Finances:

• Create a durable Power of Attorney to name a person to control your parents’ finances when they no longer can
• Compile all the information about your parents’ assets, including location and account numbers of checking and savings accounts and other investment vehicles.
• Find out where they keep a safety deposit box and where they store their important documents.
• Run credit reports (www.equifax.com, www.experian.com, and www.transunion.com) and analyze all outstanding debt (mortgage, loans, and credit card balances)
• Assign a family member to their day to day finances or consider hiring a daily money manager to assist with bill paying, budgeting, and balancing the checkbook.  A daily money manager is a relatively inexpensive option (www.aadmm.com)
• It is possible that your parents could qualify for federal and state assistance.  Check by completing the National Council of Aging questionnaire at https://www.benefitscheckup.org/.

Healthcare:

• Review your parent’s current insurance coverage including Medicare benefits
• Guide your parents to execute a Living Will as well as a Power of Attorney, to designate a person to make medical decisions when they are not able to
• Talk to your parent’s physician so you can get a full understanding of their medical needs and future prognosis
• Reach out to their pharmacist to guard against negative medication interactions resulting from prescriptions from multiple doctors

Living accommodations:

• Talk to your parents to determine which type of elder care facility they would select if they are no longer able to care for themselves.  You should think about whether or not you would like them to live with you at that point, another relative, or if assisted living/nursing homes would be more appropriate.   It’s also important to think about these costs now as you develop a future time table.
• Be prepared for additional out of pocket expenses which could include home health aides, adult day care, visiting nurse services, and physical therapy
• Consider utilizing modern technology to make your parents’ lives more comfortable (i.e. visual aids, electric stair climber, heart and blood pressure monitoring systems)
• Think about food preparation and delivery services as an option for when your parents are unable to take care of their own meals.  Research options such as Meals on Wheels (www.mowaa.org) that cater to the elder demographics

Transportation:

• Keep in mind it may be difficult for your parents to give up their car despite declining eyesight and slower physical reaction
• If your parents are not at this point yet, it still makes sense to have a conversation with them now to agree when it’s time to take away the car as their primary mode of transportation
• Find other methods for your parents to shop, visit, friends, go to the doctor, etc. (buses, car service, and cabs)
• Check with the local community and the county to see if special transportation for seniors is available
• There’s also the option of moving your parents to an area where there is more adequate public transportation

There are resources out there for assistance and additional information:

National Alliance for Caregiving (www.caregiver.org)

National Association of Area Agencies on Aging (http://www.n4a.org/)

Administration on Aging (www.aoa.gov)

Elderweb (www.elderweb.com)

Three pots

In the “three pots” system, each spouse contributes money to one money “pot” for household expenses, and his or her own “pot” for individual expenses. No one gives up their independence or autonomy completely, but some finances mingle. Maintaining separate accounts isn’t a sign of distrust. In fact, the opposite is true. Allowing your partner to maintain financial independence sends the message that you trust that person to not keep secrets about finances, and to contribute responsibly to your financial life together. Autonomy also fosters self-confidence. That feeling of control over your own money is critical for many, many men and women.

Keep a joint bank account for joint expenses

Having a joint account for shared expenses can really simplify bookkeeping for the household budget. Both spouses don’t have to contribute equal amounts (and shouldn’t if one earns significantly more than the other), but the total each month should cover everything you’ve agreed to pay together, like the mortgage, utilities, groceries, insurance premiums, auto loans and so on.

Create a detailed budget together

You need to know exactly where your money goes and how much you need each month to cover all of your expenses. Once you start spending someone else’s money, it’s important that you’re able to account for it. The household budget must only include things you both agree to pay for together.

Keep separate accounts for separate expenses

Costs that are related to the passion of one spouse are prime targets for separate budgets. Maybe one enjoys concerts and the other collects books. These optional purchases may be made with money set aside by each person in a personal account.

Use the same rules for credit cards

Credit card accounts do not become joint accounts upon marriage. Consider opening a joint account for charging things – family vacations, for example – that you’ll pay off together. Successfully managing credit cards in marriage is to practice total honesty with each other. Don’t hide purchases, especially debt. Your separate credit card debt won’t affect your spouse’s credit score, but it will affect your ability to move forward as a team with large, important purchases, like a home.

