Avoid this Common 401k Mistake

Many investors have a huge percentage of their 401k money in employer stock.  On the surface, this doesn’t seem like such a bad idea because you are investing in a company that you know a lot about and have faith in.  Countless times investors have justified concentrations in their company’s stock with the maxim, “Put your eggs in one basket…and watch that basket!”  But the reality is that even the bluest of the blue chips can give employee stockholders the blues if they take a bit hit in their share prices.  British Petroleum, Citigroup, Pfizer and General Electric have all had difficulties the last few years that have devastated their share prices (not to mention Enron!) and profoundly impacted the retirement outlook of its shareholders.  Furthermore, the moment you decide to empty that basket it’s likely that the rest of the world will have come to the same conclusion. 

It’s better to diversify with index funds as core holdings and (if you must) have a small percentage allocated to employer stock.  Employees are understandably emotionally attached to their employer’s stock (ask anyone that works for Coca Cola).  Loyalty is a great virtue but it must be balanced with prudence.

What Every Boy Needs to Know to be a Man

Second Hand Lions is one of my favorite movies.  It’s a coming-of-age story about a shy, young boy sent by his irresponsible mother to spend the summer with his wealthy, eccentric uncles in Texas.   This movie has something for everybody: a love story, aerial acrobatics, dogs, lions, sword fights, fist fights with teenagers and (my personal favorite) shotgunning for travelling salesmen.

In one scene, Hub (the eccentric uncle played by Robert Duvall) gives his nephew (Haley Joel Osment) his “What Every Boy Needs To Know to Be a Man Speech”.  You can watch it on this link: http://www.youtube.com/watch?v=JXn5-r8mj-s&feature=related .

It’s a good, formative talk and I have given my version of this speech to my clients’ children and grandchildren dozens of times.  Sometimes high school or college-aged young adults need to hear this from someone who isn’t a parent or a relative.  Each dialogue is different but the basic outline for this conversation goes something like this:

1. Have fun in school.  You only get to do it once.  But be careful and responsible.  Honor the values your parents have given you.

2. Get  the best grades you can.  You and your parents worked hard to give you this opportunity.  Respect their sacrifice (and your own) by working hard.

3. Stay out of debt.

4.  Put aside something each time you get a paycheck or allowance.  Even if it’s $1 in a coffee can.  

5. Do something for someone less fortunate than you.  It helps you to appreciate what you have and where you are. 

6. Do what you say you are going to do.

7. Be courteous to your parents.  Let them know where you are.  They might be annoying but they love you.  Remember to tell them that you love them.  You won’t always have that opportunity.

Is Your Financial Advisor a Salesman or a Fiduciary?

I need a new car.  Perhaps I’ll go to a dealership and ask a car advisor to give me advice on what I should buy that would be the best fit for me and my family.  I’m sure I’ll get the best possible deal available.  That sounds a little naive, doesn’t it?

Obviously, the car salesman is not exactly an advisor.  His job is to sell cars for his dealership and his motivation is to earn the highest commission he possibly can on a specific vehicle.  That’s not a bad thing.  His family deserves to eat.  The salesman is a trained professional whose job is to employ various tactics to consummate the sale.  This doesn’t mean the salesman is a bad person or that  the consumer is not getting a quality car for a good price.  But a lot depends on the character of the car salesman and the astuteness of the purchaser.  This is the essence of caveat emptor (buyer beware) and there is nothing wrong with that.

In this example, the car salesman is not a fiduciary but an agent of the dealership.  A fiduciary is legally, ethically and morally obligated to always act in the best interest of the client. 

Many investors seek counsel for their situation with financial product salespeople, most of whom are NOT fiduciaries.  The “advisor’s” job is to sell financial products for their broker-dealer.  With recent market turbulence, some Wall Street brokerage firms are fighting to maintain this distinction to minimize their liability.  Meanwhile, they cultivate the public perception that their agents are acting in the best of interests of investors.

The benchmark for fiduciary responsibility and competency among financial advisors is the Certified Financial Planner (CFP) license.  All Certified Financial Planners are fiduciaries.  The first thing to look for in finding an advisor dedicated to integrity, competency and prudence is the CFP designation.  

Ask your financial advisor if he is a fiduciary.  If you don’t like the answer, the National Association of Personal Financial Advisors (NAPFA) is a great source of information on the financial planning industry and how to find a qualified Certified Financial Planner: www.napfa.org.

