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Do You Have Investing FOMO?

 

 

You get it: you need to invest wisely in order to grow your wealth.

You understand the importance of getting your money into the market, and you’ve been diligently contributing to retirement accounts and maybe even a brokerage account for years now.

But you can’t help but wonder… are you investing in the best possible way? Are you potentially missing out on a better investment someone else is using that you don’t know about?

It’s reasonable to feel this fear of missing out on something great — or having a little investing FOMO. It’s when you act on this fear that you can start making bad choices, choosing poor investments, and making speculative decisions rather than strategic ones.

What Is Investing FOMO?

There’s a research-backed definition for FOMO or fear of missing out: It’s the “pervasive apprehension that others might be having rewarding experiences from which one is absent.”

The prospect of “rewarding” opportunities tends to lure potential investors into the “take this opportunity now” trap without even thinking about it. This plays on your emotions, not your intelligence or capacity for reasoning.

You’ve probably seen these traps before. They sprung up around BitCoin. They come up around every new “hot stock” from talking heads on CNBC. They might even be lurking in your office when you hear your coworker talk about some wild investment that’s generating crazy returns that you just have to get in on.

Hearing things like this often makes us feel uncertain. Are we missing something? Is there an investment that’s bigger, more exciting, and more profitable than the ones we have now?

Your FOMO Could Lead to Serious Financial Costs

The answer in almost every case is “no.” Financial markets are efficient, and thinking you have the inside scoop on a huge investment that no one else knows about flies in the face of that.

There are millions and millions of market participants out there. Your odds of actually having information they don’t are slim to none.

Of course, you’d know that if you thought through this rationally. (Ever heard of things that are “too good to be true?” There’s a reason for that saying and it certainly applies in investing!)

But the fear that you could be missing out on something — even if you’re not entirely sure what that “something” is — often influences investors to make poor choices because they deviate from their cohesive strategy and impulsively act based on what other people they perceive as successful are doing.  

Those poor choices include:

Trying to time the market: Plenty of people love to try and predict when the next big downturn or upswing in the market will be. None of them have any real clue about when it will happen. 

Sure, we know it will happen. But we don’t know exactly when. And how will you know when to get back in? Anyone tempting you to invest big now (or to sell everything and get out before a crash) is leading you to a big mistake, and probably a new product.

Speculating instead of investing: Investing FOMO usually manifests through speculative behaviors. BitCoin and other cryptocurrencies are a great example.

Watching other people make hundreds of thousands, even millions, of dollars from buying coins can make you feel like you’re missing out, big time. No one is arguing you could make a lot of money from such a purchase.

But we need to be clear about one thing: if you do so, you’re speculating, not investing. Speculating looks a lot like gambling, and there’s no strategy behind it. It’s a lot of chance and luck, which means you could hit it big — but more likely, you’re risking money you may or may not have to lose.

Jumping from craze to craze: On a similar note, investing FOMO can cause you to dump money in whatever’s trendy this month. This creates huge potential for loss, not just because you’re jumping around without a plan.

But you’re also likely incurring higher fees, transaction costs, and throwing your asset allocation and diversification way out of whack. A better way? Invest strategically and with care, with the long-term in mind.

Getting Over Your Fear of Missing Out on the Next Big Investment

So, how do we get over FOMO and avoid making the wrong financial choices? The first step is to be self-aware. Start to recognize those uncomfortable feelings that creep up when someone you know or someone on TV or in the media begins talking about that next hot stock…

…and then learn to do nothing with that feeling. You do not need to act. You can acknowledge you feel uneasy, stressed, or worried that you’re missing out, but you don’t need to try and meddle with your investment strategy.

Step two? Reach out to your financial advisor and let them know how you feel. Your advisor is there to help you stay the course even when you’re emotionally tempted (by either fear or greed) to take a wild left turn into speculative territory.

Finally, you might want to immerse yourself in a little knowledge. If you can better understand how markets work and develop your own strong investment philosophy, you’ll be better able to sort through the noise that could previously trigger your sense of investing FOMO.

You’ll know what’s worth listening to — and what’s simply a distraction along the way.

Again, your advisor may be able to point you in the right direction if you’re not sure what resources to use to increase your knowledge and deepen your education on finance and investments. Your family’s life savings depends on it!

Budgeting for the Holidays?

 

 

Christmas with the Kranks, playing at any given time on a number of cable channels during the month of December, has a Rotten Tomatoes score of 5%. You read that right: 5%. A movie has to be mightily bad to receive such an abysmal score.

And yet, when I watch it, I see beyond the scathing critic reviews to the sound fiscal policy that lies central to the plot of this Christmas dud: a middle-aged couple, newly established as empty nesters, decide that the holidays have become a testament to excess.

They vow to skip Christmas this year, opting instead to spend their usual holiday expense on a Caribbean cruise for two.

Now, aside from the shenanigans that you would expect to ensue from such a premise, in a movie starring Tim Allen, there are some gleaming nuggets of wisdom we can take with us from those Scrooge-like Kranks.

And maybe, just maybe, the actions deemed horrific by their friends and neighbors can serve as lessons to help you keep some jingle in your pocket this holiday season.

Lesson #1: If you’re not budgeting for the holidays, you’re doing it wrong

Luther Krank is a numbers guy. He really crunched previous annual spending, down to ornament repair costs, to truly put a price tag on their customary Christmas expenditures.

As Grinch-y as this practice may sound, Luther Krank has the right idea. He will not be spending beyond his means because he’s accounted for every penny. He’s created a budget. And so should you.

If you don’t like the “B” word, let’s call it a spending plan. Either way, if you don’t know your financial limits, you’re setting yourself up for overspending.

