Blog - Page 11 of 37 - Financial Literacy

Be wary of Wall Street gimmicks

March 11, 2018 Investing Comments Off on Be wary of Wall Street gimmicks

The ETF (exchange traded fund) landscape is littered with failed investment fads, gimmicks, tricks, niche ideas, and junk. In 2017 alone, 150 ETFs were closed for failure to attract enough investors – which normally happens for funds that fail to perform.

Back around 2011, I learned of an ETF with great promise. A smart researcher designed it using market timing models on a very diverse asset classes and I bought some right away. While many of the asset classes were going up, this dog went nowhere for a year until I dumped it. Once a year, I’d check and it remained flat for 6 years until it finally closed for lack of investor interest. ETF management companies throw spaghetti at the wall with all kinds of niche products. A few of the ETFs that closed last year include these fund ideas:

  • Double inverse silver mining companies fund
  • Stock-price splits fund
  • Regional banking fund
  • Solar energy fund
  • Spanish large-cap fund
  • Municipal bond fund with 12-17 year expiration

Under-performance is one problem but a larger problem can be a structural weakness of a fund. For example, how would you like to own the ETF in the chart above? One day it is at $125 and a week later it has fallen by 90% to $11. This is an inverse volatility fund and there is a whistleblower with details regarding fake volatility quotes (called spoofing) that is allowing risk-free profits to scammers. Other funds, such as low-volatility versions of the S&P 500 fell just as violently as the regular S&P 500 over the last month. Investors in this fund were giving up some upside capital-gain potential in exchange for price stability, but the moment you actually need that stability, it disappeared.

As I see it, there are tactics and strategies that work in specific market environments. But when that environment changes, these strategies frequently fail. Until there is a long track record of validated success for an investment strategy, it is best to stick with what has worked for decades, rather than chase the gimmick of the season.

Financial Spring cleaning

March 4, 2018 Personal Finance Comments Off on Financial Spring cleaning

Spring cleaning is a good time to clean out some clutter in your financial life. There is money that you may be overlooking in two locations: physical items that you no longer use and ongoing services that you do not use. Together, eliminating these two frees up some money that you could use elsewhere for savings, investing, or other spending. We have fake reasons for holding onto clutter, such as, “I’ll get around to using this stuff – someday,” but you never do. If that day arrives, then buy it at that time. But until then, gather everything and sell it on Craigslist, eBay, donate it, give it away, or trash it.

Physical items that you do not use, but will “someday,” are tying up money and cluttering your life. Examples for you to consider getting rid of include:

  • Sports equipment – skis, surfboard, treadmill, golf clubs, roller blades, pool table, and bicycles
  • Clothes, shoes, or accessories that are out of style or no longer fit
  • Electronics – old printer, monitor, camera, iPad, bread maker, and stereo equipment
  • Entertainment – books, DVDs, game consoles, and music instruments
  • Other – tools, toys, hobby equipment, and furnishings

Services that you may not use can be found as recurring items to your credit card or checking account. Some examples of services that you may not be using and could cancel include:

  • That gym membership you haven’t used in 6 months
  • TV, music, movie, and gaming subscriptions and upgrades you don’t use
  • Online services such as Dropbox, LinkedIn, AngiesList, and LifeLock
  • Publications such as newspapers, magazines, and newsletters
  • Storage units – if you haven’t seen it in a year, perhaps it is time to let it go

There are a few companies that will identify all of your recurring payments so you can cancel unwanted services with a click. Ironically, they are subscription services with poor reviews and are difficult to cancel!

Last year, a neighbor did a big clean out (clothes and accessories in particular) and was able to donate nearly all of it. As a result, he says he received $1,600 in a tax refund for his effort.  Periodically search for money leaks by: cancelling unused subscriptions; clean out your garage and house of unused items. Turn what you can into cash and then donate or trash whatever remains.

Gig-economy careers are starving retirement savings

February 25, 2018 Personal Finance Comments Off on Gig-economy careers are starving retirement savings

There is a growing gap in retirement savings in the gig-economy with contract workers. Freelance workers, people with a few side gigs agglomerated together, and other self-employed workers are not adding enough to their retirement savings. According to a Small Business Majority survey for self-employed: 40% have no retirement account; 31% say their erratic income makes it difficult to save for retirement; and 38% say they do not make enough money to save for retirement. The crisis is that your retirement savings must be treated as a non-negotiable ongoing expense. This is an expense that you have to be able to afford, now, while you are able to work. A compounding problem is that your retirement social security is based upon your income, and if you are under compensated, then your social security payments will be far smaller than they could have been during your decades in retirement.

