Personal Finance Challenges

August 17, 2011 by  
Filed under Financial Planning

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The following guest post is a personal story written by an intelligent, conscious friend, who wishes to be anonymous.   I post it here, because all couples need to work on their communication regarding money issues.  And all individuals and couples need to be aware of why they make the decisions they do.

I believe that individuals and couples will learn something from the experience Anonymous shares, his honest assessment and changed behavior.

Money Challenges for a Conscious Couple

Like Roger, I am a Certified Financial Planner (now retired, however) and have an MBA in Finance.  For several years, I have been very involved in The Mankind Project, a men’s organization which is dedicated to improving the world by helping each man achieve his full potential.  My wife is a therapist who counsels people on developing effective communication, especially with their primary partners and family members, and learning to live life to the fullest. 

You might imagine, then, that we, a happily married couple, would be very effective at communicating with each other about any and all matters that arise in a marriage, including those issues with a financial aspect.  Unfortunately, that is not the case; the issue of managing our finances has been far and away the major point of contention in our marriage.  Embarrassing as they may be, I will relate our struggles with the hope that, by sharing this, you can learn from our mistakes.

One thing that we have never had to worry about, fortunately, is having enough money.  I was an executive at several different banks; I earned a good salary, received stock options, had a 401k, and I now receive a small, but entirely adequate, pension.  Just as important, I did not marry until I was in my 50’s, and my then wife-to-be had no children.  Thus, as a childless mature couple, we avoided the major expenses of child rearing and college.

When we got married, my wife was an independent, intelligent businesswoman from New York City who made good money in a commission-based job.  I moved into her NYC apartment afterward, and was, I admit, pretty unhappy.  Having lived in that apartment for over 20 years, my wife essentially “owned” it; The apartment was filled with “her” things, top to bottom, and I missed having my own stuff around me. 

Life Events Caused a Re-evaluation

I got laid off from my bank job in 2001- the fourth lay-off in ten years, as banks went through one round of layoffs after another.  That was the last straw; I examined my life hard and decided that, in order for me to be happy, I had to quit the corporate game, and move back “home” to the Washington, DC area.  I had enough money saved so that both of us could stop working full-time, if we so chose.  My wife, understanding that I was just not happy in NYC and open to a change, agreed to give up her established career and move to the DC area.

Once settled back in the DC area, my wife attempted to re-create the success she had had in NYC by doing the same type of work—helping people find jobs (attempted being the operative word.)  For whatever reason, and in spite of her incredible work ethic and outgoing, buoyant personality, she just could not replicate her NYC success.  (And with all due respect to Frank Sinatra and the lyricist who wrote the words to that wonderful old song, New York, NY, “If you can make it there, you can make it anywhere” simply did not apply in my wife’s case.)  So, she became dependent upon me and my savings to live.  Of course, I didn’t mind her being financially dependent on me, but I also didn’t think it unreasonable for me to assume that I would be the one who would control our finances.  In my mind, it made perfect sense; I was the financial expert, after all.  I believed that she should be grateful, not just for my generosity but for enabling us both to retire at relatively young ages, and for my willingness to take control of the finances.  I truly thought she would not mind relinquishing financial control to me. 

Our Background and Baggage

Both my wife and I had come from homes where money was tight, thus a constant issue between our respective sets of parents.  That was the baggage we each carried into the marriage; we both viewed money, not as a tool for enjoyment, but rather as security. 

It’s often been said that money is power, and I recognize that implicitly.  But here is what I failed to recognize:  that the person in power does not have the same “sense” of a power imbalance as does the person out of power. 

I enjoy working with numbers and have more experience with and knowledge of money management than my wife.  So, it was only natural for me to take on the role of Chief Financial Officer for our family, and for many years, my wife had no objections to it.  I paid all the bills and made all the investment decisions and we did just fine. 

Having gotten married for the first time when I was 54, I was used to making decisions on my own, without consulting anybody else.  Even after getting married, I didn’t really see the need to change my behavior and consult with my wife, especially in areas where I felt supremely confident, namely with respect to money management.  After all, she couldn’t possibly add any value to the decision making process, given her lack of knowledge.  I didn’t know it then, but my wife was very hurt at how easily I could make financial decisions on our behalf, but without consulting her. 

Mauled by the Bear Market

The Great Recession of 2008-2009 presented us with a particularly challenging time.  As with so many others, our nest egg suffered a major hit, and we lost over 25 % of our savings.  One major bone of contention was my investment philosophy; I was (am) basically a “buy and hold” kind of investor and was more than willing to leave our asset allocation alone.  My wife, on the other hand, had told me, even prior to the downturn, that we should get out of the stock market, because she “did not have a good feeling.”  I was the financial expert so I dismissed her “feeling” and overruled her. 

