay buried for a very long time.

Want to exceed your financial goals? Understand your hurdle rate

The ringing in of a New Year brings a sense of hope for the future and closure of the past. It’s a time of reflection of past goals and habits and the ushering in of new, better behaviors.

In the financial planning and investment world, it’s very much the same. Advisors, wealth managers and clients are looking back at what went right or wrong and determining the next actionable steps for the new year.  Advisors and money managers should be doing this daily, but for most, unless you’re in the day-to-day dealings of the markets, this may be difficult. There is so much information out there, and the incessant talk of new highs can easily cloud one’s judgement.

As we’re meeting with clients and updating financial plans, a big part of assessing the prior year is looking at calendar year returns.

“How did we do versus the market?” is one of the most common questions. BUT, is it the right question?

I’d venture to say no unless your overall goal is to beat the market. For most, that’s not the case, and comparing your portfolio to the Dow is like comparing apples to bananas or oranges unless you’re only investing in a large cap blended portfolio.

We set hurdle rates.

A hurdle rate is the minimum return you need for a successful financial plan. In the majority of our cases, many clients’ hurdle rates are far below the actual average rate of return they experience in their portfolios. However, it’s not the market’s rate of return nor should it be. You see, if you want the market’s rate of return, you must take the good with the bad unless you employ a buy/sell discipline.  Most don’t have a strategy to exit the market, but we’ll save that for another time. When investing in an index fund you can’t get the actual index’s return with those pesky things called expense ratios or fees. We can’t forget there will also be times of prolonged poor performance. For example, if you invested in the S&P 500 from 2000-2010, it took you 10 years to get even, (we call it ‘the lost decade’.) You went in with $10,000 and you came out with $10,000.

When markets are this fully valued, there is bound to be something bad in the future, meaning prior years’ returns have pulled returns from the future. Yes, there will be a reversion to the mean, but knowing your hurdle rate will allow you to rebalance or take risk off the table after having a good year. Hence, prepare for a rainy day. I think we can all agree that’s not a bad idea.

When you’re determining your hurdle rate, there are many considerations to make. What type of sequence of returns are used? Is bad timing included, meaning what if you retire and the market drops the first two years? Does the plan inflate your expenses annually? What is the rate of return used? Sometimes advisors will make things look a lot better than they are simply to earn your business. That is not the way we conduct business, but it occurs.

What type of risk can you handle?

This is extremely important, but often glazed over with a “look at these long-term returns” says the broker.

That’s great, but what if you retire right before or in the middle of a downturn? Can you push through and work longer? Will your company keep you around? Will your health hold up? Can you wait out the recession? The last big recession took many investors 4-6 years just to get back to even without considering any fees or distributions from your portfolio.

What type of risk will not keep you up at night, but still give you the returns you need to maintain your lifestyle? Returns that “beat the market” sound great, but keeping more of your hard-earned money sounds even better. Did you answer an 8-question questionnaire on your market experience and your intestinal fortitude that are typically based on ‘recency bias’?

Deep down you know yourself and the limits you can stand in the midst of turmoil, but a good financial plan shows what type of loss your wealth can withstand and still enable you to have a successful retirement.

The higher the hurdle rate the less likely your plan will be successful—meaning, a major lifestyle change may be coming your way.

When we are building or reviewing a financial plan we do several things:

1. Use realistic returns. (Yes, I’m talking to all of those 12 percenters out there, media pundits and planners who use those numbers). We revise our numbers annually based on market cycles and current valuations.
2. Use variable rates of return; no one makes a flat 7% each year.
3. Inflate your expenses annually. I have never yet had one client give themselves an annual raise-but remember we’re stress testing
4. Provide income tax alpha. We’re not CPAs, but we can help you determine the best way to take distributions to help you keep more of your funds.
5. Make smart decisions regarding Social Security benefits and Medicare.
6. Provide risk management that is not accounted for with financial planning software to portfolios. And no, it’s not with annuities or insurance products, it’s through having a very defined buy and sell discipline.
7. Evaluate portfolios to ensure they aren’t built for the past, but prepared for the future. We have no crystal ball, but we can make very educated decisions by using fundamental and technical analysis and evaluating the current economic landscape. No portfolio should be built simply on the prior year returns.  Unfortunately, this happens way more often than you might think.
8. Use a realistic life expectancy. We have our clients go to www.livingto100.com. This gives us a better idea on life expectancy; we understand everyone doesn’t live to 103.
9. Look at long term care and insurance policies. Many of the couples I meet with are self-insured. It’s usually the wife I’m most concerned with as it’s likely she’ll outlive her spouse.
10. Ensure client has an estate plan. It doesn’t have to be fancy or sophisticated, but it should always include a will, power of attorney and medical directives.

These are just a few tips to help you evaluate your own financial plan. Numbers are everywhere these days. We know our credit score, social security number, checking account number, debit card pin and alarm code like the palm of our hands, but how many of you know your hurdle rate? I’d bet more of you know the Dow Jones return for 2017 than your minimum rate of return (hurdle rate.) Get acquainted with it, know it. It will change annually depending on markets, impacts of withdrawals and your overall life situation. Financial plans aren’t meant to be static, they’re as fluid as our lives. Things change quickly in our lives and so should your plan. Don’t let one thing bog you down.

Ask your advisor for your hurdle rate, he or she should know it. Also, be sure to follow the 10 rules of the road above to ensure your family is getting the most out of your plan.

A financial plan or investment strategy isn’t something to rush through or skimp over because it is only your financial security we’re talking about.

Take It Personally

It was a real electronic beauty. One of the finest CB radios on the market.

Metal smooth around the edges. Simulated woodgrain; swirly, rich blends of chestnut brown and tan leather-hide. Shiny chrome knobs and a backlit power and modulation meter with a needle-like instrument that swung like a pendulum from red to green depending on whether you were receiving or transmitting.

In 1976, my paternal grandmother handed a new model over to a diminutive gray-haired man with a face etched in permanent scowl. The goal was to convince him, the manager, to consider her grandson (me) for a job as a “stock boy,” at the urban supermarket “C-Town,” that was located near Kings Highway and McDonald Avenue in Brooklyn.

Ironically, I work with stocks today; as a pre-teen, stock meant long supermarket aisles choked with piles of cardboard cartons, and wooden (yes wood), crates that stored metal coffee containers, boxes of Kellogg’s cereal, white, red labeled Campbell’s soup, and cans of cat and dog food. Granted, it was strenuous physical work, but I was responsible for two long aisles – from pasta to coffee, pet food to canned soup, and took pride in how neat (all labels uniform, facing out), and well-stocked my shelves were. I guess you can say I was obsessed.

My father owned two CB radios/car stereo stores then, “The Communication Hut,” in Merrick and Bellmore, New York. Grandma was able to cajole dad into the CB radio bribery caper. My love for all things radio began with Citizen’s Band and pre-dawn New York AM radio.

At the time, the CB, a defunct brand named Teaberry, sold for $189. Compute for today’s dollars? $838 bucks. A lofty sum. You can pick up a new CB radio for $59. Listen, except for collectors like me, the demand for CB radios is weak to say the least. Although, I lament often how much fun CB radio was compared to social media outlets like Facebook, today.

Well, what about color televisions? We all love television, right?

In 1977, a Sylvania with a 25-inch screen sold for $850 (a whopping $3,581 today adjusted for inflation).

At Best Buy, I can pick up a 32” LED for $180.

Inflation is a popular and personal topic. Whether it’s low or high, to most of us inflation is always the elephant in the room or the boogieman in the closet. A real sore point for consumers for as long as I can recall.

In the 1970s, inflation was indeed a formidable foe for many American families and a real standard-of-living destroyer for my financially-stressed household, as you can see in the chart.

Money velocity or the turnover of the money supply, has collapsed post-financial crisis, confounding economists; in the 70s, it was a different story. Generally, an increase in the money supply should lead to price increases as more money chases the same level of or less goods.