How to Fix the State of the Union

In the fifteen years of my financial career, I have never experienced anything like the past calendar year.  One year ago, the markets accelerated into a free-fall that culminated in the low of March 9.  There are a lot of similarities between this period last year and today, but there’s a lot of differences as well.

The political posturing and rhetoric in the first quarter of 2009 is very similar to what we’re seeing now.  And its impact on the markets is predictably similar.  The stock market is not sure what the rules are.  In the absence of this certainty it will sell off and park in cash.  The dollar is negatively correlated to the market and to commodities and it is still perceived as the safe port in a financial storm.

Which begs the questions: is this a new storm developing on the horizon?

It’s definitely raining on financial markets over the past week, but it doesn’t even compare to Hurricane Fannie and Freddie of 2009.  The Great Recession is over and the recovery is underway.  It will proceed in fits and starts and it will not create much in the way of jobs, but the global economy is expanding.  For real economic growth to happen and good jobs to be created, small businesses must be nourished and that’s not a priority of our public policy.

Every company on the stock exchange started out as two guys in a garage with a good idea.  They started selling the good idea and had to hire people to fill their orders.  Two guys became ten guys in a year, which was a 400% increase in their labor force and an even higher increase in revenue.  The beauty of this invisible hand is that something is created out of nothing.  A service or product happened that wasn’t happening before and new jobs were created as a result.  More than 90% of job growth in the United States comes from small businesses and a similar percentage of Americans work for small businesses.

The biggest incentive, or disincentive, for small business owners is taxes and regulatory hurdles.  There is a tipping point for every entrepreneur where they decide the risk and the effort to be in business is worth it, or not, and their decision impacts the lives of real people, their employees that depend on them and the public which purchased the product or service.  It’s costly to maintain a team of tax and legal advisors to keep up with the tax code, manage liability (tort reform would transform our economy) and ensure compliance with government regulations. Unfortunately, Congress is extremely willing to add to these burdens, which makes a jobless recovery a very likely scenario for 2010.  Because the resources expended to meet those burdens will not be used to grow our economy and create new jobs.

Accounting for Off-Balance Sheet Assets

If you read the SEC filings for publicly traded companies, there is a portion called “Management Discussion & Analysis”.  In this section of the filing, management interprets the financial statements and sometimes they discuss off-balance sheet liabilities that are not otherwise documented or possibly assigned to a footnote in the filing.  This information isn’t exactly hidden, but it can easily be overlooked.  Generally Accepted Accounting Principles (GAAP) allows for off-balance sheet liabilities to be disclosed in this manner.

In November of 2009, I’ve implemented a new Generally Accepted Accounting Principle: I am scouring the footnotes of my life and the lives of my friends and family (aka “clients”) for off-balance sheet ASSETS.  

Off-Balance Sheet Assets are the things that matter the most but are measured the least, if they are measurable at all. 

This has not been a fun year for anyone that I know.  Some have lost jobs, others have lost companies or gone into bankruptcy, and all of us have seen our personal balance sheets suffer.  It’s easy to get depressed and discouraged by these personal tragedies and struggles, and I have slipped into that abyss several times over the course of the past year, but not anymore.  Now, all I feel is gratitude.

I’m grateful that our clients are O.K., that they weathered the financial equivalent of a category 5 hurricane (aka Hurricane Freddie and Fannie).  I’m grateful for my family and friends.  I’m grateful for our health and for this season. I’m grateful for the roof over my head.  I’m grateful for the opportunities I have to help others, even if it’s just smiling at them.

Sir Winston Churchill wrote, “A pessimist sees the difficulty in every opportunity. An optimist sees the opportunity in every difficulty.”  I’m not suggesting that we all take a Pollyanna world view and ignore the legitimate struggles that we face.  Rather, I am acknowledging that I am not in control of the stock market or the economy or government policy.  The only thing I can control is my attitude and I have chosen to be grateful because I really should be.  Life is a miracle and we’re surrounded by miracles every day.  We’ve conditioned ourselves to ignore them by being busy, and when we fail to recognize them, we lose perspective.