In the madness of weekend sales, 24-hour specials, and last-minute markdowns, it’s easy to keep piling up those purchases that are such a “deal.”

And what does that get you? “Blue Monday,” which falls on January 19 next month. That’s the saddest day of the year, due in part to our excessive holiday spending finally catching up with us once those credit card statements come rolling in.

Don’t be a Blue Monday victim. Make a game plan:

  • How much can you afford to spend?
  • Who are you buying for?
  • What are your other holiday expenses? (parties, dining out, charity, décor, movies, concerts, etc.)

Once all expenses are accounted for, divvy up your budgeted dollars accordingly and enjoy the holidays guilt free! And my next tip might help with keeping your budget in line, too.

Lesson #2: Invest in experiences, not things

You’ve likely heard this one before, but kids outgrow toys, clothes go out of style, and physical objects rarely stand the test of time. But you know what lasts? Memories.

When Luther and Nora Krank decide to take a Christmas cruise, they decide to invest in quality time with each other. They even begin to connect more during the weeks leading up to their cruise, as preparing for the trip (and dodging holiday commitments) gives them something to look forward to together.

I’m not saying you have to skip Christmas altogether, or that you have to make a gesture as grand as a cruise.

But think about the little traditions unique to the holiday season that create priceless memories: putting up decorations, seeing distant relatives, baking cookies, looking at holiday lights, volunteering or otherwise giving to charity, and more.

These things cost little to nothing at all but can create a lifetime of cherished memories.

Don’t just take my word for it. This teacher’s post went viral for sharing that it’s the experiences her students talk about long after Christmas, not the expensive toys. 

Lesson #3: Sometimes, Just Sometimes, Giving Freely is the Way to Go

Without giving away any spoilers, I’ll just say that by the end of the movie, Luther Krank ended up spending double what he normally would on Christmas, being forced to pry open his checkbook and unclench his fist from around his tightly guarded wallet.

And he was perfectly fine with that.

I don’t mean to negate everything I just said, but despite all our best planning, sometimes the opportunities to embody the holiday spirit, or to help someone in need, or to create wonderful experiences will present themselves when we least expect them.

And far be it for me to tell you to deny yourself the ability to take advantage of these opportunities. After all, these are the things that make the season bright.

Indeed, the reason I saved this lesson for last is that, if you have followed lessons #1 and #2, you’ve probably made it a lot easier to put lesson #3 into action.

Staying within budget, and prioritizing quality experiences, means you may have extra cash, or time, or good old holiday cheer to be able to give freely, whether that’s with money, time, or hospitality – all of which carry value and can be worth their weight in gold to those on the receiving end.

From my family to yours, I wish all of you a wonderful holiday season and may the spirit of Luther Krank guide you throughout the new year.

 

The Basics of Benefits Enrollment Packages

Photo courtesy of Brennan Clark on Flickr

When you think about your compensation, do you immediately think of your salary?

Most people do. But your salary is only one part of your compensation — and if you fail to account for the other aspects of that, you might be missing out.

Those other aspects, of course, are your benefits. As open enrollment season approaches, it’s worth considering the basics of your benefits package. By optimizing the benefits you use, you may keep more money in your own pocket — which is money you can then save and invest.

Here’s what to keep in mind.

Get the Right Health Insurance

One of the biggest benefits of working with a company is the fact that you get access to group insurance policies, which are far cheaper to utilize than buying your own private insurance.

The obvious policy you want to get through your employer is health insurance — but what might not be so obvious is the right choice of all the policies you can choose from.

Many people opt for the plan that offers the lowest deductible possible (which can still feel pricey even when it’s the smallest amount available). That makes sense if you want to minimize what you could be on the hook for paying out-of-pocket.

But you might want to at least consider a high deductible health plan or an HDHP. Yes, the deductibles are high. Some run into the thousands of dollars for individuals and even more for families, which can feel like a bad idea to take on if you know you’ll have to pay so much for healthcare.

HDHPs, however, remain a good option for two main reasons. For one, your monthly premium payments will be lower. That keeps more money in your pocket — which you can then use to save into an account that an HDHP gives you access to a health savings account.

HSAs are the second reason why HDHPs make a lot of sense. They offer tremendous tax advantages.

You can deduct your contributions from your taxable income. You can invest the money you contribute so it can grow over time — and those earnings are tax-free, too. And finally, you can spend the money in the account, tax-free, if its used on qualified healthcare expenses.

No other account offers so many tax advantages, which makes HSAs well worth the HDHP required to use them. If you want to get even more value from them, max out your HSA — but don’t spend down the money in the account.

Instead, pay your medical bills out of pocket as long as you’re working and earning an income. Leave your HSA money invested until retirement. Then, you have a specific fund of money to spend on healthcare in your later years (when medical bills will likely be the highest expense in your retirement budget).

As for that high deductible? You can either build in a line item to your budget to set aside a little money each month in case of emergencies. Or you can plan to use your emergency fund should you need to cover a big medical bill before you hit that deductible.

Look at Other Policies, Too

In addition to health insurance, your benefits likely include disability and life insurance. Life insurance policies are usually small, and the benefit paid out to your beneficiaries may only be enough to cover the cost of a funeral.

Still, it’s better to opt into this coverage and relieve your surviving loved ones of being on the hook for such an expense. (It also means any assets you leave behind can go to those beneficiaries, instead of being used on any end-of-life costs).

If you have people in your life who depend on your income for their financial stability (like a spouse, even one who earns their own income, and certainly any minor children), you may also want to buy term life insurance to supplement the small policy you get through work.

Disability insurance is one of the best benefits your employer offers because it protects your biggest asset: your ability to earn an income.

Life insurance only covers you should your life actually end. But if you’re injured or ill and can’t work, disability will kick in to provide an income when you can’t earn one.