In the 70s, there were two or three varieties of soup and a couple of brands of paper towels. This afternoon I can walk through Kroger’s and be flummoxed by the competition and variety of choices available. It makes me wonder how consumers don’t freeze up from confusion and walk out of a store with nothing. I’ve done it.

Now, discussions about inflation are heating up again (pun intended). As the U.S. economy experiences record levels of low unemployment, the unemployment-inflation trade-off as demonstrated by the Phillip’s Curve, or the relationship between unemployment and especially wage inflation, is a re-surfacing debate.

The U.S. Labor Department reported a December increase in core prices of .3% which exclude volatile food and energy – The biggest jump in 11 months.

Unfortunately, housing, transportation and medical care costs were inflation culprits for December which is detrimental for many households.

To piggyback off Michael Lebowitz’s article The Only Benchmark of Wealth, it’s important for investors when it comes to financial planning, to understand how inflation affects not only their wealth, but their emotions and behavior.

Here are several points to consider.

Inflation is personal to and differs for every household.

My household’s inflation rate may differ from yours.

Thanks to an inflation project undertaken by the Federal Reserve Bank of Atlanta, there’s now a method to calculate a personal inflation rate. A smart idea is to compare the results of their analysis to the inflation factor your financial professional employs in retirement and financial planning. Instruct your adviser to complete an additional planning scenario which incorporates your personalized consumer price index and see how it affects your end results or outcomes.

The bank has undertaken a massive project to break down and study the elements of inflation along with the creation of a myCPI tool which captures the uniqueness of goods that individuals purchase.

Researchers estimate average expenditures using a calculation which incorporates various cross-demographic information including sex, age, income, education and housing status. The result is 144 different market baskets that may reflect a closer approximation to household’s personal cost of living vs. the average consumer. It’s easy to use and sign up for updates. Try it!

My personal CPI peaked in July 2008 at an annualized rate of 5.2%. Currently, it’s closer to 1.2%. For retirement planning income purposes, I use the average over the last decade which comes in at 2.1%.

The tool can help users become less emotional and gain rational perspective about inflation. Inflation tends to be a touchy subject as prices for everything must always go higher (which isn’t the case). I’ve witnessed how as a collective, we experience brain drain when we rationalize how inflation impacts our financial well-being. It’s a challenge to think in real (adjusted for inflation) vs. nominal terms.

I hear investors lament about the “good old days,” often where rates on certificates of deposit paid handsomely. For example, in 1989, the year I started in financial services, a one-year CD yield averaged 7.95%. Inflation at the time was 5.39%. After taxes, investors barely earned anything, but boy, those good old days were really somethin’ weren’t they?

We’re inflation experts because it co-exists with us. It’s an insidious financial shadow. It follows us everywhere. We just lose perspective at times as the shadow ebbs and flows, shrinks and expands depending on our spending behavior. Interestingly, as humans, we tend to anchor to times when inflation hit us the hardest.

At C-Town, one of my responsibilities was to update prices (usually higher), on canned items. Not an easy task. You see, back then, every stock boy (not trying to be a Neanderthal here, stock girls weren’t a thing as they were employed mostly as cashiers at checkout in front of the store), was equipped with a heavy metal “stamper,” that was holstered by leatherette holders, attached to our belts when not in use. I kid you not. We resembled urban-western gunslingers with those contraptions.

A stamper was equipped with a long handle to ensure a firm grip. Forged to the handle was a self-contained printing mechanism that held a soaked pad of deep-purple ink and a row of 6 horizontal rubber strips of numbers and symbols that a user was able to manipulate with a couple of fingers, sort of like a series of ink-laden dials.

A stocker set the price he wanted, followed by the symbol for dollars or cents, applied downward pressure on the handle which forced down the mechanism’s rubber numbers to hit the ink and stamp the top of a can or whatever we wanted to stamp.

Frankly, it was a messy ordeal. My left thumb and middle finger were stained purple at least through 1980! In the mid-70s, pages of price changes came in weekly. It was the inevitable nature of the ominous inflation beast. Every can of tuna, cat & dog food, coffee (and some cans were 3 times the size of what’s available today), had to be wiped clean of current prices and stamped with fresh numbers that made the elderly patrons in the neighborhood groan loudly from the aisles. Several customers possessed an eerie inflation spider sense and knew to stock up before price-change day.

So, I understand the intimate journey with inflation.

On the other side of the spectrum, deflation was an outcome of the Great Depression. Simply, the overall price levels of goods and services collapsed by 25% with commodity or farm goods-related product prices declining more to compete for whatever aggregate consumer demand remained. If you were lucky enough to remain employed and not leveraged into the stock market, it was like receiving a 25% increase in pay.

Several economists argue that the lingering effects of the Great Depression including 25% unemployment, could have been assuaged if employed workers were receptive to a decrease in wages to match prices.

In other words, workers had a difficult time comprehending that in real, inflation-adjusted terms, a cut in pay would not have affected their ability to purchase goods and services. Obviously, this is an overly simplistic explanation to illustrate a point. There were multiple factors negatively affecting labor such as the deflation of risk asset valuations (like stocks), and the negative impact of deflation as it increased the cost of servicing household debts.

The goal is to think rationally when it comes to inflation. MyCPI is a good start to understanding how pricing pressure can affect a household. The comparison of personalized CPI to your broker’s financial planning input should at least spark enlightening discussion between you and your adviser.

Plan for inflation in retirement, but you may be surprised by what affects your spending.

I love westerns, especially “The Big Valley.” Rich story lines and robust acting by Barbara Stanwyck as the matriarch of the Barkleys, along with Lee Majors and Richard Long as members of a California ranching family, have captivated me for years.

Your spending in retirement is mostly a big valley. I’ll explain.

I partner with clients who have been in retirement-income distribution mode for over a decade.  In other words, they are re-creating paychecks through systematic portfolio withdrawals and Social Security retirement benefits. Although we formally planned for an annual cost-of-living increase in withdrawals, rarely if at all does this group contact me every year to increase their distributions!

There’s a time series in retirement where active-year activities, big adventures conclude, and retirees enter the big valley of level consumption. I call it the “been there done that,” stage where a retiree has moved on; the overseas trips have been fulfilled and enrichment lives a bit closer to home.

Retirees move from grandiose bucket list spending to a long period or valley of even-toned, creative, mindful endeavors. It’s a sweet spot, an extended time of good health; so, healthcare is not so much an inflationary or heavy spending concern. The big valley stage is just a deeper, relaxed groove of a retirement lifetime.

A thorough analysis I refer to often because it reflects the reality I witness through clients, was conducted by David Blanchett, CFA, CFP® and Head of Retirement Research for Morningstar. The research paper, “Estimating the True Cost of Retirement,” is 25 pages and should be mandatory reading for pre-retirees and those already in retirement.

David concludes:

“While research on retirement spending commonly assumes consumption increases annually by inflation (implying a real change of 0%), we do not witness this relationship within our dataset. We note that there appears to be a “retirement spending smile” whereby the expenditures actually decrease in real terms for retirees throughout retirement and then increase toward the end. Overall, however, the real change in annual spending through retirement is clearly negative.”

David eloquently defines spending as the “retirement spending smile.” As a fan of westerns, I envision the period as a valley bracketed by the spending peaks of great adventures on one side, healthcare expenditures on the other. Hey, I live in Texas. This analogy works better for me.

In comprehensive financial planning, it’s prudent to be conservative and incorporate an inflation rate to annual spending needs.

Medical costs affect retirees differently. Unfortunately, it’s tough as we age to avoid healthcare costs and the onerous inflation attached to them. Thankfully, proper Medicare planning is a measurable financial plan expense as a majority of a retiree’s healthcare costs will be covered by Medicare along with Medigap or supplemental coverage.

