Friday, January 23, 2009

Why Won't Someone Just Tell Me What To Do With My Money?

I am sitting here in my office looking over the book titles I have purchased and read over the years. Wealth Cycle Investing, Cash Machine and The Truth About Money are titles that jump out at me. There are many, many others.

Why did I buy those books? Because I, like so many people looking for a way out of financial quick sand, have often just thrown up my hands and wished someone with more brains than me would give me a plan and tell me what to do.

Stephen Greenspan wrote in a recent Wall Street Journal article about financial gullibility. He was swindled by Bernard Madoff. He chalked his gullibility up to financial ignorance and his failure to remedy the situation through financial education. He also outlined social factors that cause us to act contrary to our own financial self-interest. Who is Stephen Greenspan anyway? He is emeritus professor of educational psychology at the University of Connecticut. Oops and oh dear. If he gets swindled with all the tools he has to understand human behavior what about the rest of us? Are we sunk?

I don’t think so. The truth is that no one and I mean no one will care as much about our own personal financial situation than we will. A dear friend of mine used to be an investment banker on Wall Street. She asked me how I was investing my 401K. I said that I was invested in bonds and index funds. She said that that was a good thing because her co-workers who were money managers spent more time managing their own accounts than the accounts of their clients. Humm what a shocker. But isn’t this what the current financial crisis is all about? That money managers, brokers, CEOs, creators of financial instruments were far more worried about their personal bottom lines than the long term implications of their actions in the market place?

What is a person to do? The first thing is to realize that while you may have a trusted financial advisor, that advisor also has mouths to feed and we as a society seem to be a bit beyond the philosophy that payment and compensation should be based on the value one creates in the market place. There has been a giant decoupling of the concept of commissions based on the returns for the investor. Mortgage brokers and realtors were paid based on sales and loans generated for over-priced properties. Now as real estate prices plummet across the country they get to keep their money. Fund managers get to keep their one, two, three, four, five or six percent of assets under management even in a declining market. As a friend of mine recently said, it is a “Yo-Yo”: yo on yo own. One would be well served to realize that it’s a “Yo-Yo” and act accordingly.

Financial planners tell individual investors to consolidate debt by refinancing their homes, to buy and hold, diversify and invest for the long haul. What they neglect to tell individuals is that the long haul is actually a generation. Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8% of your final wealth after the first decade and 32% after the second. In other words, 68% of the total sum accumulated was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007); For the investor who invested in mutual funds in 2000 and is asking himself when is he finally going to make money, the answer is probably 2030. Too bad if that investor needed that money in 2010, 2015 or 2020. What about using a home to consolidate debt? Most financial advisors neglect to tell their clients that there is benefit in gaining the skills necessary to eradicate short-term debt. Exchanging short-term debt for long-term debt merely forestalls the problem without addressing the underlying problem for the short-term debt. Lack of skills in debt management simply means that the short-term debt will recur if the reasons for the accumulation of that debt remain unaddressed. From the financial planners’ point of view, consolidation solves their client’s debt problem that is until the debt occurs again. To me the only reason to refinance a house is to free up capital to use for other purposes including gaining the skills to retire short-term debt. Once the debt is retired, the capital can go to other worthwhile financial projects.

Why won’t someone just tell me what to do?

One of the biggest criticisms of financial author Robert Kiyosaki is that he doesn’t give individuals a specific plan to attain financial freedom. He writes, outlining broad concepts, without providing specifics. Robert Kiyosaki does not know each individual’s circumstance, level of financial education or tolerance for risk. How can he simply tell any individual what to do?