Apply this new Generally Accepted Accounting Principle to your own life.  Take out a yellow pad and write down the things you are grateful for, especially the little things.  After five or ten minutes, or two hours, it starts to really sink in.  It will not materially change the struggles that we are facing, but it does put them into perspective, and that’s what helps us to make it through them.  Some of the best things that ever happened to me were the worst things that ever happened to me at the time they were occurring.  If we gain the proper perspective while getting through these tough times, then they become fruitful, and they could become the best times to ever happen to us and our families.

Merry Christmas!

The Art of Receiving a Financial Gift

At a conference several years ago I met an estate planning attorney who was telling me about a young client that had inherited wealth from a trust.  According to the provisions of the trust, the young man was allowed to have $500,000 on his 25th birthday.  He arrived in the attorney’s office, with an entourage of eager friends, and collected his check.  The first thing the young man did upon leaving the attorney’s office was visit a luxury car dealership where he purchased a Mercedes and a BMW.  Then he lived the lifestyle of the rich and famous (with a little help from his “friends”) until it was all gone, which took six months.

Many of my clients give financial gifts to their children and grandchildren.   There are estate planning benefits, but most importantly, they want to give the subsequent generations an “edge” that they didn’t have in the creation of long-term wealth.  They want to see the subsequent generations attain at least their level of financial success, or ideally, much better.

There is an art to receiving a financial gift.  Each person’s situation and stage of life is different, but generally speaking, if you are receiving a financial gift from your parents, grandparents or a trust, there are good, bad and ugly uses for the proceeds.

Here are a few of the bad ways to use gifted funds:

1. Buying  a luxury vehicle that you couldn’t afford otherwise. 

2. Taking extravagant vacations. 

3. Buying prestigious luxury items that give the impression of showing off wealth.

 

 Here are some of the best things you can do with a monetary gift:

1. Pay off debts, especially student loans or credit cards.

2. Invest the money in an account that will grow your balance sheet.  That would include savings and retirement accounts (like Roth and Traditional IRAs).

3. Save the money in a college fund for your children or apply it towards school tuition.  If grandchildren are receiving financial gifts from family, set up a 529 plan and deposit all proceeds there.  Then let family members know about it.  Most of them would rather send a check to the college fund than buy them a toy anyway.

All of these recommendations also pertain to inheritances.

Always write a thank you note and explain how you’ve  used the funds.  It pleases the giver of the gift because you recognize and appreciate their values  and generosity. It will also likely increase the likelihood of more, and perhaps larger, gifts in the future. 

These are rules of thumb and each case is unique.  Each family dynamic is different. Sometimes the gift giver wants his beneficiary to take the family on a cruise or do something extravagant to enjoy the gift, and that’s wonderful.  The recommendations I have made show gratitude and respect for the giver and it puts the beneficiary of the gift in a better financial position, which is usually the motive for financial gifting in the first place.

Do You Know What You Don’t Know?

“What gets us into trouble is not what we don’t know. It’s what we know for sure that just isn’t so.”  Mark Twain

I’m a people person. I love people and economics (in exactly that order).  I’m a good listener and my friends and family (also known as “clients”) often ask my advice on personal as well as financial issues.  I know what issues I can give advice on and which I can’t.  That’s a very important distinction to make.

A few times a year, I’ll have requests by clients to meet with their high school or college-aged children to discuss finances and investing.  I’ll meet the young man or woman for lunch and ask them open-ended questions about what they want to be when they grow up.  This is a lot of fun for me, and I often give financial advice to these children as they become adults.

Once a client’s child called and asked me a question that absolutely stumped me.  

“Mr. Black, I need your advice on a very important decision I have to make.” 

“Of course, anything I can do for you.  What are you trying to figure out?”

“Well”, he replied sheepishly, “I think I’ve found ‘the one’.”

“‘The ‘one’ what?”

“The girl I want to marry.”

“Well that’s great!  Congratulations.” I said.  “But what does that have to do with me?”

Then he asked me, “How does one go about buying an engagement ring?”

I laughed and told him, “You’re outside of my expertise.  You’ll have to ask Mrs. Black about that!”

I’m not qualified to give advice about a lot of things (particularly jewelry).  But I know someone to ask or to refer my friends and family to for just about every conceivable piece of advice they are seeking.  I’m always looking for the best qualified, nicest people to turn to when I get a question I don’t know the answer to.  I’m not a jack of all trades.  I’m a good wealth manager and I do my best to take care of the families that have entrusted their futures to my care, and they deserve to have the best advice possible for their unique situations.  I have a lot of very smart colleagues who specialize in investments, taxes, estate planning and insurance.  I read voraciously and it’s all I can do to keep up with my area of expertise.  Consider carefully the source of your advice and the values that your advisor holds because they do flavor the recommendations that he or she is giving you.