Unfortunately, many retirees are ill-prepared for long-term care expenditures which are erroneously believed to be covered by Medicare. Generally, long-term care is assistance with activities of daily living like eating and bathing. At Clarity, we use an annual inflation factor of 4.5% for additional medical expenses (depending on current health of the client), and the cost of long-term care.

David suggests an alternative inflation proxy for older workers. The Experimental Consumer Price Index for Americans 62 Years of Age and Older or the CPI-E, reflects contrast of category weightings when compared to CPI-U or CPI-W, the CPI for urban consumers and urban wage earners, respectively.

It makes tremendous sense for the CPI-E to attach greater weightings to medical care and housing. Generally, the share of expenditures on medical care is double that of the CPI-U or W populations.

Your financial partner should be adjusting healthcare inflation accordingly in your financial plan.

As the U.S. economy heats up and pricing pressures ensue, the topic of inflation is going to gain traction and grab headlines when compared to recent years. As we have a difficult time processing the topic objectively (there’s always purple ink on our fingers so to speak), it’ll be crucial for financial partners to be pragmatic and assist you with the interpretation of inflation on your household’s terms.

Because inflation is indeed personal.

The objective is to manage “inflation-phobia,” accordingly to ensure that financial planning reflects reality. Your reality.

Thanks to Funeral Man, I am an avid reader.

Funeral man would lament. In the heat of summer, in the shade of a blood-red plush entrance to one of the fanciest funeral parlors in Brooklyn. A human frazzle of homeless dust. Inside the storm, a stack of books ranging from legit classics like “Moby Dick” to hip then now-classics like “The Joy of Sex”, he’d read.

He’d sit there for hours and shift focus from book to book like a tenured blackjack dealer armed with a familiar deck. Share thoughts mid-shift. All the time I wondered how someone who smelled like a dead body was optimistic enough to read about the joy of sex.

He was never without a book.

From a white-granite ornate bench. A rest stop for the grieving (now reading).

Funeral man in his Rolling Stones ’77 concert tee, fascinated me for several summers. Inspired my love of books and printed words. He’d show up in June, gone in September. For years I sat with him, listened as he read. Didn’t sit too close though. The musky odor of moldy page and human mixed with New York urban heat was occasionally too much.

“Have two books. One read. One save. One book perfect. One book messy.”

It made my parents, (especially dad) insane when I asked him for money for the school book fair.

“Why in hell does he need so much money for books? And then he buys two of the same %)@))@#_@ damn book, too? What a  f***ing retard!”

Funeral Man was correct. I learned to hate cracking the binder of a new book, bending a page, messing up the cover of a new paperback. I was obsessed/distressed. Even with “one book messy.” It didn’t sit kindly with me to be “one book messy.” I did it. I read the book. But it stressed me out, regardless.

Today, I’m no longer obsessed with “one book perfect.” The messier, the better. Notes, highlights. I’ve come a long way from the days when the permanent crease in the paperback cover of my favorite book, “The Poseidon Adventure,” put me out of commission for a couple of days. I still own that book. It’s funny, if you live long enough, the creases of a life pale in comparison to those of a drugstore paperback.

For a few 1970’s summers I stayed. Near the dead. As Funeral Man espoused the benefits of reading, I listened closely.

And learned.

I read 18 books a year and excited to share my top-ten selections with readers of Real Investment Advice.

Diversification among reading material is a method I use to gain knowledge and remain engaged in the material.

So, here goes:

Skin in the Game: Hidden Asymmetries in Daily Life – A provocative and foremost thinker, Nassim Nicholas Taleb shatters outdated beliefs about risk, probabilities and randomness. Taleb, one of my favorite writers and thinkers, is as close we have to a modern-day stoic. He’s never hesitant to question conventional thought and back his insights with wisdom possessed only by brilliant minds such as Marcus Aurelius.

Upon reading his books, it’s clearly understandable why mainstream economists, financial pundits and media personalities, dislike him so much. In turn, he considers their ridicule a badge of courage and calls these so-called experts out (by name) on their flawed theories in his publications and through social media.

In 2007, I sent copies of his seminal work “The Black Swan,” to several Deep-State Wall Street types for feedback. They were kind enough to inform me that Taleb’s analysis was paranoia and ridiculous. There’s motivation to purchase this new release, coming in February.

Dollars & Sense: How We Misthink Money and How to Spend Smarter  – Duke Professor and behavioral economist Dan Ariely along with Jeff Kreisler, continue to dive into the quirky motivations behind our simplest spending decisions. This isn’t boring stuff, either. The authors explore why we spend like we do and explore methods to improve our saving and spending behavior. Dan Ariely is the master of odd psychological experiments that get to the heart of what makes us tick, financially.

When: The Scientific Secrets of Perfect Timing – Daniel Pink studies people across all cultures and geographies to scientifically unlock the secrets that lead to the synchronization of maximum productivity to times of peak daily energy. The author’s methods are designed to help readers manage their hours wisely so that the most important tasks are tackled at the “right” time every day.

Adaptive Markets: Financial Evolution at the Speed of Thought  – M.I.T. behavioral economics professor Andrew Lo is far from the quixotic believer in the “random walk,” or daily randomness of stock prices, which is unusual. After all, academia lives and dies by the Efficient Market Hypothesis and the randomness of stock prices; so, I’m betting professor Lo doesn’t get to sit with the cool kids much.

He outlines in this book how the market as a collective soup of human emotions, really operates. It’s not the way your broker believes it does. Markets aren’t always rational and efficient even though as investors, we are force-fed this dogma as a convenient excuse to keep us fully invested at all times.

Lo’s unique adaptive theory is a realistic approach that blends elements of the Efficient Market Hypothesis with a necessary addition of humanity, a behavioral flow that makes emotions or animal spirits an integral part of the equation. The financial community at large hasn’t appeared to embrace this work which makes it a must read for me.

We the Corporations: How American Businesses Won Their Civil Rights – Law professor Adam Winkler documents how a 2010 Supreme Court decision to constitutionally protect big business, has turned the Constitution into a weapon corporations use to violate the rights of ordinary people like you and me.

The history which lead up to the 2010 rulings is explored. Sadly, corporations use the 2010 ruling to protect themselves against further regulatory actions that protect American citizens.

The Kings of Big Spring: God, Oil, and One Family’s Search for the American Dream – Author Bryan Mealer weaves a master tale of a Texas family that spans four generations overwhelmed with flaunted financial opulence, personal drama, heartache and failure. A big-state tale of fortune and ruin, the author outlines a story of his great-grandfather that not only spans wealth and adventure, tragedy and prosperity; it’s one of those books that simultaneously takes the reader along for the birth of a Texas nation. I’m a sucker for sweeping epics like this. They’re healthy for the imagination and a welcomed break from finance and economics.

Tribe of Mentors: Short Life Advice from the Best in the World -Entrepreneur and motivational guru Timothy Ferriss interviews his business and entertainment idols about their daily rituals, failures and successes. There are over one hundred interviews in the book. Some you’ll relate to, others you’ll ignore. This is my ‘lightest’ reading choice of the year and I’m especially interested in positive morning rituals that get the day started on productive footing.

Revolution Song: A Story of American Freedom  – I’m envious of Russell Shorto. He’s one of the most gifted wordsmiths I’ve ever read. Every sentence he pens is poetic and breathtaking. The struggle for freedom (which continues today), during the American Revolution is chronicled through the eyes of six people whose lives were forever changed. His style reminds me of historical fiction written by John Jakes.

Shorto uses words the way an artist employs a brush; the Revolution’s freedom song is brought down to the notes of the collective individuals who form it with a relentless, turbulent forming nation as a brilliant yet unmerciful backdrop.