You need to look at both short-term and long-term disability. Both these policies cover different needs — and what you get through your employer may or may not be enough.

Look at what they offer and opt-in, as it will likely be cheaper than buying your own policy. Then, consider what gaps that coverage leaves and consider talking to a financial planner about strategies to cover those gaps as necessary.

Take Advantage of Your Retirement Accounts

Retirement plans that provide you with an employer match offer a great way to literally increase the amount of money going into your account. If your match is 3 percent, for example, your employer will match your contributions up to 3 percent.

Contributing at least enough to your retirement accounts to get the full match offered is like giving yourself an instant raise that goes straight to funding your future self. It doesn’t get much better than that.

Keep in mind that this could be an option for you even if you don’t have a 401(k). You might have a plan like a SEP or SIMPLE IRA, but these could also provide your match. If you’re not sure, ask your HR department and get information about what your plan includes.

What If You Already Max Out Your 401(k)?

That last point might not be helpful if you’re already on top of it and contribute not just enough to get your match, but enough to completely max out how much you can put into the account. (That’s $18,500 in 2018.)

If that’s the case, consider other ways to save. Do you have other benefits that allow you to take advantage of tax-advantaged accounts or even equity compensation?

Look into your benefits and see if you can take advantage of ESOPs, ESPPs, or nonqualified deferred compensation packages. These are a great way to build wealth in a different way than just topping off retirement accounts.

What Else to Look for — and What You Shouldn’t Use in Your Benefits Package

As you go through your benefits, you may want to take advantage of additional offers, like stipends or reimbursements for wardrobe or transportation. Some companies offer perks like free (or at least discounted) gym memberships, meal subscription services, tuition,  or childcare.

If you’re not sure, ask HR what kinds of perks might be available. The answer might be, “none,” but it’s worth making absolutely sure if you could opt in and use what the company offers rather than spending your own money on services you use anyway.

But you shouldn’t fall for the so-called “teasers” that may be included with your benefits. You don’t need things like accidental death insurance. You probably don’t need vision or dental insurance either.

A more effective use of money will likely be setting up a comprehensive financial plan that accounts for these kinds of things — and is less expensive than the fees and premiums you’d pay otherwise.

Good financial planning can also help you evaluate all the benefits available to you, and make sure that you take advantage of the ones that will help you add to your nest egg or help your dollars stretch just a little further.

How to Write a Nasty Email or Blog

Photo Courtesy of Web Brain Infotech on Flickr

 

At one point or another, you’ve probably opened an email only to find it was full of negative comments or even hate. The person on the other end was clearly angry or upset, and now you’re bearing the brunt of their frustration in the form of this ‘nastygram.’

 

It’s incredibly hard not to immediately respond with a message that’s just as riled up and angry. The same could be said for when someone wrongs you and you feel like going on the attack.

 

Whether you were unjustly the recipient of a ‘nastygram’ yourself and wanted to respond, or if you have something you need to get off your chest, here’s how to write a snappy reply back:

 

Don’t.

 

Take the High Road in Online Communications

 

What a disappointing answer! But it’s the best advice you can receive when it comes to writing a nasty email or blog. Just don’t.

 

The internet makes it all too easy for people to vent, rant, and get their negative emotions out of themselves — and on to other people.

 

There’s definitely a time and place to address conflicts or right wrongs. Through an email or article that you can’t take back, however, is rarely a good channel to use.

 

While you may feel free to say what you really feel and truly unleash all the thoughts you think that other person needs to hear from you, the presence of the screen between us and them creates a strange effect: we start saying things we’d never dare say to someone’s face.

 

How to Tell If You Should Step Away from the Keyboard

 

That’s a good first test to determine if it’s time to hit pause and just walk away (at least for a little while): if you’re about to type something you would never say in person, don’t do it.

 

Assume anything you put on the internet is there forever. Considering this, words you write when highly emotional, defensive, or upset may be ones you regret once you’ve had time to cool off and rethink the situation.

 

Before writing any kind of response to something that gets you worked up, put the email or post aside. Talk to other people about the incident. Or write out what you really want to say on a notepad or in a word document as a way to vent — then delete it and start over from a calmer, more reasonable state of mind.

 

If you still feel like you really need to give someone a piece of your mind, consider this: when have you ever been on the receiving end of a nasty email or blog post and thought, “man, this person has a point! I really am a jerk!”

 

Even if you made a mistake, having someone (digitally) yell at you for it probably wasn’t an effective way of dealing with the problem. That’s a two-way street: if you want to persuade someone, or request they address a mistake they made, or point out where they need to take responsibility for an action, being mean or aggressive will not get you the result you want.

 

Say What You Mean Without Getting Nasty

 

None of this means you have to sit back and let someone run over you. It doesn’t mean that you can’t ever share your opinion or what you think about a situation, either.

 

Here are a few ways of voicing your thoughts or addressing your concern in a constructive way:

 

  • Look at what actually happened, not how you feel about the situation. Focus on facts rather than what you made a certain action mean. Keep your emotions out of it.
  • If you can’t keep emotions out of it because you were hurt or disrespected, first think about what you hope to get out of sending a message about the incident. Do you want an apology or another action? Don’t leave it up to the other person to guess. Explain what happened without making accusations, and then request what you need to resolve the situation.
  • Before you criticize, think of what suggestions you could make for improvements or changes. Instead of just naysaying someone’s effort or ideas, offer a constructive solution to the problem.

 

Again, it might be a good idea to talk through the situation with an objective third-party first. Or at least write out the ‘nastygram’ you want to send, so it’s out of your head, then delete it.