Acting the part of the bon vivant, I got a very late start on my financial path and had to make up for lost time. My solution has been to realize first that it is a “Yo-Yo” and to read widely, very widely. Understanding that there is no one size that fits all when it comes to financial matters, I am careful about where I get my financial advice. I was listening to a recent Business Week podcast. The discussion was about credit, the credit markets and ways to protect yourself financially during the current downturn. The correspondent did not even know her credit score when asked. I listened to the podcast, but I certainly wasn’t going to take that correspondent’s advice. I have carved out a plan that works for me. My plan isn’t sexy, it is slow and steady. It isn’t all one strategy, but a combination of strategies gleaned from a few sources. I use free online calculators at bankrate.com and hugh’s calculators to make savings and investment projections. I diligently work my plan. I make mistakes and I blow opportunities but my plan works nonetheless. Yes, I have financial advisors, but the advisors I started out with are not the ones I have today. The advisors I have today have proven over time that they have my interests as well as theirs at heart. I never expect an advisor to throw themselves under the train for my sake but I do expect that if they spy the promised land that they will take my hand and that we will journey there together.

What are the lessons? First, realize that it is a “yo-yo” act accordingly and read widely. Second, financial intelligence is the only remedy for financial ignorance. Third, wealth creation takes time and is not without risk. Fourth develop a plan and work that plan. Fifth, evaluate that plan. Sixth, wealth creation is a team sport so develop your advisors and evaluate those advisors based on the results they get for you. Seventh, as Jesus once said, the poor will always be with you, so understand that whatever is going on in your life that is preventing you from accomplishing steps one through six will always be with you, so the time to start truly is now.

Saturday, January 3, 2009

It is a business decision not a bail out

The past few weeks have been breathtaking to watch. Turmoil in the financial markets have roiled, boiled and spilled over into the broader economy.

It would seem that until recently not even our politicians have understood how vital the credit markets and trust in the integrity of the US financial sector are to ours and the global economy.

When the Chinese government announced on the 24th of September that it instructed its banks not to make interbank loans to US banks I felt sure that this was only the first step in the world’s attempt to confine America’s economic woes to American Shores.

Our government and its citizens have become increasingly dependent on the availability and use of both short and long term credit to maintain the illusion of prosperity. The expansion of credit and the increasing indebtedness of US households began during the boom years of the Clinton Administration and accelerated during the comparatively weak Bush expansion.

Since the 1990’s Americans have moved from one bubble to the next, increasing their debt burdens and in so doing becoming the largest consumer market in the world. Manufacturing has left American shores leaving us with a service economy based on consumption and indebtedness to maintain levels of consumption. This necessarily means that the terms of our quality of life will be determined by those who manufacture and sell to us as we become increasingly dependent on imports while simultaneously exporting our money overseas into the coffers of our trading partners.

Now we face a crisis of confidence in our markets and our government must act. On the table was the proposal to inject liquidity into the financial services sector by buying assets.
The US government has the balance sheet and the time to hold these assets to determine which will perform. In all liklihood the American taxpayer will make money. This proposal is, therefore, a business decision rather than a bailout. The Paulson plan was a clean one entailing only the purchase of assets, we are now awaiting the compromise plan put together by congress.

I am a real estate investor and I know that I am far less likely to make another purchase, or otherwise allow a major capital outflow from my accounts, if for some reason one of my assets does not perform as planned.

This psychology is exactly what is going on on a massive scale on Wall Street. Because assets are not or may not perform as planned, financial institutions are hoarding the only asset they can be sure of, capital.

I have also had partners tell me recently that they reason that they continue to do business with me is because I am true to my word.
Sound business dealings are often based on integrity.

Integrity is lacking in the markets right now.

To the person on Main Street who doesn’t have a credit card the Paulson plan or any financial plan will look like a bailout of a “fat cat” at their expense. That is until that Main Street worker misses a paycheck because their employer cannot secure a bridge loan to make payroll.

Our financial system is simply too interconnected for our government not to act. And I am sure that if our government does not act, other nations will. I am a firm believer that it is better for us to implement our own solutions than have terms dictated to us by other nations.

I grow tired of pundits, economists, even Nobel Prize winning ones, whose knowledge is theoretical rather than practical and who have never run a business.

I believe that my greatest disappointment is the fact that our representatives in Washington have done a poor job connecting the dots for themselves and their constituents.