Thinking in Bets: Making Smarter Decisions When You Don’t Know All the Facts – Poker champion Annie Duke advises readers how to embrace uncertainty and make clear decisions in the face of it.  The author now business consultant, teaches readers how to graduate from a need for certainty to a perspective of probabilities when it comes to making decisions – an analysis of what you know, what you don’t, and the outcomes that may occur (good and bad), can help decision makers remain calm and increase the odds of success, or at the least, deal successfully with adversity in the face of bad decisions.

The Truth Machine: The Blockchain and The Future of Everything– Michael Casey and Paul Vigna seek to demystify the blockchain, an open digital ledger of economic transactions, and explore how this cutting-edge technology will permanently alter the landscape of several industries from finance to shipping.

Blockchain technology per the authors, will level the playing field for billions of people who currently have limited access to the global economy, shift the balance of power away from self-interested middlemen and allow consumers to bypass those financial, banking institutions which have been rapidly losing credibility since the financial crisis. Hey, you may not believe in cryptocurrencies like Bitcoin, but the technology behind them will probably affect how you transact business in less than a decade.

Early in the new year, I’ll again pull one of my forever favorites from my business and investing library and re-read. If you haven’t checked out my “go-to” library selections, check out: Ignore Business Insider’s Reading List: This is What You Should Read.

In the summer of ’77, I threw Funeral Man a psychological curve ball. While reading near the foot of the master, a self-improvement book he recommended, I looked to him and said:

“You know, you read some great stuff. Why can’t you live the words?”

He was clearly hurt. I mean with all this knowledge, why hadn’t he done more with his life?

What words will you read today and really take to heart?

Will sentences change your perspective, motivate you?

Words change and improve who I am every day.

So do the lessons learned.

Funeral Man died in 1979.

I attended the service. Room B. Inside plush further inside plush of his favorite death parlor.

I didn’t recognize him at first: I thought it was a mix up. All cleaned up. Hair neat. His name was Sam. He wore a military uniform. With multiple medals hanging from his chest.

I truly felt bad for what I said.

Funeral Man was indeed a man of lessons.

He did live words. His truth. Obviously, it was just enough to drive him insane.

I ran four blocks home for my copy of “The Sun Also Rises.”

It was buried with Funeral Man a long time ago.

Not a cover was bent.

One book perfect.

One book saved.

Like a life not lived.

But not you, Sam.

You live on.

I hope RIA readers enjoy these selections for the new year.

An adage overused by financial professionals is “investing is all about the long term.” A team of academics took it seriously and created for the first time, an extensive annual database of total rates of returns on 4 major asset classes for 16 advanced economies. Housing, equity, bonds and bills compromise over half of all investable assets in advanced economies today, according to the study.

A monumental task to say the least, the authors of the study “The Rate of Return on Everything, 1870-2015,” Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan M. Taylor, include total returns for residential housing, an often ignored but major component of household wealth.

Empirical results add color to how the growth rate of an economy has paled and conflicted with the accumulation of wealth and rate of return on capital as possible drivers of wealth and income inequality. In other words, a robust economic growth rate benefits labor whose increasing wages spur aggregate demand for goods and services.

The rate of return on risk assets benefits those who generate wealth through ownership of capital assets. At times like we’ve experienced through the decade post-Great Recession, economic growth has progressed at below-average rates. Global central bankers utilizing unprecedented monetary policy methods, have pushed risk asset prices three-standard deviations above historic norms and extremely out of proportion to realized economic growth.

However, over the past 150 years, the real return on wealth has substantially exceeded real GDP growth in 13 decades and has only been below GDP growth in the two decades corresponding to two world wars.

Currently, monetary policy and cheap money have motivated corporations to take on debt and buy back common shares thus driving a greater wedge between the wealth of capital and financial stagnation of labor. Facts this paper outlines and what we’ve been writing about at RIA.

Well Rich, we know all this from reading the Real Investment Advice blog. Why should I care?

Here are several observations an investor should take away.

Low returns on safe assets are more common than you think.

Safe returns over the last century have been low on average, falling in the 1-3% range. What’s surprising is not only are returns low for most of the period, but volatility is high. Not a good long-term combination for investors.

Each of the world wars was a time of very low real (adjusted for inflation), safe rates; well below zero. Low returns served a purpose. They allowed for rapid debt reduction post-WW2. Today, low rates allow global governments to service their overwhelming debt obligations.

Safe assets such as Treasury Bills as referenced in the study, from an investor perspective, may be a sleeve in an asset allocation used for ongoing cash requirements and or utilized to protect against portfolio losses through bear market cycles for high risk assets, like stocks. Safe assets as validated in the research, provide inadequate protection against inflation. Not a surprise.

Risk premiums (risky rates minus safe rates), don’t necessarily co-move with business cycles.

Obviously, we’ve experienced a similar outcome over the last decade where U.S. economic growth has been mired in a below-average malaise, yet stock market returns have more than doubled.

Through most peacetime periods, the risk premium has been stable at roughly 4%-5% with bouts of extreme volatility and strong mean reversion.

Equity returns have experienced wealth destroying boom-bust cycles with real returns as high as 16% and as low as -4% over the course of decades. Equity prices are subject to large and prolonged swings which makes complacency and a focus on recent, robust stock returns a potential lethal blow to wealth creation and long-term financial security.

Most important at this juncture is to focus on risk management. For example, as of December 29, the 13-week T-Bill (or risk-free) rate was 1.39%, the S&P 500 Index closed the year up 19% which far exceeds the average risk premium calculation and more than triple Wall Street return projections. Keep in mind that risk premiums were or at near their highest level in almost every country in the study largely due to low returns on safe assets. Sound familiar?

Unfortunately, there’s no way to predict when mean reversion hits and becomes reality. Therefore, portfolio risk management guidelines should be created and diligently followed.  Need a jumpstart for the new year? Download RIA’s Financial Survival Guides – “The Ultimate Chart Guides for An Investment Life,” and “Investment & Planning Rules for Financial Success.”

Global diversification isn’t what it used to be unless you seek to purchase rental real estate in Norway.               

We’ve been beating this drum repeatedly at RIA. Equity diversification is falsely touted as a ‘free lunch’ and a viable method of portfolio protection by the financial services industry. The industry’s motivation is to keep investors fully allocated to stocks, regardless of the cycle. The study outlines how equity returns have become highly correlated across countries.

Housing is a different story.

Although aggregate returns on equities exceed those on housing, equities do not outperform housing, especially when rental income is considered, in risk-adjusted terms.

Surprisingly, housing has been as good a long-run investment as equities. Long term, housing outperformed equities in 6 countries, equities outperformed housing in 5. Returns on the two assets were about the same in the remaining 5 countries.

Sharpe ratios (returns in excess of risk-free rates), for housing in all 16 countries is more than double those of equities. Naturally, transaction costs, taxes as well as liquidity add variability to these results. Leverage increases both risk and return for equities and residential real estate.

Cross-country residential real estate provides the lowest correlations and greatest overall diversification benefits with returns in housing markets following a smoother path than equities.

Think you’re diversified when invested in publicly-traded real estate investment trusts? Think again.

REIT returns are more volatile than ownership of unlevered residential real estate. REIT returns are subject to the similar gyrations of the overall stock market.

Residential rental real estate isn’t for everyone. However, for investors who are up for the task, review RIA’s Guidelines for Rental Property Diversification.

The volume of work at the least, should spark discussion among academics, economics and investors who seek to gain an understanding of not only how asset class returns experience boom and bust cycles and periods of tight correlations, but how ironically, the safest of asset classes may be very risky at times. For savers and investors, the research provides long-term perspective of risk premiums that risky assets bear when compared to safe assets like government bonds and short-term bills.

Last, the research clearly showcases how the persistent, widening gap between economic growth and the appreciation of capital assets have also coincided with increases in wealth inequality across the majority of countries studied. The authors’ findings shed additional light on the ongoing debate about the underlying causes of the declining labor share of income both in the U.S. and globally since the 1970s.

