Advice Only Musings

Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Friday, August 15, 2014

Trends I Don't Like

By Jim Ludwick

Now you might recall, I’ve labeled myself as the Andy Rooney of financial blogging.  So here’s another piece in that particular style. 

I’m uncomfortable about a number of issues that affect financial consumers.  Here’s some and here’s why.

1.     Target Date funds being used for the wrong reason.  These fund of funds that automatically become less stock and more fixed income as time progresses are supposed to be an easy and sometimes are a default for 401k/403b retirement accounts.  What’s wrong you ask?  Investors (yes, if you have a 401k plan, you are an investor) in many cases don’t look at the underlying asset allocation (stock to bond ratio) to see how volatile it might be, especially in a down market.   I would argue that the ratio is more important than the target date, which can be quite arbitrary. 

2.    More online investment managers using cookie cutter portfolios.  Venture capitalists are funding these efforts left and right.  I participate in two of them for research purposes so I can know what I’m talking about and am prepared with a response when I’m asked about them.  When the VC boys and girls are throwing money at things, they smell profit.  At who’s expense, you might ask?  So far the jury is out and these investment programs may have a place, but I don’t see how they can manage an individual or family investment strategy when they only manage a portion.  Too easy for overlap or concentrations.

3.    SEC fails to hold brokers to a higher standard.  For awhile I thought the consumer was going to reap the benefit of Dodd-Frank insisting that the financial services industry put the customer first, before profit.  It’s not working out that way so their still buyers beware.  Just Google: “Favorite Brokerage Company Name followed by the word Fines.”  Have fun; the best customers seem to get the worst treatment.

4.    Online statements being pushed.  It’s easier to neglect to review transactions, fees and other details when it’s not in a paper format.  It’s that smaller typeface and bunching together that facilitate the difficulty of review. That’s what we’re seeing and it’s a worrying pattern.  There are benefits to online statements, don’t get me wrong, but it’s not helping detect problems like it was when clients had paper statements.

5.    Discount brokers selling more stuff to customers.  Yes, it’s the good old-fashioned competition gig.  “Once we get you in the door, what else can we sell you?”  Amazon has this down pat.  Now discount brokers are selling money management, financial plans, annuities, and all kinds of insurance.  The do-it-yourselfers are under attack with every phone call.  How do I know? I have accounts at most of the discount brokers and experience it personally.   It’s not all bad, but one stop shopping has its downsides.  You may not be getting the best deal or even need that deal.

There are more trends out there I don’t like, but that’s my current top five.   How about you? I’d like to hear your views on these or other non-consumer friendly trends.

Friday, August 1, 2014

Doom on the Horizon

The correction is coming, the correction is coming.  Do I sound like Paul Revere announcing the British?  Well, yes, that’s my intention.

Now I could have written this piece six months or even two years ago.  I would be saying the same thing:
o   Stay diversified

o   Have enough cash on hand to wait out 2 to 3 years of a down market

o   Buy low, or lower as the markets go down if you have extra cash

o   Don’t pay too much attention to day-to-day movements

o   Look to rebalance two to four times a year.  The calendar is not sacred, but percentages should be.

I have often remembered and repeated Warren Buffet’s advice: “Be fearful when others are greedy; and be greedy when others are fearful.”  The last big downturn 2008-to early 2009 gave me the opportunity to put this strategy into action.  My partner Anna will attest, I was buying on really bad days.   It served me well.

Last year I cut back my asset allocation from 90/10 stocks to bonds to a more realistic 60/40 given I have five years or a little bit less until I plan to start spending some of that money after long years of saving and investing.  I also have about two years of cash on hand for down market investing or spending without touching investment monies.

It’s all drama.  That’s my summary of day-to-day financial news.  The bolder or more dramatic the headline, or the scrolling BREAKING NEWS tag running across the screen, the more I want to turn off the TV, computer, or fold up the newspaper and magazine and throw them away.  Six months later it usually was no big deal.

So why this post?  I want my family, friends, clients, prospects and other allied advisors to be prepared.  You’re the reason I’m doing this. 

o   Don’t get caught up in the day-to-day dramatic news

o   Get out that checklist on an annual basis to cover all your bases (If you don’t know what they are, or don’t have a checklist, email me)

o   Reaffirm your life priorities, not just your financial goals

o   Enjoy the rest of summer.  It’s looking good.

Tuesday, June 17, 2014

Have a Digital Control Plan

My best friend died two years ago this month.  I still miss him.  But we had a mutual pact: a digital control plan.  A digital control plan is invoked when someone is incapacitated or dies.  A surrogate takes over control of that person’s digital accounts, websites, blogs and files.

I had a sealed envelope and an encrypted hard drive located in my friend’s gun safe eight miles away from my home office.  He had a sealed envelope located in my safe in our garage.

I went to the safe the day after he died, sad as all get out, and retrieved his envelope to hand over to his only child, a 40 year old son I had known since age six.  

My friend grew up with computers and the internet.  He worked in Air Force intelligence and later at the National Security Agency.  He taught me everything I know about computers and the internet up until the time of this death.  He helped me put together my first computer from a Heath kit by instructing me over the telephone.  He was very smart and talented in those electronic ways.

So how can you benefit from best friend’s advice?