These challenges are not new and many careers have erratic income: anyone on sales commission (such as realtor or stock broker), seasonal work (such as farming, grass cutting, snow removal), or short-term assignments (such as acting or modeling). People in these careers have typically supplemented their income with an additional part-time or full-time job. It could be temp work, waiting tables, or some other profession easy to get into, hopefully with some flexible hours for their main gig or side gigs.

If you’ve gone all-in on your dream career or side-gig, and it is unable to support you and adequate additions to your retirement savings, then at some point it is time to bail out and find a job/career that will financially support you. Some careers can take many months or a couple years to gather traction and momentum, but you need some reasonable deadline as a trigger for “this is not working, time to do something else right now.”

Stock market hitting interest rate headwinds

February 19, 2018 Investing Comments Off on Stock market hitting interest rate headwinds

I received a few panic phone calls two weeks ago about the fall in the stock market. “Should I sell everything right now?” was the most common question. While I am not a registered investment adviser, there are some general comments that I can provide.

The U.S. economy has been performing so well lately that inflation is starting to tick upward for the first time in a decade. (Increasing inflation prompts bond investors to require a higher interest rate. Bonds have an inverse relationship to interest rates. The price of a bonds falling is the equivalent of interest rates rising). In the last two weeks, price indexes have been rising, which is an indicator of future inflation, so bond prices have fallen to reflect higher interest rates. (In addition, this makes it more difficult for stock prices to rise. This is because the interest rate used to discount future company earnings into a company’s stock valuation goes up as well, putting downward pressure on stock prices).

Rather than write a primer about bond and stock investing and the impact of interest rates, suffice it to say that: as interest rates rise, bonds will fall and stocks will have a tougher time advancing. Interest rates are rising across the yield curve (2 year, 5 year, 10 year, and 30 year bonds). So anything interest-rate related will likely have a higher rate going forward. This would include: mortgages, car loans, credit cards, but also savings accounts and bank certificates of deposit.

As interest rates rise, you may want to consider reducing your allocation to bond funds and possibly your stock funds to lock in some of the gains over the last several years.

Hiring succeeding generations

February 11, 2018 Career Comments Off on Hiring succeeding generations

Adults complaining about the following generation have been going on for thousands of years. Even Socrates had some comments. So this perspective seems to be normal human nature. When it comes to business, I’m old enough to remember several iterations of consulting companies offering “how differently you need to address the new generation being hired now.” The new generation entering the workforce is somehow “totally different,” and so their particularities need to be catered to for both hiring and retaining them.

For a hundred years there have been slight differences between current workers and new hires in regard to expectations and behaviors. Most of these differences can be summed up by saying: You need to be extra sensitive and lower your expectations.

The latest generational label is Millennials and human resource directors read articles every month about how this generation is so very different than prior few generations. This is nonsense. Recruiting and retaining top talent hasn’t changed, ever. What are some timeless tactics for successful recruiting?

  1. Outline paths to advancement
  2. Go over the desirable characteristics of the company and position
  3. Detail the vision, purpose, and values of the business
  4. Never permit a slacker or critic in the door (or once discovered, remove immediately)
  5. Fairly fulfill your promises to employees

While the exact benefits package will slowly shift over time, these 5 tactics will not. Each generation has a wide variety of talent and if you sort for the best then you have a chance of hiring the best. Each generation entering the workforce will trigger a new avalanche of consulting presentations. As long as you stick to the timeless 5 tactics, when the next “totally different generation” comes along, you won’t have to modify to your recruiting program.

Your credit rating isn’t just for loans

February 4, 2018 Personal Finance Comments Off on Your credit rating isn’t just for loans

There are several ways that your credit rating impacts your finances, so it is very important to maintain the best score that you can. A new study showed that a whopping 76% of personal loan applicants are denied. Among the people who do get approved for loans, 35% of them reject the loan because the interest rate or loan amount is not what they want. Presumably this is because their credit rating wasn’t good enough for the best loan terms.

Getting a personal loan comes down to creditworthiness and the average American’s credit score is 687. This is well below the average 741 FICO score of those getting approved for personal loans.