We stood pat and watched our net worth go down, and down again.  Never giving up, my wife would regularly lobby for us to get out of the stock market and, as usual, I would resist.  It wasn’t until near the absolute bottom of the market, that my wife’s constant lobbying (and I admit now, grudgingly, my own annoyance for not having listened to her in the first place much earlier), persuaded me to finally really listen.  She wanted the mortgage on our house paid off, so I sold off enough stock from our portfolio to pay off the loan balance.  In truth, to me, paying the mortgage off didn’t make sense – smart investors buy low and sell high!  But the majority of people do the opposite.  Much to my chagrin, we later joined the masses in buying high and selling low.

Preparing to be a Widow

A couple of years ago, the husband of one of my wife’s dear friends died after a long bout with cancer, and his wife had to learn how to handle the family’s financial affairs.  Unfortunately, she was not well-prepared to take on this task, and struggled with the burden of it, in spite of her husband’s well-detailed instructions on what to do with each account.  It was my wife’s observance of her friend’s struggle that was the wake-up call that she, too, should become more knowledgeable about our finances. Now.

My wife insisted that I make no financial decisions without consulting her first.  I hated the idea, but acquiesced once I realized how strongly she felt about it.  It took me some time to get used to the idea of it, but now we have regular meetings to discuss how our finances look and what we should do or changes we should make.  My wife has assumed responsibility for monitoring our expenses, using the free on-line tool, Mint.com.  She has become disciplined in reviewing each and every expenditure on that system and assuring that it is correctly categorized.  I calculate our net worth on a monthly basis and evaluate our asset allocation.  As a result of our most recent look at our asset allocation, we decided to change our portfolio allocation, together.

My Advice for Couples

To those couples who argue over money (and really, who doesn’t nowadays!), I suggest the following:

  • Understand that both money and knowledge are power. 
  • Share the three major tasks of managing your money, i.e., paying bills, monitoring expenses and investing.
  • Monitor your expenses on a monthly basis.  The free on-line tool, mint.com, is a wonderful way to understand what you are spending money on and how much by category.
  • Determine what asset allocation you are comfortable with and rebalance your portfolio so that you stick to your target.  Take on only the amount of risk that you are comfortable with and that you need to achieve your goals.
  • Monitor your net worth on a quarterly basis. 
  • Have regular financial meetings to discuss expenses and investments.

And most importantly, never assume anything with respect to your partner’s feelings about money management- have the tough discussions early on to make certain you are both on the same page.

- Anonymous

Postscript by Roger Streit

Many people are not motivated, or do not have the time, to analyze and monitor their financial situation.  A good financial advisor should be able to help you assess your goals, discuss your risk tolerance, set up a sensible portfolio, and even help you unpack your feelings about money.  Do-It-Yourself is not right for many people.

Living with Stock Market Volatility

August 10, 2011 by  
Filed under Investing, The Education of an Investor

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The current renewed volatility in financial markets is reviving unwelcome feelings among many investors—feelings of anxiety, fear, and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.

At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets.

So, developed world equities, oil and industrial commodities, emerging markets, and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold, and Swiss francs.

It is all reminiscent of the events of 2008, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private-sector to public-sector balance sheets.

As to what happens next, no one knows for sure. That is the nature of risk. But there are a few points individual investors can keep in mind to make living with this volatility more bearable.

* Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by Standard & Poor’s of the US government’s credit rating, following protracted and painful negotiations on extending its debt ceiling, actually led to a strengthening in Treasury bonds.

* Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks,” remember someone is buying them. Those people are often the long-term investors.

* Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was last this bad—the S&P 500 turned and put in seven consecutive of months of gains totalling almost 80 percent. This is not to predict that a similarly vertically shaped recovery is in the cards this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

* Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished—making the overall losses to balanced fund investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road.

* Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. As the IMF noted recently, while advanced economies seek to repair public and financial balance sheets, emerging market economies are thriving.1 A globally diversified portfolio takes account of these shifts.

* Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

The market volatility is worrisome, no doubt. The feelings being generated are completely understandable. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety.

Jim Parker, a Vice President of Dimensional Fund Advisors, wrote this essay.  It is posted here with permisson.

America’s Tarnished Credit Rating

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“In the short-term the stock market is a voting machine, while in the long-term it is a weighing machine.” – Benjamin Graham.

On Friday evening, the Standard & Poor’s debt rating agency  downgraded all U.S. government debt with more than a year of maturity, from the top AAA rating down to AA+.  To put that in perspective, now only 17 countries enjoy the AAA rating on their government bonds.  Typically, that means that they are considered the safest havens for cash, and therefore are able to pay the lowest interests rates on their borrowing. 