Most important: save together and communicate frequently

Part of your financial life together must be to save. Make a plan for building an emergency fund, and for building retirement accounts for each spouse. If you have children, discuss whether and how you plan to help them pay for college – one of you might be willing to borrow money later on while the other prefers to start saving early. Touch base about financial details at least several times each year (monthly if income or expenses tend to fluctuate). Don’t keep secrets.]]> http://www.figuide.com/were-getting-married-should-we-join-our-accounts.html/feed 0 http://www.figuide.com/is-a-100000year-retirement-doable.html http://www.figuide.com/is-a-100000year-retirement-doable.html#comments Thu, 13 Jun 2013 13:06:05 +0000 Roger Wohlner, CFP® http://thechicagofinancialplanner.com/?p=4089 A recent New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be.  While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think.  That said I wanted to take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years.  This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen, a NAPFA colleague.

Like any rule of thumb it is just that, an estimating tool.  At you own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick estimating tool let’s see how someone with a $1 million combined in their 401(k) s and some IRAs can hit $100,000 (gross before any taxes are paid).

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule.  This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide.  Here are some ways this gap can be closed:

• If they have significant assets outside of their retirement accounts these funds can be tapped.
• Perhaps they have one or more pensions in which they have a vested benefit.
• They may have stock options or restricted stock units that can be converted to cash from their employers.
• This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
• If they were business owners they might realize some value from the sale of the business as they retire.
• If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
• It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

• Avoid high cost financial products that often do more to boost the bottom line of the financial sales person than that of their clients.
• Likewise don’t give into the fear mongers peddling financial products like Equity Index Annuities or similar products “that can’t lose.” 
• Don’t be too cautious with your investments in retirement, inflation is a retiree’s worst enemy.
• On the flip side don’t take on excessive investment risk in an effort to catch up if you feel that you are behind where you need to be. 

The scenario outlined above is hypothetical but very common.  As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

The Social Security Act was signed into law in 1935 under President Franklin D. Roosevelt. It established two national social insurance programs; old-age retirement benefits for workers in private industry and unemployment benefits for those who had lost their jobs. In large part these programs were a response to the devastating effects of the Depression which had decimated the lifetime savings and job opportunities for many older workers.

The scope of this program was broadened in subsequent years through amendments including those adding benefits for disabled workers, dependents of retired and deceased workers, and cost of living adjustments tied to the Consumer Price Index to offset the effects of inflation.

Social Security was designed to be a pay-as-you-go system, where the money raised by payroll taxes on workers is paid out to beneficiaries. Social Security benefits are funded primarily by the 12.4 percent (shared evenly by employer and employee) tax on our earnings from work. A portion of the payroll tax is used to pay current benefits, and the balance is invested in the Social Security Trust Fund which consists of government bonds earning interest to help pay future benefits.

In prior years there were more working people contributing to the system than retirees collecting benefits, generating cash flow surpluses for Social Security. As our population has aged however, the ratio of retirees to workers has increased. People are also living longer in retirement and the liability to pay more beneficiaries for longer periods is now being spread among a smaller number of workers presenting major challenges to the system.

According to figures published in the 2012 Social Security Trustees’ Report by the Congressional Budget Office (CBO) released last year, starting in 2010, Social Security began operating with a cash flow deficit. By 2021 benefit costs are expected to exceed Social Security’s tax revenues and bond income. As a result the program will need to begin selling bonds from the Trust Fund to pay benefits. In 2033, the Trust Fund will be depleted. At that point, with no bonds left, and with only payroll taxes to rely on, Social Security will only be able to pay about 75 cents on the dollar, with the shortfall growing quickly thereafter.

One excellent source that addresses the financial problems facing Social Security is The Social Security Fix-It Book written by The Center for Retirement Research at Boston College. It states “The only two ways to fix the problem are to cut benefits or increase revenues, but the longer we wait, the larger the benefit cut or tax increase needed to fix the problem”.