“We still have reason to celebrate the economic principles of that first Thanksgiving of nearly 400 years ago. The productive and efficient U.S. economy has absorbed some hits this year, but has posted solid growth, driving income gains and a rise in the stock and bond markets, and improving the financial well-being of Americans – definitely something to be thankful for.” – November 2007 – Jeff Kleintop, CFA, Senior Vice President, Chief Market Strategist, Linsco Private Ledger

Was Kleintop living on the same planet as the rest of us in November 2007?

If he were on the front lines attempting to protect wealth and manage client emotions, I think he may have choked a bit on his Thanksgiving turkey.

Certainly, I’m not the only one who wonders why big-box financial retailers keep investment and market strategists on staff. Am I?

“Alternatives to equities are not all that attractive. Real interest rates are below historical norms, and they’re heading higher, and that makes bonds relatively unattractive. The residential real estate market is no longer an option and commercial real estate is way overpriced.” It all adds up to a bull market for stocks – at least for a little while longer.” – July 2007, Michael Metz, Chief Investment Strategist, Oppenheimer Funds

Thanks for being patient with me: One more:

 “The market will inevitably slump, they say, but that’s unlikely to happen in the second half of 2007. “Don’t panic,” says Wayne Lin, an investment strategy analyst at Legg Mason. “There doesn’t seem to be much out there to cause the market to tank in the next couple of quarters.”

In September 2007, I believed something was very wrong with markets. So much so I drafted a memo to Charles Schwab Investment Management expressing how the impact of lower future market returns would affect retirement distribution portfolios and overall returns for those saving for retirement.

My analysis was ignored.

I was naive to believe my concerns would be addressed. It was a humiliating lesson yet one I’m thankful for every day.

Since 2009, I have excluded research and so-called pundit commentary produced by financial organizations, especially those who serve front-line sales forces of brokers, from my daily reading regimen. I refuse to peruse market forecasts (forecasts are a waste of time, anyway) and analysis from strategists whose primary responsibilities are to be credentialed faces that lure investors to go “all in,” and remain “all in,” managed products which serve their firms’ profit margins.

Oh sure, these richly-compensated pros bloviate about market and business cycles throughout various national media outlets. Some even provide blessings for Thanksgiving. Yet when it comes to portfolio actions, they lose their appetites. The pervasive blanket advice for retail investors is to do nothing in the face of a bear. Granted, that may be suitable advice. For the so-called pundits? It’s the only guidance employers will permit. You’ll rarely hear the word ‘sell.’ It’ll be some nebulous, milquetoast, politically-correct terminology like “maintain a neutral weight to stocks,” whatever the heck that means.

At critical market junctures, the talking heads go silent about risk management (outside of the words stay diversified).  

Read: Never Look at Diversification the Same Way Again.

So why again do financial retailers that peddle mostly allocations-in-a-box spend big bucks to hire strategists when the ‘real’ strategy is to set a portfolio and then forget it?

What should you as an investor, consider?

It’s commendable to stay informed, just understand the motives.

I’ll never fault an investor who seeks education about markets and the economy.

If you’re comfortable with the research your broker’s research department produces, that’s fine. It’s better than not learning at all. However, remember to round out the perspective with professional commentary and data that differs or at the least, provides an objective perspective (which may mean career suicide for a pundit on a financial retailer’s payroll.)

Frankly, the motivation behind www.realinvestmentadvice.com is to provide a comprehensive alternative to mainstream Pablum; our contributors believe it’s their responsibility to question dogma and expose the underbelly of the financial industry and overturn stale investing theories.  Other reliable sources of objective thought include –  Doug Short’s work at www.advisorperspectives.com  (thorough analysis for investors as well as advisors), www.247wallst.com and writings from the market trenches at www.seekingalpha.com.

Limit commentary that considers diversification some special form or “Holy Grail,” of risk management.

Diversification among stocks in rising markets is an effective way to maximize returns.

For example, global diversification has enhanced portfolio returns this year. Spreading wealth among different markets and sectors has allowed investors to capture strong equity performance. You see, on the trend higher, investors may seek to employ a series of risk horses to fully participate in the race.

Fixed income or bonds, and cash equivalents do a good job of helping investors manage risk through bear markets as they are negatively correlated to stocks. On the way down, stocks across markets connect and head south in sync; some fall faster than others. Unfortunately, when stock diversification is needed the most, it fails.

With current valuations and stock prices extended well beyond their long-term trends, investors must be aware of reversions that have the probability of wiping out a decade or longer in gains. Stock diversification will not protect you if or when this occurs (let me know if you’ve heard this from your broker’s research hub as of late; I bet you haven’t).

Strategists for big-box financial retailers are consistently wishy-washy when it comes to the current unsustainable altitude of stock prices. It’s not in their best interest to take a stand. It would be a death knell for their careers.

Recently, one of the paunchiest of the brethren shared on CNBC: Stocks are “slightly overvalued;” followed by – “that doesn’t mean you should do anything here.” Perfect. Well done. That’s how seven-figure compensation packages are earned, folks.

When it comes to retail investors, time is as or more precious a commodity as money; we at RIA consistently write and research the math of investment losses to make sure you remain emotionally grounded and don’t allow greed to blind your judgment. We are not afraid to outline the risks inherent in extended markets.

Personally, I’m not willing to give up a decade or two to break even. Are you? Don’t worry about your friendly neighborhood talking heads. They’ll continue to collect big paychecks and hefty year-end bonuses as long as they play senior managements’ game. A broker’s research department superstar spokesperson is paid handsomely to point out when markets reach new highs but rarely expound on how long it takes to achieve or in most cases, reclaim them.

A big-box financial retail investment strategist’s primary role is to forge and fortify a firm’s presence or brand and help front-line brokers keep investors fully invested through rough market cycles, nothing more.

As you may surmise, these individuals are products of the finest Ivy League educations and are lauded with Wall Street “cred.”  I consider them nothing more than lethal arsenal for brokerage marketing initiatives.

Don’t be fooled like me. There was a time, regrettably, when I respected the insights from several well-known Wall Street personalities. My research two years before and during the financial crisis permanently upended my beliefs.

After a decade of unorthodox, globally-coordinated central bank policies which have provided an impressive tailwind to stock performance, big-box strategists are firmly emboldened in their views.

As an investor, do your wealth a favor. When you hear professionals from the largest publicly-traded financial firms share investing wisdom on television, hit the mute button.

Your portfolio will be better off.

As an advisor who has a passion to do noble work for clients, it’s important to investigate beyond your research department’s myopias. Be open-minded to the point of mania; search out independent thinkers who will poke holes in your head strategist’s point of view.

You may be enlightened and disheartened by what you find.

I was.

“People often make suboptimal decisions for a variety of reasons, including incomplete accounting of costs and benefits, partial risk understanding, and flawed assumptions regarding the probabilities of various outcomes.” – Boombustology: Spotting Financial Bubbles Before They Burst by Vikram Mansharamani.

The investment vs. speculation discussions with ecstatic Bitcoin buyers are a real-time study into behavioral economics.

I understand the thrill of a cryptocurrency ride.

I too, find the dizzying parabolic moves higher, cascading drops, and the shaky trading infrastructure experience fascinating. It’s reminiscent of the heyday of tech stock Wild-West trading when a company like EToys launches an IPO in 1999 at $20 bucks a share, closes at $76 and eventually goes bankrupt in 2001. Although I personally believe cryptocurrencies and blockchain technologies will have a longer shelf life than Pets.com.

However, it’s time to sit “Bitsters” down and explain a few things. Stop squirming and listen! I refer to those who undertake little if any homework and at least try to comprehend Satoshi Nakamoto’s vision, as “Bitsters.”

Nakamoto’s is a purely mathematical design which creates a peer-to-peer, open electronic cash system to allow payments to flow quickly without going through a financial institution.