 

When you’re ready to write a calm, unemotional response, go for it. Then ask someone whose judgment you trust and who does not have a vested interest in the outcome of the situation to review the email and edit it for you.

 

Ask them to point out accusatory language, emotional verbiage, and just plain unproductive sentences. Work to remove that from your message, so your response is clear, level-headed, and useful — not nasty.

Before You Kick Back to a Traditional Retirement, Read This

Photo courtesy of ulvi can @Flickr

 

Dreaming of the days you can sit on the beach, tropical drink in hand and not a thing on your to-do list? Ready to call it quits at your job and walk out to an endless vacation where you never have to check a single email or attend a meeting again?

It’s nice to daydream like this when you’re in the middle of your career, drowning in responsibility at work and home, and feeling like you’ll never catch up on all the sleep you missed in the last 10 years.

After all your hard work, you might look forward to the day when you can quit for good and kick back to a relaxing retirement free of any kind of obligation or responsibility.

But you may want to rethink that plan because more and more research shows that a “traditional” retirement — where work up until full retirement age only to quit and never work another day in your life — can be bad for your health.

The Potential Pitfalls of a Relaxing Retirement

When you simply stop going to work and have nothing on your to-do list, you can quickly run out of reasons to leave the house and interact with others during your everyday routine.

Many retirees become increasingly secluded and lonely without jobs to go to or people to see for a specific reason.

You can always plan trips to visit friends and family, of course. But it’s hard to beat the loneliness that can settle in when that’s not part of your day-to-day life.

A UK study found that loneliness, depression, and physical health issues are common among retirees who kick back to a traditional retirement with nothing on the daily agenda.

Initially, that relaxing retirement is restful and rejuvenating. But the longer it extends, the more prevalent health issues become as retirees increasingly retreat — consciously or subconsciously — from a more active life.

How to Have a Healthier Retirement

To avoid these pitfalls, plan your retirement around communities, relationships, and experiences. Researchers at Harvard found that you need to organize this new phase of life to include 4 fundamental factors for good mental and physical health:

  • A new social network outside of the job you leave behind.
  • Play, meaning hobbies you enjoy like camping or tennis.
  • Creativity, in whatever form that takes for you — taking up some sort of art, making something by hand, and so on.
  • Constantly seeking to learn new things and keep your mind engaged.

If you don’t have family nearby, consider how you can engage more in your local community, make new friends, and maintain existing relationships with neighbors or coworkers.

You could also consider a move as part of your retirement planning so you can be closer to those you want to have good relationships with as you age.

Play and creativity may be easier to weave into your retirement plan, as these are fun and rewarding activities. The key is to be intentional and make them part of your plan — don’t just assume you’ll naturally fall into something that satisfies these needs.

Retirement planning needs to cover the financial stuff. But you can plan for your actual retirement lifestyle, too. Make sure you give yourself a reason to get up, move around, and interact with other people every single day.  

You’ll Enjoy Financial Benefits When You Switch Your Retirement Mindset, Too

When you consider alternatives to the traditional retirement that include possibilities like working part-time, putting your expertise to work as a consultant, or even starting your own business, you also make retirement planning considerably easier.

For one, you’ll enjoy all the benefits outlined above. Your physical and mental wealth will likely be better than if you kicked back and did nothing at all.

That, in turn, benefits your financial health. Healthcare is the biggest expense for most people in retirement. If you can maintain your health for as long as possible, you’ll likely pay less in medical costs down the road.

Plus, creating some form of income stream beyond just your retirement savings nest egg means you alleviate some financial pressure. If you continue to work — even if it’s just part-time — you’ll earn some amount of income.

That means you don’t need to rely 100 percent on what you saved during your working years to last you through 20 or 30 years’ worth of retirement.

Are You Planning for an Active, Robust Retirement?

Of course, kicking back and relaxing should be part of retirement. But it shouldn’t be the only thing you do in your life after work.

“Retirement” today could simply mean the day you no longer need to depend on a full-time job that provides you with a specific number on your paycheck.

It’s the day when you’re free to explore your hobbies, pick up a part-time job doing something you really love, or volunteer with an organization you’re passionate about.

This could be your chance to start a second act as a freelancer or consultant. You could start your own business — or even learn a completely new set of skills that allow you to start an encore career (with more flexibility and a lighter schedule than your previous job, of course).

Retirement shouldn’t mean you retreat from life. Find ways to stay active, engaged, and productive.

You’ll be happier as a result — and as a bonus, you could make it even easier to fund the retirement you want since you won’t be sitting around, twiddling your thumbs and hoping your savings alone will be enough to fund your retirement lifestyle.

How Much Is Too Much College Debt?

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Over 44 million Americans walked away from their time in higher education with some amount of college debt. The total amount of student loan debt collectively carried by college students and grads today is $1.45 trillion, and the average 20-something-year-old borrower pays $350 per month on their loans.

 

There’s no question about it: student loan debt is a serious financial burden for many students, parents, and newly-minted grads.

 

Whether you’re considering college costs for a family member or want to go back to school yourself, you likely want to avoid dealing with student loan debt thanks to statistics like this and harrowing news items that detail individuals who are struggling to handle their tens of thousands — or even hundreds of thousands — of dollars’ worth in college debt.

 

But debt isn’t inherently bad. In fact, student loans can be useful tools to use as leverage. The real question is how much is too much college debt, and when does it shift from useful tool to financial anchor holding you back?

 

Using Student Loans as Productive Financial Tools

 

There’s a lot of fear and uncertainty around student loans. But this kind of debt can actually be useful to you or your student. Here are some reasons why:

 

Student loans allow you to leverage your cash flow. Instead of shelling out for the cost of college in cash — and potentially leaving you vulnerable to other unexpected expenses and emergencies — student loans allow you to gradually pay for college over time in a way that doesn’t stress your liquidity as much.