Although states have differing regulations on what your credit score can be used for, it is commonly used in decision-making for:

  1. Loans and mortgages
  2. Insurance rates
  3. Apartment rental
  4. Employment screening
  5. Car lease rate
  6. Utility services

Some banks and credit card companies provide your credit score for free. The four ratings agencies (Esperion, TransUnion, Equifax, and Innovis) also offer your credit score for free, once a year. If you have average or poor credit (under 750), you may take steps to improve it from many online resources, books, and courses.

Before you become a whistleblower

January 28, 2018 Career Comments Off on Before you become a whistleblower

In every profession, there is ample opportunity for complaint. Before you contact human resources or the press, though there are career considerations you need to assess. Likely, your action will kill your career at your place of employment, and possibly follow you anywhere that you go.

There could be a long general discussion on ethics and beliefs, and since each case is unique, I want to illustrate a starting point for your consideration. This is because I have friends, relatives, and colleagues that have ruined their careers for minor complaints or whistleblowing actions that they later regret. Most were warned about the backlash, and never expected any consequences to hit them personally, but they did. Plus, you’ve likely read or heard about numerous similar cases or very public ones that occur every day.

There is an old saying: “There is no such thing as a smart mob.” This also applies to employers, both public and private. Once you’ve been labeled as “a trouble maker” or “traitor/disloyal” then you become radioactive to your supervisor, manager, union, or anyone else with hiring authority. It is a permanent stigma that taints your reputation, no matter how justified the reason may have been. Perhaps you’re a hero for getting a policy changed for the better, but you will personally pay the price in lost career opportunity. The consequences for going to human resources, regulators, the press, or anyone with your complaint could be immediate dismissal (in spite of any state or federal rules to the contrary), or finding yourself demoted to the bottom rung of the career ladder for the remainder of your career. The more public your whistleblowing escalates, the higher your risk for smear campaigns, harassment to you and your family, blacklisted, death threats, and more by anyone else threatened by your actions.

If you are aware of imminent harm to befall others, that is a different level of issue than the person in the next cubical getting a slightly larger office that has less seniority than you. In this context, where on the spectrum of concern or consequences does your issue fall:

  • Is the public unknowingly putting their lives or health at risk?
  • Are customers being defrauded?
  • Is there systematic unfair treatment against a group?
  • Is this a personality issue between individuals?

Of course, if the public or people are being put at health or financial risk, action must be taken. But must it be taken by you? Could others already be aware of the situation and working on actions that you may not know about? Today, there are many ways to make an anonymous notification to regulators or law enforcement without anyone figuring out that you alerted them. Inside a large organization, it is possible in some scenarios to make anonymous accusations about issues. But be aware that without courtroom proof from someone coming forward to interrogate, human resources or regulators cannot do much or anything about it.

The big question you have to decide is: is this issue so important to you that it is worth ending or stunting my career? If it is, that is fine. But few people think through all of the career and financial consequences and are blindsided when their colleagues, supervisors, and others begin cutting you out of their lives. If there is an issue that is a big problem, but just for you personally and not worth potentially ending your career, it is time to get another job. If you’re working for a large company, perhaps you can move to a different department, division, or group. But for most, it means seeking employment with a different company or organization.

Profit from your own self-insurance program

January 21, 2018 Personal Finance Comments Off on Profit from your own self-insurance program

When some people hear the term self-insurance, they think of millionaires with piles of cash so they don’t have to buy any insurance. In reality, you can start your own self-insurance program with only $500. Here’s how:

First, a little background on insurance with an example: If you had a car wreck that involved other people with physical injuries, it could be catastrophically expensive. Let’s say $100,000 in potential financial liability. Of this $100,000 of risk exposure, you take on the first $100 of that risk and pass the rest on to an insurance company with a policy that has a $100 deductible. The insurance company may not want all of that risk, and so they may re-insure part of the policy risk with another insurance company called a re-insurer. You are actually self-insured now – the first $100 risk is yours to fund.

But there is a financial opportunity. If you could save up $500 into a savings account dedicated to self-insurance, then you would be able to afford cheaper insurance with a higher $250 deductible. Your account will now allow you to pay for 2 potential insurance claims within a year, $250 X 2 = $500. Since your insurance premium will go down with a higher deductible at $250, you can then add that premium savings to your self-insurance account each year. As your self-insurance account grows, you can raise the deductibles on your insurance coverages (health, auto, homeowners, renters, business, disability, long-term care, etc.).

