Bruce's Blog: Wiener Financial Management

News & Notes

When Important is Not Important

 

Sam and Sadie have been happily married for over sixty years. A good friend asked Sam the secret of his successful marriage. "Well," Sam declared, "I was in charge of the big issues and Sadie was in charge of the small ones." The friend seemed confused by the answer.

"You see," Sam explained, "Sadie handled the small things, like what cars we drove, where we lived, and where the kids went to school. I dealt with the big issues—politics, the economy, world peace."

In the world of investments, you can be either like Sam or like Sadie. According to financial planner Carl Richards in a recent article in the AAII Journal, it's better to follow Sadie's approach. Instead of agonizing over the fate of Europe, the U.S. economy, and the daily fluctuations of the stock market, Richards believes it is more fitting to concern ourselves with something we at least have control over.

"We [should] start to focus on our personal economy instead of the global economy. Our personal economy becomes the filter for all the noise. Things like Europe, the market and individual stocks drop off our radar. Instead, we focus on information that helps us with one thing we can control: ourselves."

I find that people often worry a lot more about the world economy and market fluctuations rather than their personal spending habits, level of debt, and rate of savings. We can manage our personal finances. The fate of Cyprus lays outside our control.

We should not, of course, be blind to the world around us. Major events do influence how capital markets behave. We are not always good, however, at predicting how major events will play out or their eventual impact. We should be careful about making dramatic changes based on perceptions of a world we can not control. Constructing a portfolio to meet your specific needs and goals over varying market cycles—and sticking to it—is a step in the right direction.

 

Words of Wisdom

What if everything is an illusion and nothing exists? In that case, I definitely overpaid for my carpet. —Woody Allen

News & Notes

When Facts Get in the Way

of the Health Care Debate

 

The United States ranks near the bottom of 17 affluent countries with respect to life expectancy. It would seem that this is an indictment of our health care system. That may not be true.

 

Musical Treat

Proper medical treatment requires a good doctor. I'm partial to Dr. John. One of my favorites is "Such a Night" from the movie "The Last Waltz." You should also check out "Right Place Wrong Time," which you can hear in the studio version and live with Eric Clapton. 

News & Notes

The Meaning of "Failure" in Retirement Planning

 

Financial advisors are often asked:  "How much money do I need to retire?" Today, advisors are more apt to prepare a financial plan that determines the probability of your retirement success or failure, not a fixed dollar amount. In either case, the result of a complex analysis is articulated as a single number. We often attach great faith in this one number even though the underlying concepts may be misunderstood. We should be cautious as to how much emphasis we place on this number.

This does not mean that we should avoid engaging in retirement planning. Far from it. We must be careful, however, how we interpret the results. Properly understood, retirement planning can help us determine if we're on the right track. [Editor's note: The link is worth clicking, especially for Broadway fans.]

Planning occurs when an advisor engages in a thorough review of all of your relevant information—assets, income, expenses, debt, and retirement goals. The advisor will then run a Monte Carlo analysis and provide you with the probability of a successful retirement. But what does the probability of a successful retirement mean?

As financial planning guru Michael Kitces points out, most of us don't really know how to evaluate a determination that our retirement has, let's say, an 80% chance of succeeding. Instead, we substitute an easier question—"How bad will I feel if I run out of money?" An 80% success rate sounds good, but a 20% chance of hitting $0 at some point during retirement is a scary proposition.

Kitces declares that it's not accurate to think of failure as running out of money. The proper way to view failure is the probability that an adjustment will be needed during the course of your retirement. The probability of failure really "represents the odds that [you] would be heading down an adverse path that, through monitoring, might require a mid-course correction to get back on track."

In other words, it's possible to spend excessively and blow through all your money. But another scenario, which is hopefully more likely, is that you need to continually monitor your situation to determine if you are on an acceptable path. An 80% probability of retirement success means that in all likelihood you won't have to significantly alter your projected spending over time. A 20% chance of failure is the likelihood that some changes will have to be made during the course of retirement.

You should remember that the use of sophisticated computer programs—employing complex mathematical calculations—leads us to accept the conclusions of the financial planning process as chiseled in stone. The messiness of projecting investment returns and the limitations of Monte Carlo simulations should provide us with a degree of caution.

Nevertheless, we should take advantage of the most sophisticated tools that are currently available. The methods advisors use in this regard are extremely helpful in providing you with valuable guidance. Going blindly forward without making a reasonable attempt to gauge where we are in our financial lives is not a viable alternative.