Bitcoin was never to be an “investment,” or a method to speculate on the moves in its price. That’s the motivation of naive “Bitsters,” who have no clue how badly they may get hurt gambling on price moves and falsely convincing themselves how they’ll maintain Bitcoin no matter how far its price may fall.

You see, “Bitsers,” are venturing into unchartered techno-territory of dedicated Bitcoin “Hodlers,” or those who will never sell their Bitcoins; they perceive minimal value in a fiat currency. They’re a freakishly smart group who speak their own language like the garbage dump freaks on the hit show The Walking Dead.

So “Bitsters,” you’re as human as the rest of us. And as a human you’re plagued by overconfidence and unaware of the limitations of your own knowledge and increasingly unaware of the mis-knowledge (look, I created a word), of others who are affected by a similar fever for cryptocurrencies with Bitcoin being the granddaddy of them all.

In other words, you’re experiencing availability heuristic. Frankly, as people we are hot soup of flesh, blood, experiences and mental shortcuts when it comes to making decisions. An availability heuristic is a psychological quick path which relies on immediate examples that come to mind when evaluating a topic, concept or decision. The readily available and pervasive exhilaration about Bitcoin is that the price seems to climb to astounding records every day (hour).

Here’s what I’d like to say.

Bitsters: I implore you to get a grip.

You’re participating in a boom that will lead to a bust. It’ll happen. I just don’t have a date to share with you.  Bitcoin will survive; however, in five years with increased supply, competition from other cryptos, the inevitable scrutiny by regulatory authorities, and futures contracts (with possible buffers that will quell wild price swings), eventually Bitcoin will find an equilibrium demand price that could be much lower than it is today.

Heck, every new paradigm or technology eventually goes mainstream. As it’s human nature, sexy ostensibly departs. It’s just part of life. The thrill dissipates. Like the internet. Sure, a gamechanger. So was electricity and radio at one time, too. Markets inevitably discover the proper footing and price for everything that trades. The price of Bitcoin is based on scarcity and demand.

As it is currently scarce, (new Bitcoins are generated by a process called “mining,” and will stop at a total circulation of $21 million, with 16.4 million in existence, today), and demand is feverishly high, prices are volatile and distorted.

So, I implore “Bitsters” to humble themselves, don’t attempt to recruit others or drum on your chests like boisterous gorillas about your newfound latest hot-crypto pick. Take your ego out of the trade. Step away; be swift and anxious to take profits, convert Bitcoin into currency you can use to stock up on stuff you can buy at Walgreen’s. You know, like toothpaste.

I’ll reiterate: Bitcoin is NOT an investment.

The creator of Bitcoin has no mention of it as an investment in his original paper. Neither should you consider it one. As a Bitster, I implore you to remain grounded and treat your purchase as a gamble, a thrill ride through a carnival fun house. Purchase with money you can afford to lose. Nothing else.

Why are you creating rules for a medium of exchange that isn’t an investment?

Bitsters I encounter attempt to wrap rules around Bitcoin like “if it drops by 50%, I’ll buy!” I as well as they, are uncertain as to why arbitrary rules of purchase are created. In other words, Bitcoin isn’t an investment; you cannot calculate its value. So, how would I or anyone else know whether a 50% haircut is a buying opportunity? I guess it makes buyers sound smart, or responsible. How is $19,000 expensive and $10,000 a bargain?

You tell me. I have no idea.

If Bitcoin is based on demand and somewhat current limited supply, why not buy it here, take a leap of faith, and pray the price goes higher? There are no price anchors in unchartered territory; when it comes to speculation one must strike when the iron or opportunity is hot and exit before it cools. Therefore, Bitcoin, as I repeat what seems to be every hour, must be considered speculation at this point.

What are my personal thoughts?

Do I personally believe cryptocurrencies are here to stay? Yes. Do I think increased supply, regulation, and competition from other cryptocurrencies, eventually moderate the price of Bitcoin and obliterates “Bitsters?” Why, yes. Yes, I do.

Do I love how gatekeepers (those who make the rules for the rest of us), fear cryptocurrencies and discount their future acceptance? Absolutely.

The financial, banking and systems of Wall Street deserve dissonance. The fear and sorrow that major financial institutions have transferred to the majority of Main Street and the bills they’ve stuck households with for bailouts during the Great Recession, deserves such a threat (albeit small right now).

A vast system for open transaction; a medium of exchange that has nothing to hide is as good a nemesis as any. Who knows? In 50 years, cryptocurrencies could be mainstream. Anything is possible.

Major institutions and financial pundits rail against Bitcoin because it confronts their beliefs and someday may be a formidable threat to their shadow systems. For now, it’s like turning on a kitchen light and watching gatekeeper roaches scatter.

As I’ve read recently from a Blockchain Ecosystem builder:

“For us, Bitcoin IS the end game. We cashed out alright. We cashed out of the current system forced upon us because we did not have a choice in the past. Dedicated Bitcoin holders consider fiat currency dirty money and will spend it before they do their clean version.

Now we do.”

For the amateur players in Bitcoin who can’t keep their emotions in check, cryptocurrency may be a tough but required lesson.

The week after Christmas begins with thoughts of lofty resolutions dancing around in our heads along with high expectations for success through the new year. There lies the great opportunity to settle in and take several financial actions that jump starts 2018 on solid fiscal footing.

Clean house.

Consider tax-loss selling where underperforming or losing investments are sold in brokerage in non-IRA accounts. Capital losses that are realized can be used to offset long and short-term capital gains or reduce ordinary taxable income by a maximum of $3,000 a year if gains aren’t achievable.

Losses not used against gains or income may be carried forward to future tax years; make sure to keep track of them. A smart idea is to inform your financial adviser or partner so that he or she may track and utilize losses accordingly.

Mutual fund investors will likely realize record capital gains for 2017 which makes scrutiny of losses to offset gains an important financial move by year end.

Realign to your original portfolio target.

So, you’ve allowed stocks in your portfolio to run year to date on momentum of tax-reform hopes, a somewhat dovish Fed and a solid synchronized global growth story? Well, good for you. Now, do your wealth a favor for 2018 and manage risk accordingly by taking profits, thus reducing your allocation to stocks to where they were last December.

At the least, your portfolio should be rebalanced to a neutral point where risk is in line with your emotional makeup or gut. And it’s fine to maintain the proceeds in cash or a short-term bond option. If anything, your weighting to fixed income probably requires a fresh look and additional investment. No, bonds are not dead.

Read: Bond Bears and Why Rates Won’t Rise.

Profit-taking this year may be especially prescient as the Senate tax bill has introduced a “FIFO mandate,” or first-in-first-out edict where retail investors (institutional is excluded), must sell their oldest shares first which most likely possess the lowest cost basis.

Ostensibly, unlike today where a retail investor can identify specific lots to sell, preferably the ones with the highest cost basis (and lowest capital gain tax liability), the Senate proposal would punish retail investors with heavier tax burdens by forcing them to sell the most profitable shares first.

The mandate has potential to alter behavior; retail investors may be hesitant to sell to avoid greater tax burdens. Thankfully, the mandatory FIFO provision is not included in the bill passed by the House Of Representatives.

Stash cash virtually.

Still stashing emergency cash in an outdated brick & mortar bank? Spend at most, 10 minutes online, to open a high-yield savings account with an FDIC-insured virtual bank like www.synchronybank.com. Due to lower overhead costs, savings and CD rates at online banks are anywhere from 50-65% higher than their outdated walk-in brethren. Worried about customer service? Don’t be. A chat feature and 800 number are available to communicate with bank representatives.

Make it a habit to transfer extra cash from your current institution to a new virtual choice. It’s easy to establish an electronic connection and easily move cash between them.

Drop a liability.

You may be surprised by the number of stealth monthly charges that hit your credit card accounts. It happened to me recently. After going through a paper credit card statement, I realized I’ve been auto-subscribed to a periodical I haven’t read in well over a year. Ostensibly, I racked up over $200 in charges.

