Everything we do in life involves some element of risk. Some risks are known, and believed to be understood, while others are more uncertain and involve either probability or magnitude that we find difficult to quantify. When investing, we generally seek to obtain the highest return possible given the amount of risk that we are able and willing to tolerate. Unfortunately, gauging the degree of risk associated with various investments is not always easy. Studies have shown that people tend to prefer known risks over unknown risks. In many cases, this propensity, referred to as “ambiguity aversion,” can cause us to overweight or exaggerate risks that we are unable to quantify or that we do not entirely understand. At the same time, people are prone to downplay risks that are common and familiar, where undue significance may be attributed to our own subjective personal experience (i.e., “I’ve done this for years, and nothing truly bad has happened to me, so it must not be very risky.”). Taken together, these (often subconscious) biases can prevent us from properly assessing our alternatives – resulting in decisions that are based on perceived risk, rather than actual risk. Chances are, you know people who are frightened of flying in airplanes but don’t think twice about getting into an automobile, despite statistics that place the odds of dying in a plane crash at 1 in 11 million while the odds of dying in a car crash are (according to some sources) as high as 1 in 5,000. Continue reading
I like to write at least one article on basic estate planning each year because it’s just that important. Financial advisors spend years working on financial plans and investment programs that can easily be dislodged by overlooking small estate planning tasks. Many people start thinking about these issues once they get married and/or have kids because that’s when others start relying on them. Even if that continues to be the case, some basic level of estate planning really should be a priority for everyone, even if to a lesser extent. For example, an unmarried individual with some money and property may use a Will simply to designate a few people and charities to give their stuff to. However, a married couple with a baby may be more concerned with issues of guardianship such as what they would do in the unspeakable scenario in which they were to die together and somebody had to take custody of the kids. This should be spelled out in your Will so that relatives and friends don’t have to guess at your wishes about such a sensitive and important topic. Continue reading
Below are some headlines which have been moving the markets this week. The articles highlighted below are provided by First Allied Asset Management. I’m not sure how many of you did “Black Friday” shopping last week but I can tell you the malls were dead around Long Island, New York. It was much quieter than years past and from what I understand, Cyber Monday was somewhat disappointing as well. On the issue of gas prices, I feel great about the $15 I’ve been saving each time I fill up my car. The price is finally hitting that $3 point on Long Island which is well below the $4.30 per gallon which we were paying just a few months ago. This should create some additional household saving and spending as gas is a major expense for people between heating their homes, their businesses, and operating automobiles. Continue reading
From what I’ve seen, fee-based advisory firms, my own included, generally charge an annual fee which ranges from .75% to 1.75% of assets under management. Generally, the larger your account balance, the more likely you are to receive a lower fee. In fact, fee schedules are often tiered such that the initial 250K is billed at a higher rate which scales down at varying thresholds such as 500K and 1M. There may, however, be other methods of determining an advisory fee beyond simply the size of the account. For example, some firms are more active (tactical) than others. Those firms would likely charge a slightly higher fee than a firm which is more passive and investing strictly in products which mirror indexes such as the S&P 500 and the Dow Jones. Firms with passive investment strategies may still charge fees over 1% if they are including valuable services such as financial planning, estate planning, tax planning, etc. What is included in the fee amount (above and beyond investment management) should be discussed in clear detail at an initial consultation. Continue reading
I thought this entry would be interesting for both financial advisors and for people who work with them. Having a truly productive relationship with your financial advisor means trusting them and giving them the needed information to figure out how to really help you. Much of that information doesn’t come out through back and forth discussion and needs to be extracted through specific questions and elaborate answers. Below are 8 of the questions which I ask my clients that I think really help to gain a more complete understanding of their financial profile: Continue reading
I find the entire debate surrounding economic interest rates to be highly significant at the moment. What is supposed to be a policy tool used by the Federal Reserve to contain inflation and occasionally encourage either economic expansion or contraction has turned into a drug which our economy is gradually becoming immune to. The debate over interest rates is currently taking place at high level institutions such as the Federal Reserve who understand that if they wait too long, the drug can have serious consequences. The debate is also taking place across America where portfolio values and real estate prices have been on the rise, giving people the satisfaction of passively achieved wealth. That satisfaction, however, is partially masked by the concern of bubbles and whether those asset prices may come back down at some point soon. Continue reading
I’ve come across several articles lately about the emergence of online sites (sometimes referred to as “Robo-Advisors”) which customize and automate the investment process for individuals. These sites are totally separate from discount online brokerage firms which allow you to buy and sell stocks at low rates. Robo-Advisors create investment portfolios, most often by utilizing securities which replicate broad market indexes. They collect fees for this service, generally is the form of annual fees taken as a percentage of invested assets (approx .15% – .50% per year).* The asset mixes are generally created after analyzing personal data including age and risk tolerance. While people in the financial services industry have fairly strong opinions about these websites – some think they will fail over time while others fear they may capture a serious portion of the traditional business – I think it’s clear that the investment advice industry has plenty of room for both traditional wealth managers and the many online solutions which are popping up. Let’s look at both sides of the debate: Continue reading
Americans love getting big checks. The instant gratification of dramatically increasing one’s liquid net worth is far more desirable for most people than the comfortable but far less exciting feeling of getting a check every month for the rest of their life. Ironically, taking the lump sum option is most often the wrong decision. People mistakenly believe they can better manage funds on their own than leaving it in the hands of experienced pension managers and insurance companies. It’s not so hard to understand why people make this choice – if you were 65 and deciding between $500,000 or $3,000/month for life, I think many people would take the lump sum. Why? You can buy a house with $500,000, or pay for a college education, or buy a boat, or take many incredible vacations. However, $3,000 per month doesn’t allow for any of those large and highly gratifying purchases. That last point is exactly why we want to pass on the $500,000 and take the long-term income stream instead.
Picking the right life insurance is tricky. Should you go with the absolute cheapest coverage, term? Or is it better to buy a cash value policy such as whole life? What other choices do you have (such as return of premium) which may work better in your situation? Like many personal finance decisions, the right type of life insurance depends entirely on your individual needs. The purpose of this article is to help you assess your needs and find the right type of insurance. As always, feel free to contact me directly if you seek professional help with this.
Save Early and Often – It’s some of the most popular financial advice out there – start saving in your 20’s, and yet so many people don’t do it. I understand that people have other obligations such as paying off debts and getting established in their careers which can interfere with implementing a savings plan. However, most people don’t properly prioritize saving. If you treat saving like paying a bill and you make it totally automatic, you’ll forget you’re doing it. Create an automated savings plan when you’re young and get started. Even if the amounts are low at first, it’ll be easy to increase the amounts as your income level rises and your debts disappear.