The researchers propose various ways that benefit cuts could be accomplished and the implications of each approach including immediate across-the-board cuts for current and future beneficiaries, raising the age we can claim benefits to more accurately reflect the trend toward longer life spans, or reducing the amount of the cost-of-living adjustments to benefits. They go on to suggest that revenues could be raised by either increasing the payroll tax above the current 12.4% tax rate, or raising the amount of each worker’s income that would be subject to the payroll tax. The second option means that higher income earners would have more of their pay subject to the tax.

Regardless of which solution or combination of solutions our policymakers adopt, the message is clear. The sooner we take action the less drastic and painful the measures will need to be.

Of course this question has different answers for different situations.  I’ll run through several different sets of conditions that a person might find him or herself in, and some suggestions for how you might use that $1,000 to best improve your financial standing.  It’s important to note that you don’t have to have an extra $1,000 lying around to use this advice – you could have an extra ten or twenty or fifty bucks a week and put it to work with the same principles.  The point is to find money that isn’t being spent on something critical, and put it to work for you!  Even small steps amount to wonders.

Debt

If you have consumer debt, including credit card debt, auto loans, student loans and the like, it makes the most sense to use this money to bring down your overall debt balance or eliminate it if you can.

If the interest rate on your debt (or a portion of your debt) is greater than about 3% or 4%, you aren’t likely to find a better way to “invest” than to eliminate some of your interest costs.  This is because debt is a negative investment – when you have debt that carries an interest rate of 8%, year over year while the debt balance is there, you are “earning” a –8% return on that money.

Some folks recommend eliminating all debt, but that’s a bit impractical in today’s world.  Low-cost mortgage debt and auto loans can be good uses of leverage – especially mortgage debt at the rates we’ve seen of late.  I suggest that you focus on the highest rate consumer debt first and foremost, eliminating this drag on your financial state.  Once you’ve eliminated every debt except for mortgage debt, you can move on to other pursuits.  Eliminating consumer debt at high interest rates is the best move you can make to  improve your financial self.

Emergency Fund

An emergency fund is an amount of money set aside that can be used to cover all of the unexpected expenses that come up and surprise you: new tires for the car, roof replacement, or medical expenses not covered by insurance, for example.  The other thing that an emergency fund is for is to give you some “cushion” if you find yourself unemployed for an extended period of time.  It’s for this reason that an emergency fund is typically referred to as a certain number of months’ worth of expenses – such as 3-6 months’ worth of expenses.  You should have an emergency fund of an amount that would provide for your living expenses for several months should you be unexpectedly laid off.

If you don’t have an emergency fund, or if your emergency fund is smaller than you should have set aside, this is another great place to put your extra $1,000.  Typically an emergency fund is in a place that’s a bit difficult to get at – such as a bank savings account without debit card or ATM access.  This way you’re not tempted to invade this money for non-emergency purposes.  Sometimes folks use a Roth IRA as a dual-purpose account until they can establish separate accounts for retirement and emergency funds.

A Roth IRA could be used as your emergency fund, since you can withdraw your contributions to your Roth IRA at any time for any purpose without tax or penalty.  I don’t recommend this option for your long-term use, because if you have to get at the funds for an emergency purpose and you’re not able to replace them in the account within 60 days, you’ll lose the Roth treatment of those contributions forever.  You can always put more into the Roth IRA at a later time, but once you’ve got the money in there, you shouldn’t take it out before retirement without a very, very good reason.

Knowledge

The most important tool for achieving financial success is knowledge.  For this reason, I suggest that you use some of your new-found riches to improve your financial knowledge.  There are many good books out there (I’ve reviewed quite a few of them, click this link for a list of financial books I’ve reviewed) that will help you to better understand your finances and how you can improve things.

I wouldn’t suggest spending all $1,000 on education – maybe as much as $50 or $100 for several good books.  This will help you to make good decisions with your remaining money.

Retirement Savings

If you haven’t maxed out all of your retirement savings for the year, such as 401(k) plans and IRAs, this is another good place to put your $1,000 to work.  For an IRA or Roth IRA (if you’re eligible by your income level) it’s simply a matter of making the contribution to the account and investing it appropriately.