If it happened to me, it can happen to you, too. Every year I go through and cut a recurring charge for a service I don’t use often enough to warrant the cost. This year it’s Netflix for me. What is it for you?

Drop me an e-mail and let me know what you cut, and why, and I’ll discuss it on the Real Investment Advice radio hour (anonymously, of course.)

Give yourself credit that pays you to use it.

If you’re going to use credit, consider cash back.

If you’re above average managing credit and paying off balances monthly, step up to cash-back rewards. Why not? Several issuers offer 5% cash back on everyday purchases like groceries, gas and restaurants.

Cards may charge annual fees ranging from $39 to $95 a month. However, if you spend $30-$65 a week on groceries or gas, you’ll more than make up for them.

Check out Nerdwallet’s list of best cash-back cards for a thorough review of issuers and pros, cons of each.

Bolster the “pay yourself first,” mantra.

Program yourself to pay yourself before everything else. Proactively adjust household expenditures so that company retirement and or emergency savings accounts are funded first. Payroll deductions or some form of automatic deposit feature make it easy to create and stick with an aggressive saving and investment program.

Make an initial bold move. A financial leap of faith: Take a step to super-saver status and immediately increase your retirement payroll deduction to 15%. Don’t even think about it, just do it. Before consideration to your household spending.

Micro-track expenses for the month of January after the new deduction is in effect. Adjust spending to meet the new, increased deduction. Then work on the necessary cuts to expenses to continue the 15% or possibly adjust even higher, to 20%.

My thought is you’ll be amazed to see how quickly the change is accepted and the impact minimal to the quality of life. I’ve witnessed how this action alters thinking to attach good feelings and reward to savings vs. spending.

Get a portfolio health assessment.

How much thought have you given to your overall portfolio allocation to stocks vs. bonds and cash? For example, many contribute to their company retirement accounts and ignore how their money is invested over time, or fully understand investment choices available.

The last week of December is perfect to meet with a financial professional, preferably a fiduciary, to assess the current risk in your portfolio vs. future return prospects.

Keep in mind, the stock market has appreciated 35% since 2014 while reported earnings growth has risen by a mere 2% through the same period. Sooner or later, this extreme premium in stock prices will work off through correction or long periods of much lower than average returns. Hey, it’s math and eventually math prevails over emotion.

Prep a reading list (include Real Investment Advice Survival Guides and blog).

My 2018 book choices are listed, purchased and ready to go! Need some ideas of seminal books or “must reads,” on the topic of finance? Click here for my personal favorites. I refer to at least one of these tomes annually. My 2018 choices include Richard Reeves’ Dream Hoarders and Ray Dalio’s Principles: Life and Work.

At www.realinvestmentadvice.com, there are several Financial Survival Guides available free for download. From questions you must ask when interviewing a financial adviser to investment and planning rules, these guides were created to help investors and savers make the most of their money.

Our latest Guide, “The Real Investment Advice Investing Manifesto,” is a Roberts & Rosso creation, suitable for framing or display, that outlines our financial philosophy in a creative, aesthetically-pleasing format.

Flip your money script.

According to Brad T. Klontz, Psy.D., CFP® & Sonya L. Britt, Ph.D., CFP®, money scripts as coined by Brad and Ted Klontz, are the core beliefs about money that drive ongoing behavior. Money scripts are unconscious beliefs about money formed in childhood, passed down from generations.

They may develop in response to an emotional charge or impact such as parental abandonment, devastating macroeconomic episodes like the Great Depression and the lingering impact of significant financial losses. I’ll add lack or volatility of household financial security. Also, I’ll add embarrassment to the list. As I pre-teen it was embarrassing for me to use food stamps when purchasing groceries for my tiny household.

So, what is your money script? How was it formed? How are you wired? Have you thought about it?

If you possess negative money habits, writing and exposing them consciously will help you to change them. Engage the assistance of a spouse, close friend or objective financial professional to rewire how you perceive money and keep you on track.

Financial changes don’t need to be difficult. Simple moves as outlined can prepare you for a fiscally strong 2018.

Couples with similar money scripts grow or destroy their net worth at an exponential rate.

I don’t require fancy academic or empirical backup to make the statement. I possess close to 3 decades of face-to-face meetings with couples to review their money habits and provide financial planning guidance. Couples that share similar philosophies about debt, savings and investing are a synergy to wealth creation or they’re the death of it.

It doesn’t matter if both are strong wage earners or if one remains home to care for children. In other words, household income isn’t as relevant a factor; the highest and best use of the net income or the utilization of household dollars, whatever level they are, is critical. Those who can allocate (or in some cases, misallocate) funds and mutually agree on the flow of their funds are likely to stick together through thick and thin, rich or poor.

Not to be morose, but it’s to the point where I can predict with respectable accuracy who is going to meet their forever marital obligations. I’m not a relationship expert by any stretch of the imagination. However, I do know that financial stress in a marriage can be toxic to its health.

The question is – how do you define stress? I understand couples who experience financial distress are more likely to part ways. However, two people together aligned as profligate spenders or passionate savers, in my experience, tend to stick it out.

According to Brad T. Klontz, Psy.D., CFP® & Sonya L. Britt, Ph.D., CFP®, money scripts as coined by Brad and Ted Klontz, are the core beliefs about money that drive ongoing behavior. Money scripts are unconscious beliefs about money formed in childhood, passed down from generations.

They may develop in response to an emotional charge or impact such as parental abandonment, devastating macroeconomic episodes like the Great Depression and the lingering impact of significant financial losses. I’ll add lack or volatility of household financial security. Also, I’ll add embarrassment to the list. As I pre-teen it was embarrassing for me to use food stamps when purchasing groceries for my tiny household.

So, how do you know as a couple if you’re fin-patible? Or financially compatible?

Go appliance shopping together to understand a partner’s money makeup.

It’s amazing what can be learned about each other just from something as ordinary as purchasing appliances. Those who follow a money script driven by status may select the top of the line washer and dryer equipped with the latest bells and whistles and not place a priority on thrift. Partners driven by practicality and value may select a simple set that does the job with less buttons and dials, and of course with focus on price.

I’ve witnessed how status seekers and partners thrilled by thrift after years together can unknowingly fester a deep-seeded resentment.

For example, the status seeker perceives spending on lavish gifts and a comfortable lifestyle as a display of care or nurturing. The thriftier of the two, the partner who tempers expensive purchase decisions, seeks cheaper alternatives or requests less expensive gifts, may be perceived as rejecting the love of the status seeker.

If conflicting behavior goes on for long periods and not discussed, eventually one or both partners grow dissatisfied and give up on the relationship entirely, especially if one is always giving in to the demands of the other.

Couples who talk it out, respect each other’s money scripts, and find a blend of value and style, nip bad feelings in the bud. Discussion diffuses the situation. Compromise goes a long way to meld differing money behaviors.

You see, money scripts aren’t easily classified; they’re not black and white, they’re an emotional soup of past experiences including fears and insecurities that emerge in present decisions.

So, next time you’re both in Best Buy scoping out a new fridge, look for key differences in the financial approach to your purchase.

Whether you’re a deep saver or big spender, be receptive to the manner you’re treated if your partner disagrees with your money DNA. The couples who endure are the ones who find a working medium or a hybrid DNA strategy. The key is to watch for language of judgment and money behavior that jeopardizes the current situation or the health of the future household balance sheet.

Want to score? Get naked. Credit score naked, that is.

One of the worst fiscal violations I’ve witnessed is how credit is misused in a relationship which causes one party’s credit score to falter. I have seen otherwise smart individuals allow a partner to use their credit and turn a blind eye to misuse. Until it’s too late and they’re in a hole financially – spending years paying back big debts.