Here’s the list, and I’ve included the current yields on each country’s 10-year government bonds in parentheses.  This lets you see what the top-rated countries pay on their debt, compared with the 2.5% interest the U.S.  government has to pay on its 10-year U.S. Treasuries: 

France (3.41%), Germany (2.83%), Canada (2.93%), Australia (5.75%), Finland (3.19%), Norway (3.29%), Sweden (2.82%), Denmark (3.06%), Austria (3.30%), Switzerland (1.53%), Luxembourg (NA), Guernsey (NA), Hong Kong (2.29%), the Isle of Man (NA), Liechtenstein (NA), the Netherlands (3.17%), and Great Britain (3.11%). 

The first thing to notice is that the U.S. government is still borrowing at very attractive rates compared with the triple-A nations, and Treasury rates actually got better during the angry debate in Washington, as investors continued to beat down our doors to lend money to our government.  Why?  The downgrade and recent weakness in the stock market have made bond investors nervous, which usually causes them to buy the safest paper they can find.  The United States still offers the deepest and most liquid bond market in the world.

The second thing to understand is that, despite the high levels of government debt, there is really no crisis in the government finances or in the economy.  S&P officials made it clear that they were more influenced by the recent messy debate in Congress than the fundamentals of government finance.  They may have been particularly rattled by public statements by key members of Congress that it might not be a bad thing if the U.S. government defaulted on its sovereign obligations to its global lenders–sort of like one of us telling the bank that we’re thinking seriously about not making any more mortgage payments.  

David Beers, global head of ratings at S&P, said in a supporting statement that the agency was concerned about “the degree of uncertainty around the political policy process.”  A separate statement by the rating agency said that policymaking and political institutional control had weakened “to a degree more than we envisioned.”

Long-term, our government faces some difficult choices.  The question now is whether we’ll get action from Congress or more political posturing.  We’ll get an early look between now and Tuesday, as a new Congressional committee, made up of Democrats and Republicans, will be set up.  The committee will be looking for $1.5 trillion in deficit cuts that have not yet been specified through the debt ceiling compromise.   (A total of $917 billion in cost reductions has already been earmarked).

What should investors do?

What does all this mean for investors?  The investment markets were clearly rattled by the tone and uncertainty of the debt ceiling debate, with the S&P 500 losing 10.8% of its value over the ten trading days of the Congressional standoff.  Early indications are that global markets have been negatively affected by the S&P downgrade.

But a Money magazine report points out that when a country loses its AAA rating, that is not always terrible news for the nation’s stock market.  Canada, for example, was downgraded from AAA status in April of 1993, but the country’s stocks gained more than 15% the following year.  The Japanese government’s bonds were downgraded in 1998, and the Tokyo stock market climbed more than 25% in the next 12 months.

The awful nature of the debt ceiling debate, plus the downgrade, has clearly added fear and uncertainty to an already sluggish economic recovery.  The Treasury debt downgrade is a blow to U.S. pride, and a warning to Congress–particularly those representatives who think the U.S. can simply walk away from its obligations without consequences. 

However, as the decline in Treasury rates made clear, the downgrade is largely symbolic.  Congressional gridlock and partisan posturing could leave us with a long 15 months until the next time we have a chance to vote on their job security.  But it might be helpful to think back to last summer, when concerns about a double-dip recession and mild panic sent the S&P 500 down a long unhappy slide to a low of 1022.58 on July 2, 2010, with a few additional bounces along the bottom until a September rally.  Investors who sold out of the markets at that time missed significant–and largely unexpected–gains through the fall, winter and spring, as people gradually realized that the world was not coming to an end.  (Despite periodic “end of the world” stories promulgated in the press, the world never does end.)

Our Cloudy Crystal Ball

No one can predict stock market prices, because in the short term, emotions can rule the market, and they are visibly tilting toward panic right now.  Longer-term, market prices always tend to return to fundamentals, and it’s helpful to remember that corporate profits remain strong, new jobs are being added and the economy is still growing. 

The Price of Panicking

The U.S. markets weathered much worse than this in 2008, in 2000, during the first and second world wars and a lot of panic-stricken times in between.  Without the ability to see the future, our best prediction is that the Sun will continue to rise each morning, and the U.S. will emerge from this crisis like it has all the others.  In the past, investors who managed not to succumb to the panic like so many did last summer did extremely well.

The alternative is to get out of the market now (after prices have already declined) and wait to get back in, when the economic environment is settled, and things no longer look downright dangerous.  The price you pay for this respite from anxiety is usually very high.  By the time you feel comfortable  being an investor in stocks again, prices will typically be much higher than when you sold.

Selling low and buying high has never been a winning strategy.