 

You can pay down debt and continue saving. In addition to not needing to drain your savings accounts, the fact that you can pay back student loans over time allows you to balance that responsibility with the responsibility you have to yourself to save for the future.

 

Student loans can help students build their own credit. If your teenager is headed off to college, taking out a loan can help them build their own credit (which they’ll need as adults in the real world). This is a less risky way to help them than providing them with a credit card, which can be hard to manage and far more costly if they fail to make payments thanks to dramatically higher interest rates.

Still, Debt Is Debt

 

If you’re reading this and thinking you now have the green light to take out all the student loans you want, think again. At the end of the day, debt is debt. And it costs you money to borrow and finance an education.

 

It might make more sense to avoid student loans altogether if you have the financial means to do so (or your student can help pay their own way, so you’re not on the hook for the entire cost).

 

But what if you are….

 

  • Considering emptying your savings accounts to cover college costs
  • Not saving for retirement so that you can save for college instead
  • Able to pay for college out of pocket through your cash flow, but just barely

 

If you find yourself in these situations, student loans can be a reasonable solution. Just make sure you understand how much debt is too much first.

 

How Much College Debt Is Too Much?

 

Let’s be clear on the obvious indicators of “too much college debt.” If you’re looking at debt that reaches into the six figures, it’s too much.

 

Most grads won’t earn anywhere near $100,000 in their first year out of school, making this debt extremely difficult to pay off and a huge burden to handle financially. If your student is aiming for a career path that typically pays $40,000 to entry-level workers, $80,000 is far too much debt.

 

How much of an income you can expect to make after college is the biggest factor in determining how much is too much. Here’s an easy way to start estimating an appropriate amount of student loans:

 

  • Research how much you (or your student) can expect to make after entering the workforce with a new degree. Don’t just look at old data from something like the Bureau of Labor Statistics — go on job boards like Monster.com or Indeed and search for open positions that you might qualify for after school and view what the starting salaries are for those jobs.
  • Look at how much a degree from a chosen university will cost. Include tuition, fees, room and board, and other common expenses like textbooks. Most colleges have information on average costs and expenses that you can use.
  • Calculate how much of that cost you can reasonably cover and determine how much in student loans you’d like to use to help finance your education.
  • Compare a reasonably expected salary to your expected amount of college debt.

 

If your expected amount of student loan debt is more than your expected salary, it’s too much. If it’s the same as your expected salary, it’s also likely too much (if you don’t want to spend the next 10 years paying off those loans).

 

If you estimate that the amount of your salary is more than the amount of debt you plan to take on, it could be a reasonable financial move to make.

 

Even when student loans can be used as financial tools, you need to be very careful about how much debt you take on. You also need a strategic plan for repaying it at the lowest cost possible before you start applying for loans.

Why Average Investors Don’t Beat the Market

Photo courtesy of http://401kcalculator.org

Most people invest in order to grow wealth over time. It’s only natural to want the biggest returns possible as part of that process.

But focusing on returns isn’t necessarily a sound investment strategy — and it could be part of what leads average investors to perform so poorly.

In fact, average investors don’t just fail to get big returns. They tend to underperform market indices that they invested in, like the S&P 500. In 2015, the S&P 500 index outperformed average investors by 3+% percent and they did the same with the Barclay’s Bond Index!

Theoretically, that shouldn’t happen. An index simply tracks the market. Investors are getting beat up trying to beat the market.

And that’s where they get into trouble.

Why You Shouldn’t Try to Beat the Market

These investors are actively involved in their investments. They constantly watch the market (or the news, or both) and try to predict the best moves to make in order to earn the biggest return.

It’s not just individuals who do this. Some advisors will promise returns, too. If you run into one of these, run the other way. Over time, most active investment managers fail to beat the market just like average investors do.

Again, it’s only natural to want to maximize your ROI. To us as humans, that means we have to work for it and take actions and constantly be striving to earn that return.

But time and time again we see that tinkering with your portfolio — rather than simply sticking to a sound investment strategy that aligns with your goals, risk tolerance, and time horizon — leads to losses, not gains.

What’s going on here? Why can’t smart people use their intelligence to outsmart the market?

There are a few factors at work against you as an individual investor acting alone without a reasonable, fiduciary financial planner at your side to help guide the way. Let’s look at 3 of the biggest mistakes you can make that put your portfolio in the most danger.

1. Trying to Time the Market

Average investors get into a world of trouble when they start trying to time the market — especially when it comes to attempting to sell high.

It’s very simple: no one knows what the market will do tomorrow. We don’t know what it will do next month. We don’t know what it will do next year.

Trying to plan around guesses about what the market may or may not do is setting yourself up for failure. In this case, that means losses.

What we do know is that the market will, at some point, take a nosedive. We don’t know the day, and we don’t know where the bottom will be — so it is entirely pointless to try and time it.

Similarly, we know that once the market takes a tumble, it will eventually recover. But again, we don’t know precisely when this will happen. Say it with me: it’s entirely pointless to try and time it.

Investors tend to wait until they feel very confident to buy in after a market crash, at which point they’ve missed out on most of the gains and buy at premiums. The opposite tends to happen during the pullbacks: investors tend to wait for a ‘bounce’ to sell, and by the time they’re convinced they need to sell the market already tumbled. They sell and experience major losses making it even harder to buy on dips!

You nor anyone else has a clue when exactly market peaks or troughs will occur. Don’t try to guess and leave yourself buying high and selling low.

2. Giving in to Groupthink

You’ve heard that famous Warren Buffett quote, “be fearful when others are greedy and greedy when others are fearful.” It’s an excellent piece of investing advice that almost no individual investor follows.