Never permit a loved one, including a marriage partner to take advantage of your available credit and perhaps ruin your credit score. It’s not a matter of trust; it’s a matter of control.

You must be the steadfast gatekeeper of your available credit and scores. If it’s true love, the discipline will be appreciated. If you do share credit, make sure to carefully examine all credit card statements and access credit reports annually for free at www.annualcreditreport.com. Once a year it’s smart for couples to pull their credit reports and check for discrepancies.

If you don’t regularly discuss money matters, you may end up in divorce court.

Lack of communication is a couple killer especially when it comes to life-changing financial decisions or big purchases. It’s ok if you fail to mention lunches or an occasional discretionary purchase. When it comes to large expenditures like expensive durable goods or making big decisions that may affect both parties like a new job offer or decision related to retirement, it’s best to share all relevant information with a partner or spouse before moving forward. Even if it’s a wise decision, the action of sharing and receiving feedback is crucial to the health of a relationship you cherish.

Before financial decisions bigger than $100 are executed, think twice and open up beforehand. Take to heart information shared through open dialogue. Get an objective third party involved in the mix to listen to both sides and weigh the evidence, if needed.

 Write your Personal Money Philosophy and share it with partner.

If you’ve never formally considered a money philosophy, consider it now.

Again, you do have one; your money DNA has been with you since youth. Let’s expose it to paper. It was formed by your parents, friends, and other outside influences. Share the details of this exercise with your partner, yet work on this project alone.

The end result is a few sentences that spell out sincere reflection about your ongoing relationship with money.

Here are a few shared with me:

“I’ve been afraid of debt for a long time and feel compelled to pay off debts quickly. My parents taught me to not dig a hole I can’t climb out of and I’ve always been that way.”

“I always make sure to have money in an emergency fund.

“I try to save at least 5% of my salary in my 401K.”

These statements don’t need to be pretty, they need to be real and reflect your values about finances.

Consider fun yet money awareness exercises for couples like the card game available at www.moneyhabitudes.com.  What an eye-opener when it comes to disclosing and understanding your money personalities.

Financial compatibility is crucial to reaching goals like retirement or at the least, happiness, however you define it.

Who would have thought appliance shopping could help couples gauge how fiscally aligned they truly are?

Bear markets are a challenge for investors to endure, emotionally and financially.

Bears are part of the deal. You wouldn’t know it, especially based on stock behavior as of late, but markets do thrive or die in spans of time, or cycles.

Never forget – When you play, you eventually pay.

The market is one of the greatest legalized mechanisms, hotbeds if you will, of humility and euphoria. One of my hobbies is reading biographies of lionized Wall Street traders. Jesse Livermore was a legendary albeit tragic figure whose life is thoroughly documented in the book “Jesse Livermore – Boy Plunger: The Man Who Sold America Short in 1929,” by Tom Rubython.

Livermore achieved and squandered great wealth. Enough for multiple lifetimes; however, the trade that placed him on the national radar was the $100 million fortune made selling short in the few days up to and including, October 29, 1929. Many of the rules this master trader created are still discussed and followed today.

Wait – tell me if you heard this one?

Bear markets don’t occur that often.

A tenured fairytale spun by most of the financial industry and its money-candy media arm is how U.S. stocks are in bull markets historically 80% of the time (not really), thus minimizing the impact of the carnage of bears.

Therefore, you as the protector or the primary party responsible for safeguarding your family’s wealth, must remain grounded, vigilant and relentlessly skeptical.

Per market and economic historian Doug Short, since 1877:

• Secular bull gains totaled 2075% for an average of 415%.
• Secular bear losses totaled -329% for an average of -65%.
• Secular bull years total 80 versus 52 for the bears, a 60:40 ratio.

Secular, or long-term bears occur 40% of the time; more often than is communicated clearly by mainstream financial news. Flippant sound-bite commentary like “stocks usually go up,” falsely lulls retail investors into complacency.

I’m certain the message is not designed to purposely obfuscate; personally, I believe biased or blinded financial professionals are chained to big personal liabilities, fear and possibly overblown egos which seduce them into swallowing the data-mined swill administered by their employers’ research departments.

Ironically, individual investors seemingly earn a badge of courage by Wall Street for standing tall and taking the full fiscal kick to the household balance sheet that takes years and additional hard-earned capital to recover from. Breaking even is a strange dichotomy to achieving wealth over time.

Don’t let the percentage gains of bull markets fool you, either. Percentages can be misleading. Let’s focus on the point gains and losses.

A clearer picture emerges above. Bears appear more prominent. In some cases, they can wipe out previous gains entirely.

That’s not to say you shouldn’t invest. What it does help to understand is that risk must be managed. Through proper asset allocation matched to the time required to reach a financial goal, coupled with a rules-based sell discipline, it’s possible to reduce the impact of severe losses.

Unfortunately, during a bear mauling when financial professionals are paid to step into the line of fire between you and your emotions, you and large drawdowns, they default to either their big-box company lines of false ‘comfort,’ (what if you missed the 10 biggest market days?), as part of a musty old script crafted during and unrevised since cone of the greatest U.S. bull runs which began in August, 1982.

Here are additional stale lines that will leave your wealth out in the cold.

It’s only a loss if you sell.

No, I’m pretty sure it’s a loss. To “ENTER,” a sell order and change the status of the loss from unrealized to realized is not considered a prerequisite to reality. The questions are – how much greater will this loss become? How may I protect against further downside? How long if possible, will it take this investment to recover?  If you’re the unfortunate investor on the other end of this delivery, then here are the questions you should ask your financial partner.

Markets always come back.

Well, it’s a truth. A half-truth, but still a truth. Not that this line is comforting, as it’s going to take precious time and additional capital to return to where you were. But like I said, if you want to play, you’re going to pay. Now the question is – “How much do you want to play and pay?”

What if you can cut the time to breakeven in half? Or, even by a third. Wouldn’t it be worth the effort?

As I outlined previously, having a proper allocation, one that isn’t entirely in the stock market by the way, can provide better risk-adjusted returns with less volatility. An allocation decision is usually a smart first step.

In addition, the application of simple rules to reduce exposure to stocks as the long-term trend breaks down can shorten portfolio recovery time. That’s one of the reasons you hire a money manager in the first place – to manage downside risk.

You don’t want to get emotional over your money.

It’s ok to trust your gut. It’s acceptable to be concerned. I give you permission to take charge of your wealth and take a stand if you feel uncomfortable.

The more your input is politely ignored, the greater the frequency of phone calls and meetings that result in similar words communicated by your adviser, the stronger the eventual impact, possibly negative it is going to have on your portfolio. All talk no action is not going to help keep your emotions in check. Sometimes, it takes compromise to avoid rash, costly decisions.

As markets continue to falter, the longer you are dismissed as being “emotional,” the greater the ultimate explosion of a building emotional powder keg is going to be. The result will be an all-or-none decision where you’ll demand all stocks liquidated, most likely at or close to the bottom of a negative cycle.

In other words, if your financial professional listens, I mean actively listens, and initiates with alacrity some disciplined form of risk protection, even if it’s surgically trimming away the investments which are experiencing the most negative impact (possibly cyclical, emerging market stocks), thus raising cash, the greater the odds you’ll stick with an allocation to stocks through the downturn and ostensibly experience the upswing.

I call it selling down to your personal emotional-neutral zone. It may take several surgical strikes depending on the cycle, but hey, that’s better than taking a machete to the portfolio at once, selling everything and then ostensibly, never returning to the market.

Be prepared to eventually be on the other side of the desk, listening to the same old advice that cost you to lose a decade of wealth creation.

Eventually, a bear will awaken.

The brokers will be scrambling, clearing dust off old scripts. Awaiting to minimize your concerns.

And like a bad movie, you’ll get to relive a time you’d rather forget.

Unless you ask the right questions, take a stand, be proactive, and avoid the moldy stench of stale dogma.