Debating the Fed’s Current Interest Rate Policy

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

Which is Better: Traditional Financial Advisors vs. Automated “Robo” Financial Advisors

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

Retirement Decisions: Lump Sums vs. Income Streams

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.

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