Why? We’re biased toward influences from our social circles. FOMO. Fear of Missing Out. You can refer to this as groupthink or herd mentality — either way, we tend to let our desire to belong to a group or community override logical (and even creative) thought.

Today, of course, our survival wouldn’t be jeopardized if our “herd” kicked us out or if we chose to strike out on our own. But that wasn’t the case thousands of years ago when being accepted or rejected from our groups could mean the difference between life and death.

We go with the herd because we don’t want to get left behind, miss out, or worse, be shunned by the tribe. This happens in all areas of society — including in business and financial markets.

Groupthink can lead us to simply go with majority opinion while leaving our own critical thought and reasoning processes behind. It’s what drives market bubbles or the desire to buy more and more stocks when everyone else is doing the same.

When others are greedily buying up stocks, and the market is soaring, as Buffett mentioned, there’s reason to be cautious. Similarly, when everyone is panicking and selling shares, it provides the successful investor an opportunity to snap up stocks at bargain prices.

To avoid the mistake of groupthink, turn off the TV. Don’t worry about sensationalized headlines. Ignore your colleague at the water cooler who has the inside scoop on the next hot stock pick.

Stick to your investment strategy, even if it means going against the herd.

3. Not Realizing “No Action” Is a Decision

Sometimes, all the knowledge in the world is not enough to stop investors from doing stupid things in situations where they should know better. It’s not always easy to just sit back and do nothing, especially when you feel emotional.

And investing is a big emotional roller coaster full of very high highs and some terrifying lows. But just like a roller coaster, you need to keep the seatbelt buckled and stay in your seat until you reach the end of the ride instead of attempting to leap off at some point in the middle.

Many of the decisions investors make focus around choosing between one of two (or many) actions. What average investors sometimes miss is the fact that not doing anything is also a decision and a choice you can make.

Avoiding the actions that lead to mistakes is sometimes more powerful than choosing all the right moves to make.

In fact, this is one of the areas where a financial advisor acting as your fiduciary can add the most value: reminding you to stay calm, keep your seatbelt fastened, and ride out whatever has you spooked.

Make the Most of Your Vacations: Save for Travel, Not a Vacation Home

 

A vacation home works for some people and can provide a lot of benefits. It’s wonderful to have your own place to escape to when you’re ready to relax and unwind. And if you make good decisions about where and what you buy — and get a little lucky in the process — a second home can be an asset.

 

But the key point? It works for some people and certainly not all. In fact, for most people saving for travel instead of a vacation home makes much more financial sense. It also ends up better for you in the long run regarding happiness and enjoyment.

 

That being said, it’s well worth understanding how to make the most of your vacations, you’re better off saving your money for trips, experiences, and various destinations — not a second home.

 

Vacations Are Fun and Games — Vacation Homes? Not So Much

 

Buying a vacation home often makes you a second-home owner. With homeownership usually comes with a second mortgage, property taxes, insurance, the responsibility for repairs, managing a property that may be far away, potentially managing renters (or paying someone to manage that process for you), and so on.

 

In other words, it may sound fun and exciting. But don’t get swept away thinking about all the benefits. Vacation homes come with all the downsides — and potentially even more — of any property you own, pay for, and are responsible for taking care of throughout the year.

 

Add in handling those responsibilities over distances, and a vacation home is often a fast-track to frustration (and a lot of work, to boot!).

 

Make the Most of Your Vacations by Maintaining Your Freedom to Choose

 

Those downsides don’t even account for the fact that owning a vacation home tends to mean you’re locked into the same vacation year after year. Again, that might be fine for some folks — but for most people, the freedom and flexibility to vacation in various places and explore new things is worth a lot.

 

You may remain stuck with one type of vacation for as long as you own your home. And even if you’re not, that begs the question: why bother with the vacation home in the first place? Keep the freedom and spend that money on taking dream vacations wherever you choose to go.

 

The Benefits of Saving for Travel

 

Still not convinced? Consider these reasons you should save for travel instead of plunking your money down in another property that you’ll only use a few weeks (at most!) out of the year. You’ll get:

 

  1. The opportunity to explore and visit more places.
  2. The option to take different kinds of vacations (cruise, beach house, camping, etc.).
  3. Increased flexibility (where you go, when you go, how long you go, how many people go, etc.).
  4. The ability to budget for “that one big trip” you’ve always dreamed of (maybe three weeks in Southeast Asia, or a month in Europe) by spending less on travel in the year or two leading up to the trip (such as a camping and hiking trip at a national park).
  5. Fewer unexpected expenses, since you don’t have to worry about vacation home repairs, furniture, the air conditioning going out…
  6. The freedom to follow the deals and to pick vacations based on deals you find online, without being locked into any one place.
  7. Simplify your life with greater peace of mind.

 

Travel Can Keep Your Other Wealth-Building Goals on Track, Too

 

Traveling, as opposed to a vacation home, can keep your other financial goals on track because you can spend significantly less on travel (even luxury travel) than you would buying and maintaining a property. Travel gives you more flexibility in how you use your money, even to the point of choosing not to travel.

 

As your life circumstances change — you suffer an injury or illness, get married, have kids, take care of an elderly parent — travel may not be the right fit for a few years. And that’s okay. You can save your money and explore places closer to home while you need to prioritize other things in life.

 

While you can choose how and when you travel, you can’t choose to not pay your mortgage on your vacation home if another savings goal or family need becomes a priority that year. When purchasing a vacation home, you lock yourself into those expenses year after year — even when your goals, financial situation, and interests change.