Hot Retirement Destinations

Growing up in Arizona, we referred to retirees that lived the summer months somewhere up North and the winter months in the Southwest as “snowbirds”.  Increasingly, snowbirds have been shedding their Northern nests and settling in the desert in massive retirement communities like Sun City in Phoenix and Las Vegas.    In the Southeast we have similar developments in Peachtree City South of Atlanta and the Villages in central Florida. These communities offer a fantastic quality of life, but they are hot.  I mean blazing hot.

Last week I helped my mom and stepdad move from Las Vegas to Tucson, which is a retirement mecca.  The temperature hovered at 108 degrees.  I don’t care if it is a dry heat, that’s hot!  When I offered to help my parents move, it didn’t occur to me they would choose the first week of August as the ideal time to do it.  But I’m not complaining too much.  At least I didn’t have to go to Houston, TX.

My bride’s grandparents grew up in Texas and lived in Houston for over 60 years.  Granddaddy’s birthday was August 9th.  Every year since he turned 98, the family would go to Houston and throw him a birthday party, and it was a lot of fun.  He enjoyed it so much, he kept having them so we could come back and visit him.   Granddaddy lived to be 104 years old.

One year we had an ice cream social at the fellowship hall of Granddaddy’s church (South Main Baptist).  I offered to ride with Grandmother and Granddaddy in the car to the party.  I was wearing a suit and a tie and I was sweating profusely because it was over 100 degrees with 110% humidity (mild August weather for Houston).  Granddaddy was sitting in the front seat with the air conditioner blowing on him.  He got cold, so he kept opening the windows to “let the warm air in”.  I thought I was going to die of heat stroke.  I would rather go to Vietnam in August than go to Houston.

Warmer climates are a great retirement destination for retirees, especially if they live in a low maintenance community.  Our retired clients live predominantly in the Southern states and are quite active.  Most of our clients are in North Georgia, which is far enough North that you see four seasons but far enough South that you don’t have to shovel snow.  We also have clients that live in Nevada, the low country of South Carolina and the Florida coast. 

Retirees are the busiest people I know.   Living in a climate where they’re not shut in for the winter months adds a lot of quality to their lives.  For folks that have settled into retirement up North, come on down to the South and look around!

Selling People Short

Short-selling is making a bet that a company’s share price will decline.  Brokerage firms loan shares of stock to the short-seller who assumes the risk of the trade.   If the short-seller is correct, he will profit from the trade.  If he is wrong, and the share price appreciates, he will lose money on the trade.  The brokerage firm earns margin interest either way.  Short-selling is particularly prominent in the hedge fund industry.

When the uptick rule was changed (which specified that one cannot short a stock unless the previous trade for the stock was an uptick in its value), I thought it was a good thing, that it would make markets “more efficient”.  I didn’t really think about the law of unintended consequences.  But now that I have seen the human cost of short-selling, I deplore it. 

I don’t aspire to profit from the failure of a company and I don’t want to willingly contribute to its demise.  Each ticker symbol that trades on an exchange (whether it is a stock or an ETF) represents the hopes and dreams of countless scores of employees, investors and their families.  Those people have dignity and value. 

Granted, not all companies are good companies.  That might be due to industry circumstances or human (i.e. management and/or labor) factors, and if I make that assessment, I simply sell the shares.  That is the dignified way to manage money.  There are countless good companies and opportunities to make money by investing in positive development.

Shorting a company’s stock destroys the wealth of its shareholders and stakeholders.  The short selling of financial stocks in 2008 was the equivalent of a back-door run on the banks.  It was like holding a drowning man’s head underwater and refusing to let him up to breathe. Short-selling traders made a killing by undermining our financial system and the security of billions of people around the world.  The human cost to the financial industry employees and shareholders and the panic that ensued around the world will probably never be adequately measured.

 The problem with the investment industry today is not that it is under-regulated or overly greedy (it has always had an ample measure of both).  The problem is that it does not recognize the dignity of people, which is the essence of fiduciary responsibility.