 

Words of Wisdom

Doubt is not a pleasant condition, but certainty is absurd. —Voltaire

News & Notes

 

The Illusion of Certainty

When it comes to investments, we often crave the comfort of certainty.  But the typical cost of known investment results is lower returns over time.  There is a need to embrace some level of uncertainty to obtain the reward of higher returns.  We  must, however, allow for sufficient time for the market to reward us for taking on this risk.

We should also be aware that "obvious" areas of potential return are not necessarily a sure thing.  Humility in making predictions is helpful.  Making big bets has its dangers.  Taking on too much risk may lead to undesired results.

Musical Treat

It's really cold outside, so I thought some warm weather vibes would be good.  Since I'm a big Chuck Prophet fan, I suggest you listen to "Summertitme Thing" -- check out both the studio and live versions.

News & Notes

Protecting You from Email Fraud 

 

We are all aware of the many email scams out there—the Nigerian prince seeking to reclaim his fortune; the relative stuck in London needing money to get home; and, the poorly-spelled, urgent alert from "Banc of Amerika." You should be aware, however, of a new fraud that you won't even know is happening to you. It turns out that we stopped one such scam artist ourselves.

My assistant Jessica received an email, allegedly from a client, asking for the balance of his account and requesting us to wire the money to a bank in North Carolina. My client claimed to be unable to speak to us because he was heading out to a funeral. Even though the email address was accurate, the ever-vigilant (and skeptical) Jessica thought something was up and called the client, who said this was a scam—somebody had hijacked his email address. We quickly got Schwab's fraud unit involved.

As you can see, not only did the perpetrator get into our client's email account, the bad guy fished around our client's correspondence to find out information about his finances.

Fortunately, we have several ways to protect our clients. We do not have authority to disburse our clients' funds. While we assist with such transactions, our clients must authorize them. Moreover, we require verbal confirmation of any wire request. Schwab, our custodian, also will not act solely on a written client authorization for a wire request—Schwab must speak to the client directly or confirm that we spoke with the client about the wire.

There are also a number of steps you can take to protect your email from being hacked—see the links from Schwab, WikiHow, and McAfee. As was said each week at the beginning of Hill Street Blues: "let's be careful out there."


Words of Wisdom

Having a good wife and rich cabbage soup, seek not other things. —Russian Proverb

News & Notes

Hanging on to the Fiscal Cliff

 

At the annual Schwab conference a couple of weeks ago, many of the expert speakers and panelists offered a similar take on our precarious financial situation. The good news is that, while a number of difficult decisions have to be made, a political consensus can lead us to a reasonable fix of what ails us. The bad news, of course, is that we are reliant on politicians to make the necessary hard choices. We are also reliant upon a public willing to accept them.

The most impressive presentation came from Alan Simpson and Erskine Bowles, who warned of the dangers of our country's tremendous deficit. While you may not agree with their plan for fiscal responsibility, they do offer a sobering perspective.

Health care costs are increasingly becoming a larger part of our economy. In 1981, they constituted 10% of our gross domestic product (GDP). They are now at 25% of GDP. We spend twice as much on health care than other developed countries without the commensurate benefits in better health.

Our defense budget also came under scrutiny. In an earlier talk, former Secretary of Defense Robert Gates detailed how he presided over major budget cuts for our military and questioned further reductions. Simpson replied that significant waste still exists. Bowles pointed out that the U.S. spends more on defense than the next 17 largest countries in the world combined, including China and Russia.

There was an agreement that our fiscal problems pose a threat to our national defense. Our security requires us to have a healthy economy and a solvent federal government. Bowles wondered whether the U.S. would have to borrow money from China to help defend Taiwan from an attack by China.

Simpson and Bowles also addressed other topics, such as Social Security—our increased life expectancy and fewer workers per retiree may necessitate a rise in the retirement age. The duo also attacked the tax code as "inefficient and anti-competitive." They called for the repeal of earmarks and deductions as well as lower tax rates.

All of the ideas on the table have their proponents and critics. The solutions are not easy. But the fact that hard choices need to be made should not prevent our politicians from making them. The status quo is unsustainable.

Words of Wisdom

Men and nations behave wisely once they have exhausted all the other alternatives.
—Abba Eban

News & Notes

 

Business Coaches — Addressing the Myths

In an interview with Jeff Miller, a business coach at Action Coach, we discuss how business owners and executives can benefit from independent guidance.  Click the video to hear a discussion that busts some of the myths surrounding coaches.