 

What to Think About If You’re Set on a Vacation Property

 

If you do choose to forge ahead with a vacation home, here are just a few points you’ll want to keep in mind:

 

  1. Make sure you know the neighborhood and surrounding area. Is it a place you are going to want to visit for the next 30 years or more (assuming a 30-year mortgage)?
  2. Are you going to have renters? Keep in mind that you have to a rent a vacation property for large chunks of the time if you want to receive the tax benefits. This usually means making the most popular weeks available to renters — not your family.
  3. Renting a vacation home often requires hiring a management company, or managing it yourself. It also means more wear and tear on the furniture and property. Account for this when you look to see if your budget can handle a second home.
  4. A vacation home is more than the price of the home. It needs to be furnished, maintained, repaired, and insured (and often vacation homes are in costly areas, such as a beach house on the water). Again, account for these expenses when you consider the financial aspects.

 

There are so many benefits to saving for travel rather than tying money up in another property. Remember, you can’t buy your freedom – and a vacation home certainly takes some of that away.

 

At the very least, if your heart is set on a vacation home, do a lot of research, planning, and consideration before jumping in feet first. Understand all the pros, and more importantly, all the cons before committing. A vacation home may make sense if you fully understand the consequences and downsides and feel those sacrifices are worthwhile.

Whichever way you choose to enjoy the money you use for vacations and other fun experiences, make sure it aligns with what’s important to you and your values.

Budgeting for Coffee Sucks, Try This Instead

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Trying to cut back on your spending gets tedious when you focus on minute details. Yes, it’s important to track every dollar — but to feel anxious about spending on small purchases that you value because you’re trying to save more and spend less? That can quickly lead to budget burnout.

 

Preparing for and responsibly purchasing big-ticket items (from a laptop to a car to a house) is much more important than counting every last penny. Think about it. Does it make sense to stress over buying a coffee or spending an extra $1.99 to add guacamole but to have zero plan when it comes to major purchases?

 

Quite frankly, budgeting for coffee sucks — and it’s not worth your time or effort to pour your energy into everyday items instead of looking at the big picture and failing to prepare for big expenses.

 

You want to make responsible decisions on the big stuff. A few coffees won’t break the bank and deserve a place in your budget if your daily latte is truly important to you.

 

But buying “too much car” or “too much house”? That’s where you can run into major financial trouble.

Cutting Out Lattes Just Doesn’t Cut It

Focusing on small expenses, like your coffee fix doesn’t do much to impact your budget, cash flow, and ability to save and invest if you fail to examine your larger purchases.

 

If you spend $5 every single day of the year on coffee, you will spend $1,825 throughout the year. Now, that’s no small number. But perhaps all you need to do is cut your coffee consumption by half. You still get to enjoy your latte multiple times per week while also saving $912.50 per year.

 

Compare that to obsessing over the tiny costs and nickel and diming yourself. You’d save some more. But you’d also likely be stressed out and less happy. And the bigger issue? You might exhaust your decision-making power by constantly denying yourself a small pleasure.

 

You need that financial willpower more when it comes to big depreciating things, like cars and boats, etc. Let’s image you purchase a car today and lock into monthly payments of $250 for five years. That means you give up more control in the future on what you can afford to buy(and how much you can save and invest) because the $250 is already accounted for, every month, for five years. All in, that’s $3,000 a year and $15,000 over five years!

 

It’s a much more dramatic impact than budgeting for coffee.

 

The Impact of Big Expenses on Your Budget Over Time

 

Take this one step further. Say you spring for the extra fancy model of the car. If your monthly payments were $500 for five years because you financed a more expensive car, that’s $30,000 worth of cash that you devote to this one expense.

 

That’s the other thing about budgeting for coffee: you can change your mind anytime about how much you’re comfortable spending on those little things. Big purchases that you pay for over time? Not so much. You commit your future budget to being limited for years.

 

If you took that same (lower) car payment of $250 and invested it instead every month over five years, you would have about $17,000 assuming a 5% rate of return. Leave that money alone for 30 more years until retirement, and at 5%, you’ll have $73,500.

 

It’s important to think bigger and look at big-ticket items that can drain your cash flow for years to come. While cutting things like a daily latte can help you reduce costs, prioritize preparing for bigger purchases first and don’t set yourself up for failure by depriving yourself small pleasures like coffee from your favorite cafe a few times a week.

 

Instead of Budgeting for Coffee, Create a Big-Picture Plan

 

Try this relatively simple process to review your big-picture budget without getting into all the details of every single purchase:

 

Take your last pay stub and find the net amount (after taxes and deductions for your retirement account, health insurance, life insurance, etc.).

If you’re paid once a month, the net amount on your last pay stub is what you want. If you’re paid twice a month, multiply the number by two. This is your net monthly income.

List every single fixed expense you have and how much each one costs you, on a monthly basis. These expenses may include your mortgage, utilities, insurance, other debts to repay, taxes, etc.

Add up the monthly cost of each fixed expense.

Subtract the total amount you spend on fixed expenses in #4 from the net amount you earn each month from #2.

The difference is the amount you have to spend each month on everything else, including savings.

 

The best way to increase your discretionary spending (and more importantly, your ability to save), is to knock off or reduce some of the fixed expenses.

 

This may mean spending a couple of hours shopping for cheaper car insurance. Or, if you’re spending more than you earn each month, it may mean a change as drastic as moving to a less expensive place to live.

 

Here’s an example:

 

Net monthly income = $6,000

Fixed expenses = $4,000

Difference = $2,000

 

That $2,000 has to cover all your food, gas, entertainment, gifts, shopping trips, everything for the month. That includes savings and other investments outside what you automatically contribute to retirement from your paycheck.

If it’s not enough, look at your large recurring expenses and see what you can cut. You may need to sell the expensive car and get a cheaper one. You may need to reconsider major luxuries in your lifestyle that seriously drain your budget of cash to put on things that are ultimately more important to you — like being able to travel, save for a big goal, or retire sooner to spend more time with your family.