1.     Think about who will be your digital surrogate and also have a backup digital surrogate.  Implement a joint plan.
2.     Confirm that the storage is secure and has very limited access.  Provide the same for your surrogate.
3.     Ascertain a safe distance away from each other.  We thought eight miles was enough distance since weather, fire, utility outage and civil disruption were not major factors, in our opinion.
4.     Learn how to encrypt an external hard drive and use it
5.     Use a tamper revealing envelope
6.     Don’t forget to update your envelope contents as often as you change master password(s) and you create/update the external hard drive for offsite storage.  Remember, the bad guys force us to change our passwords a lot more frequently these days.

R.I.P. MSgt. Robert Lloyd, USAF Ret., 1944-2012


Don’t forget about cloud storage.  I use SugarSync, and  Don’t be stuck with one provider.  What happens if your sole provider goes down?  Always have a backup.

Wednesday, March 5, 2014

Did I Make a Big Mistake With Your Portfolio?

Watching PBS’s National Business Report recently, I saw an interview with Warren Buffet.  Now that kind of interview always gets my attention.  I stopped multi-tasking to pay rapt attention to what he had to say.

Mr. Buffett, the most recognized and successful investor of our times, discussed some of the provisions in his will in his latest letter to clients.

“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.”

Should I treat some retired clients like Warren Buffet is going to treat his widow?

As I pondered this very, very simplistic strategy, I recalled the advice of Rick Ferri, William Bernstein, Charles Ellis, and Larry Swedroe whose wisdom I have followed for more than a decade as an hourly financial advisor. Maybe I was being too complex for some of my clients in the withdrawal phase?

Now, what is too complex, you ask?  Well for starters, we deal with lots of retirees, both single and married, who don’t want to manage their own investments, but also don’t want to pay a manager one percent or more for this task.  They want to pay us an hourly fee instead.

As a caveat, just like Mr. Buffett’s widow, the portfolio is probably not the sole source of income, but still a major generator of cash to live on beyond social security and perhaps a small pension.

We usually offer a recommendation of three to eight index funds or exchange traded funds tied to indexes as part of a withdrawal strategy that includes three years of federally insured cash (think CDs and high yield savings accounts)  for short term withdrawal.  That way, our clients don’t have to worry day to day about the stock and bond markets.  (Think Ukraine and its impact on the markets lately.)

So, to my conclusion, I think maybe I’m going to recommend reducing the number of holdings for some retirees who fit the situation described by Mr. Buffett.   Recently, Dr. Jim Dahle in his blog The White Coat Investor reported on a physician couple who had only invested in an S&P 500 index fund for the past 10 years and have done extremely well.  Now that might not work for all of our retirees, but it did give me more information to digest and encouraged me to surface this strategy with some of our clientele.

So what do you think we should do?  I look forward to your comments.

Thursday, February 20, 2014

Personal Finance Book For Dr's Tops Best Seller List

“The White Coat Investor – A Doctor’s Guide to Finance and Investing” by Jim Dahle, MD, should make many wirehouse brokers and life insurance agents shake in their boots.   You can quote me on that.

If there was ever a book that needed to be provided to every physician, dentist, veterinarian and other highly paid professional right out of expensive postgraduate school, this is the one.   The author, an Emergency Room physician, can be faulted for quoting some fly by night financial advisor, “This is the book I’d like to force feed physicians and other ‘white coats’” by that would be me so I will refrain from dissing the endorsements that are made on the inside flyleaf or back cover, but they are impressive, in my humble opinion.

The foreword is by William Bernstein, MD, author of “The Four Pillars of Investing” -the book I have most recommended to clients for over ten years.  This book by Jim Dahle ignites my enthusiasm to recommend it any potential high-income professional to read at the beginning of their career just as much as I have done with Bernstein’s book.  And then the author goes on to thank Rick Ferri, my favorite financial author, for providing him advice and approval.  I knew it was a must read even before I started.

If you’re not a medical student or physician in your residency, you can lightly pass over a couple of the 16 chapters, but don’t be too blasé about the topics of student loans, getting into medical school or budgeting.  These topics are close enough for many would-be professionals who have to borrow for their education that it makes these chapters worth reading.  The chapters are short, so a 4-hour read for the whole book is a possibility.

Why do you think this physician spent the time and money to write this book?  It’s self-published after all, so you know he put his own money on the line. I’ll tell you why, in my opinion.  Doctor Dahle observed the racket that likes to separate the hard earned money from the postgraduate school trained investor/saver by appealing to their ego and fear or greed.

Most purveyors of financial products and many money managers use techniques honed after decades of trial and error to capture their prey.  They know about human behavior and use it to their advantage, and the author lays that out in clear detail. Now, don’t get me wrong. This ER doc doesn’t lambast all of these so called financial advisors, only the most outrageous.  His examples, and stories from other doctors, detail experiences and how to live the good life without falling victim to high priced products and services that make more money for the sellers than the buyers.

Spoiler alert.  Early in the book Dahle tells his readers to “live beneath your means”.  He goes on to outline how graduate level living and paying off debt and saving early for significant goals are the keys to success.  I couldn’t have said it better or clearer.  The charts and graphs that are included do a good job of reinforcing the understanding of key concepts.

This book not only covers investing but taxes, loans, getting into medical school, estate planning and asset protection.  I will be buying copies of this book in bulk, not only to save money, but also to save my clients money and you can quote me on that, too.

It’s a short read as personal finance books go and contains notes and links to his blog and works by others on germane topics at the end of each chapter.  I’m going to highlight several well-written blogs of his when I pass out this book.

Thank you, Doctor Dahle.