In this manner, you can lower your out-of-pocket expense for insurance and the savings is piling up in one of your savings accounts. The key concept for self-insurance is: you do not need to take on 100% of the total financial risk exposure, just a small part of the risk, the cheapest and most expensive part of the risk. As was mentioned, insurance companies only accept certain risks and pass on some of the risk to others through buying re-insurance. Start small with your self-insurance account, but keep adding your premium savings into your self-insurance account so that it will grow over time. As your self-insurance account keeps growing, you can raise your deductibles over time to save even more money. Your self-insurance account is actually working hard for you. Having this dedicated fund allows you to lower your insurance premiums, and this savings is your investment return on your account, it is providing you a decent return on your money besides earning a little interest.

Anecdotal story: last week, an old colleague told me of a neighbor whose house just burned down. It was a very old farmhouse and the family had lived in it for over 40 years. Some structural defects preventing them from getting homeowner’s insurance, so they have no funds to recover or rebuild. They also have no money to replace any of their furnishings or personal effects. Instead, if they had acted as their own self-insurer, say setting aside $1,000 per year, in a 2% savings account over the last 40 years, they’d have accumulated $61,000. When this family was turned down for homeowner’s insurance, if they had been financially literate, they would have funded their own self-insurance reserve and saved themselves.

Stock market still powering upward

January 14, 2018 Investing Comments Off on Stock market still powering upward

The National Association of Active Investment Managers currently has their highest exposure to equities in the last dozen years. They are extremely optimistic. This is partially fueled by:

  1. U.S. manufacturing is running flat out and is limited by not being able to hire more workers.
  2. Small business optimism index is at an all-time record high.
  3. Washington’s cuts in regulations along with personal and corporate income tax.
  4. The U.S. Federal Reserve not reducing their balance sheet, however, this news isn’t widely known.

After the financial crisis of 2008, the U.S. Federal Reserve increased its balance sheet by $4.5 trillion. This added liquidity to the economy and boosted all kinds of asset prices. Well, the time has come to reduce their balance sheet which will put downward pressure on all kinds of assets: stocks, bonds, real estate, etc. In September, the Federal Reserve announced the details of reducing their balance sheet starting in October 2017. I wrote about this at the time and recommended lightening up on your stock and bond exposure over the next 6 months.

Well, the Federal Reserve has NOT followed through with their plan. They were supposed to have sold off $30 billion already and an additional $50 billion by the end of January. Instead of this $80 billion reduction in their balance sheet, they’ve only sold $5.9 billion. Four months into their reduction plan and they are already 93% behind schedule.

Since the Fed isn’t putting on the brakes, along with all of the business and consumer optimism, plus the huge tax cut that will play out over the next 6 months, it’s my opinion that the stock market uptrend is far more likely to continue this year. But of course, there are always a dozen exogenous potential events to spoil the party (such as: China holds $3.1 trillion in U.S. bonds and the Chinese Central Bank is recommending slowing or halting future purchases). So ride the current stock market trend a little longer.

How much did you borrow for holiday gifts this season?

January 7, 2018 Personal Finance Comments Off on How much did you borrow for holiday gifts this season?

According to a survey by MagnifyMoney.com, half of American shoppers borrowed between $1,000 and $5,000 on holiday gifts (and 64% of borrowers did NOT plan on going into debt for gifts). While 60% claimed that they plan to pay their debt off within 5 months, if a borrower paid the minimum on a credit card balance of $1,000, it would take 6 years to pay it off! To add further financial damage, half of these borrowers are paying an interest rate over 10%.

These are sad statistics and point to a lack of financial literacy. The holidays don’t’ randomly show up on your calendar! Yet, these borrowers failed to save money in anticipation of an expected expense. Since they did not save money, they now have to live further below their means to pay it off, plus afford the interest expense.

The better way to go about buying holiday gifts is to plan for them:

  1. Whatever you spent on gifts in 2017, divide that amount by 12 and set it aside each month so you don’t find yourself going into debt at the end of 2018.
  2. Buying items during the year when you can get a good price, rather than November and December when they are at a peak price.
  3. There is seasonality pricing for all kinds of items, and one tactic is to purchase items immediately after Christmas for the next year when items are on sale. Many people buy holiday cards, lights, and other known expenses right after the holidays when they are 50% off.

If you fail to do these, then you may be joining the borrowers paying unnecessary interest; hopefully taking less than 6 years to pay it all off.

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