 

Ready to invest in real estate? Take a close look at your margins

Philip Taylor

                              Photo credit: Philip Taylor

We’ve all heard the mantra: “Location, location, location!” When buying investment property, a great location is often considered the #1 rule for success. But as we’ve all seen in that late night, drag-out game of Monopoly, location certainly isn’t the only factor at play.

A decade ago, we all learned more than we wanted to know about subprime mortgages. People were investing money they didn’t have using loans they should never have been given. The stage was set for the perfect storm. Home prices started falling, refinancing became difficult (especially with historically high debt-income ratios), and those previously attractive adjustable-rate mortgages began to reset at higher interest rates. Monthly payments rose dramatically and mortgage delinquencies soared. It’s the scenario that led to a shocking 3 Million foreclosures in 2009 followed by a complete overhaul of mortgage banking regulations. It took years for housing prices to climb back out of a deep, black hole—and even longer for people to recover financially and psychologically.

Prior to the housing crash, real estate had almost always been viewed as a solid investment, averaging over 6% for decades. Now that housing prices are on the rise, investors are once again turning their eyes toward rental properties. Many risk-averse investors gravitate to real estate as an attractive proposition. You can feel it. You can see it. You can drive by your property and know your investment is real. But is investing in property the right choice for you? The answer depends on one thing: the margins.

Many investors look at a basic equation, “money in and money out,” when calculating returns. It seems so simple. Purchase a $200k property that generates $1,300/month rent and earn $15,600 a year—it’s a risk free 8% return using borrowed money! But is it? There’s much more to the equation, and if you dive in and look at the details that deliver the actual margins and return, you may find your investment isn’t what it seems. Be sure you’re considering these key factors when calculating your actual profit margin:

  1. Maintenance & turnover costs. Of course, installing that new water heater costs more than just your time, and your renters may not be very forgiving of an overgrown lawn. Maintaining any property can be expensive, and costs can escalate even further when you experience turnover. Cleaning, marketing, and preparing your property for a new tenant adds up, and every day your property is vacant becomes another drain on your margin.
  2. Insurance & mortgage expenses. Insurance premiums for rental properties can run over 20% more than a typical homeowners policy, and additional liability insurance may be required. Also consider that mortgage rates are higher for second (and third and fourth) homes, and require a 20%+ down payment. Creative techniques to use personal lines of credit can be used to mortgage the property, but that means tying up your available credit that may be needed as an emergency fund during leaner times.
  3. Liquidity. Speaking of liquidity, you pay a steep price for being able to ‘touch’ your property. While it may not be a tangible expense, real estate’s lack of liquidity creates costs when you need cash and timing is an issue. In most cases, completing a sale and seeing any cash in your pocket can take several months, which can force you to borrow money to cover expenses. And borrowing may be difficult if you’ve tied up your credit line with property.
  4. Weighting. Many clients ask me, “How much should I invest in property?” Unless you’re building a career in real estate, an age-old rule of thumb is that your net worth should be spread evenly across three areas, with 33% of your equity in each: 1) real estate, 2) partnering with the great companies (i.e., owning equity), and 3) lending to great companies (i.e., owning bonds). And yes, your home must be included in this equation!
  5. Estate & legal complexity. Have you seen what lawyers charge these days? As a landlord, you’ll need legal help to understand your rights, draft rental and operating agreements, choose which type of entity should own your properties, etc. If a tenant needs to be evicted or if you have a dispute, legal fees can skyrocket. Plus, estate planning for real estate can get complicated (and expensive) quickly with an LLC or partnership.
  1. Capital gains & depreciation. It’s not uncommon for CPAs to recommend investment property to minimize taxes, but in reality, when the time comes to cash in your chips and sell that property for college or that summer home you’ve dreamed about for years, all depreciation is essentially recaptured by your diminished basis—and subtracted from your “earnings” and any return on investment. Capital gains tax ranges from 15% to 20%, so they’re an important part of your real margin. Postponing capital gains is simply robbing Peter to pay Paul…and it all comes around in the end. (Think you’re exempt? If you haven’t lived at a property for at least two of the previous five years, you’ll lose the capital gains tax exemption, which allows individual filers to keep $250,000 of profit from the sale tax-free.)
  1. Tax complexity. It sounds great: write off expenses through the property to avoid Self Employment tax on your income. If you carry a loss, now you have stepped into Passive Loss Land. Income exclusions limits, at risk rules, passive activity limits, etc. Don’t forget property tax! All of this complexity eats up your valuable time, increases your expenses, and reduces your margins.
  1. Compensation for your own hours worked. Here are a couple of questions for you: How much do you make an hour? Is your money working for you, or did you “buy” another job? For example, if you’re earning $150K annually working 40 hours a week (with a few weeks vacation thrown in), you’re making about $78/hour before benefits. It’s not uncommon for property owners to spend several hours a week managing everything from rent collection to fixing water heaters to dealing with vacancies and rental applications. Of course, if you’re paying someone else to manage your property, be sure to subtract management fees from your margin, and include your true hours worked in the equation as well.

So is buying investment property a wise idea? Is it the best way to build wealth? Is rental property really ‘risk averse’? Only if you can be certain that “sure bet” doesn’t turn into a financial drain that steals your precious time, overweights your net worth with investments that lack liquidity, and adds too much complexity to your finances. If you’re not willing to do your homework and consider these important factors, don’t expect location to save a poorly planned use of your life savings. Even Park Place won’t win the game if your margins aren’t in line with your costs.

Want help deciding whether real estate is the right investment for you? Contact me to schedule a time to run the numbers.