 

Musical Treat

Advice can come from many sources—moms being one of the best. Randy Newman wrote "Mama Told Me Not to Come," which provides some wise admonitions. Newman's version is fun, but Three Dog Night really made the song come to life when they covered the tune. 

 

Please view the video on your computer if you cannot access it on your cell phone.

News & Notes

The Problem with Low Interest Rates

 

While economists and politicians hotly debate the efficacy of the Federal Reserve targeting low interest rates to boost the economy, less attention is being paid to the impact on investors. Don Phillips at Morningstar calls such interest rate policies a "War on Savers." He boldly asserts:

"These policies represent a massive transfer of wealth from savers to debtors. To cushion the blow for the millions of Americans who lived beyond their means over the past decade, the Fed continues to penalize those Americans who kept to a budget and set money aside for the future. The cost of these subsidies is in the billions of dollars and puts the retirement security for millions of prudent Americans unfairly in jeopardy."

Strong words. Why is Mr. Phillips so angry? After all, aren't we all benefiting by being able to refinance our mortgages at historically low rates?

To the extent we are debtors, low interest rates do lower our borrowing costs. But to the extent we are savers, the low interest rate environment means we are earning little on our money, especially if you factor in taxes and inflation. Meanwhile, those individuals and institutions that borrowed a lot of money over the last few years now receive cheaper money to repay their debt.

In addition to subsidizing debtors and penalizing savers, there are other consequences to near zero interest rates:

• It leads many of us to make riskier investments as a means of obtaining adequate returns on our capital. This situation is particularly difficult for retirees, who may not wish to take on the added risk.
• It can cause people to spend more instead of saving. This lowers the amount available come time for retirement.

Of course, investing in risky assets raises the stock market and spending more boosts current economic activity, two results the Federal Reserve desires in an effort to make sure the economy expands beyond its sluggish growth rate. But at what cost?

The controversy over the appropriateness of the Fed's actions will rage on. We do know, however, that even necessary steps to cure one problem may lead to unintended complications elsewhere.

 

Words of Wisdom

A nickel ain't worth a dime anymore.

– Yogi Berra

News & Notes

 

Find the Cost of Freedom—

Notes from St. Petersburg

 

The city of St. Petersburg is quite impressive—the canals, the architecture, and the history make it a wonderful place to visit.  The city is also economically vibrant, which is a far cry from the Russia of old, with long lines for a limited supply of food and necessities.  But economic success has not translated into political freedom. Disdain for the government has not overcome the fear of being jailed for protesting.

 

Musical Treat

"Find the Cost of Freedom" by Crosby, Stills, Nash, and Young conveys the idea that freedom, in any aspect, has a cost.  You can listen to the short studio version or the slightly longer live version.

News & Notes

Confounding Consumer Conundrums

Let's say that 100 bottles of beer on the wall typically cost $100. Which would you rather have—150 bottles for the same $100 or 100 bottles at a 33% discount? A recent study indicates that most people would choose the 50% increase in quantity over the 33% discount. In actuality, you get the same result in either case—one bottle of beer would sell for $0.67 instead of the regular price of $1.00.

In describing the study, The Economist states that shoppers "prefer something extra for free to getting something cheaper. The main reason is that most people are useless at fractions." Ouch!

The good folks at The Economist—the Brits who say "maths" instead of "math" —are being a bit too hard on us. As Daniel Kahneman points out in "Thinking, Fast and Slow," mathematical reasoning requires a deliberate, analytic thought process. People's brains are not wired to intuitively engage in such thinking. When faced with bargains at a grocery store, you're apt to make a quick decision based on certain biases, like "more is better." Kahneman describes experiments in which graduate students in statistics make basic mistakes in statistical reasoning when having to make snap judgments. It's just too hard for us.

The same problem arises when viewing investment returns. Quickly perusing your brokerage account statement or web site to determine how your account has done may lead to certain misunderstandings, especially when trying to compare it to various market indices. The math gets a bit involved and such calculations are not easy to make off the top of your head. Pulling out a calculator, paper, and pencil helps. Or you can call your advisor.

If you like these math brain twisters, here's another one. Consumers are often befuddled by double discounts. A $100 coat that is reduced by 20% and then by an additional 25% seems more attractive than the same coat at 40% off. And yet, in both instances, the coat would cost $60.

 

Words of Wisdom
I never did very well in math—I could never seem to persuade the teacher that I hadn't meant my answers literally.
—Calvin Trillin