If on the other hand you haven’t maxed out your 401(k) plan, you can defer this additional $1,000 by your paychecks throughout the remainder of the year and earmark this additional $1,000 to make up the difference in reduced take-home pay.  If you started in July and you have 13 more pays left in the year, you’d set aside around $75 per paycheck (if paid every two weeks) and your income will be reduced by a little less than that, since the money you deferred isn’t taxed.

Who Does Each Option Work Best For?

Folks who are just starting out in improving your financial situation quite often need to focus on all of the options I mentioned above – debt reduction, emergency fund, knowledge and retirement savings.   The list was put together in priority order, so you should focus on debt reduction first, then emergency funds, and so on.

If you’re a little farther down the timeline and have eliminated all consumer debt and have established an emergency fund, improve your knowledge first, and then add more to your retirement savings.  I mentioned before that the most important tool that you have is your knowledge.  The most important action you can take to improve your financial standing is to increase your bottom line.  We did this first when we eliminated all debt.  The next step is to add to savings.  Both moves will increase your net worth – your assets (savings and possessions) minus your liabilities (loans and other debts) equals your net worth.  The key to financial success is to make moves that will have a positive impact on your net worth.

Students who don’t have any debt accumulated should focus first on the emergency fund, and then on retirement savings.  In some cases it makes good sense here to put the money into a Roth IRA, since money in a Roth IRA won’t be counted on your financial aid forms, since it’s a retirement account.

Here are some tips as you look for that ‘new to you’ car:

Understand the depreciation curve to find a sweet spot of newness & value. While all used cars lose value, they do it at different rates. Specifically, American made cars, due to rebates and other discounting on new vehicles have the biggest depreciation hit when you drive off the lot; German cars, being more expensive to repair, have a large drop in their value when the warranty runs out; Japanese cars, due to high demand and perceived reliability depreciate at a slower rate. At some point however, the depreciation slows. This usually happens when a car is five to eight years old but varies depending on the vehicle. Your best bet is to look at Kelley Blue Book, available free online at www.KBB.com to get an idea of relative values. Wikipedia is also a good resource for doing this research as you can look up a vehicle model and it will tell you in which years a particular generation or body style was made.

Understand how your state taxes used cars. In Arizona, there is sales tax owed when a used car is bought from a dealer, but no sales tax is paid when bought from a private party. Assuming that you buy a $20,000 vehicle this can save you around $1500 in taxes! It’s also important to note in Arizona that the registration fee is the same whether the car is purchased from a dealer or a private party. Check your state’s Department of Motor Vehicles or Department of Revenue to find out what the provisions are where you live. With this tax break in place, it’s safe to say that I will never buy a car from a dealer again!

Vehicles are lasting longer now than in the past. I remember growing up that the old rule of thumb is that you could get about 100,000 miles out of a car before you needed to get rid of it. Don’t anchor on this old rule – automobiles have had tremendous improvements in quality, design, technology, and fuel economy in the last twenty years. With improved build quality and an owner who’s dedicated to preventative maintenance vehicles can last indefinitely. If you take care of a vehicle, you will get sick of that car before it wears out. Again, check sources such as KBB.com to see if the car you’re interested in has a meaningful drop in value at a certain mileage.

Have a mechanic do an inspection of the vehicle. This is common sense, but I’m including it since a lot of people neglect this step. While a mechanic won’t catch everything, they can spot major issues very quickly! Also, with more and more independent shops specializing in certain makes of vehicles, make an effort to find a mechanic who works exclusively on that brand of car. They will have a much better idea of what that vehicle’s common issues are and if the prior owner has already addressed those common issues. Expect to pay in the neighborhood of $100 for an inspection but it is money well spent if you wind up avoiding a lemon. Sometimes the shop will credit you the inspection fee if you buy the vehicle and have them do the work they identify.

As much as I love the bargains available by buying a used car, some vehicles are better to buy new. The biggest example of a vehicle that I’d want to buy new is a full-size pick-up truck or SUV with a heavy duty tow hitch attached. While the Phoenix and Tucson areas are relatively flat, a lot of Arizona is mountainous. Pulling a boat, RV, or other heavy trailer is hard for both the engine (especially with the air conditioning on) and transmission. I’d also be reluctant to buy vehicles that were in rental fleets, driven by teenage drivers, or have a lot of performance modifications. Conversely, if you can tell pride of ownership by maintenance records, cleanliness/upkeep, and close attention to deferred maintenance it’s probably a good sign.

Make sure to verify the vehicle’s title status. Although Arizona doesn’t typically have weather events such as floods and hailstorms that result in a lot of vehicles being totaled out by insurance companies there was a significant hailstorm in October 2010 that resulted in a lot of cars being turned into four-wheeled golf balls because of all the dimples! Even if the vehicle looks OK a salvage title or any other type of impaired title will cut the vehicle’s value roughly in half and make it very difficult to sell. Yes, you could get a bargain in this type of situation but you take on a significant amount of risk.

Don’t rely too heavily on a Carfax report. While you definitely want to check out a vehicle’s Carfax, recognize that they usually don’t include any accidents or other damage that was never reported to an insurance company. Even if the Carfax comes back clean, have a mechanic check out your prospective vehicle and use plenty of common sense.

Check to see if there’s an online discussion board for your vehicle. While not every make and model of vehicle will have a discussion board, you’d be surprised at what vehicles do. The beauty of looking at these types of sites is that by and large they are populated by actual vehicle owners – not people that have a vested interest in selling you a car! Among other things, I’ve used bulletin boards to get a comparison of different models and trim levels; looked to see what type of service & maintenance issues are common for a car; and to also find specialized vendors and resources for repairs. Some sites even include a ‘for sale’ section as well.

Know where to look for a used car. While Craigslist is now the most common place to buy a used vehicle, my experience is that clean vehicles in good condition and priced fairly will go quickly while the cars that are overpriced and have issues while be posted over and over again. I’ve had good luck buying vehicles from a local auto broker who serves as a middleman for private party sales. Their website is www.theautomatchmaker.com. Other places that I’ve seen good cars for sale include a bulletin board in my mechanic’s waiting area and parking lots of malls/sporting events. In North Scottsdale, the parking lot of the Wal-Mart at Frank Lloyd Wright and the 101 Freeway will have some nicer cars parked with ‘For Sale’ signs on most weekends.

Identify what you want, and be patient for it – the good cars go quick! Unlike new vehicles, where you can typically find what you want, with used cars you will normally have to make some compromises. Flexibility with things like model year, trim packages, and paint color is key. Also, work to understand your local market – in Arizona there are lots of white cars, and few four-wheel drive pick-up trucks for example. If you take your time and are patient you will be able to spot a value when you see one. Where I’ve seen people pay too much is when they need to buy a used car immediately. You are at the mercy of what’s available then and there.

Have you purchased a used vehicle recently? Do you have any tips to add? If you’re in the market, what type of car are you looking for and where do you plan to buy it? Share any experiences or thoughts in the comment section below!]]> http://www.figuide.com/10-tips-for-buying-a-used-car.html/feed 0 http://www.figuide.com/asset-allocation-with-no-reservation.html http://www.figuide.com/asset-allocation-with-no-reservation.html#comments Wed, 05 Jun 2013 16:16:51 +0000 James Shagawat, CFP®, ChFC®, MBA http://www.figuide.com/?p=19983 Did you review your portfolio this year?

Before coming into this business, I thought I was diversified by having my investments in a Vanguard S&P500 index mutual fund. I figured. Hey, I’m across 500 stocks, that’s diversification. In reality, all my holdings were in one asset class, large-cap domestic stocks. Real diversification includes many categories of investments including but not limited to small stocks, large stocks, international stocks and bonds.

As far as asset-class winners and losers, the last time large stocks gave the highest return was in 1998. Since then, bonds and international stocks performed better. So why diversify? Winners rotate; you don’t want to miss out on the best performing asset classes.

To reduce the volatility of returns in a portfolio, combine assets that tend to have low correlation to one another.

For example, a rock group needs musicians with different attributes and talents – the group must be diversified. Building a group with four guitar players is not a great idea, as much as we like guitar players. A singer is needed, as well as a drummer. Because they have different attributes and talents, the correlation between guitar player and drummer is low – and low correlation is what you’re after.

Low correlation equals diversification. Economics professor Harry Markowitz summarizes the basic premise underlying diversification and portfolio asset allocation in one sentence: “To reduce risk, it is necessary to avoid a portfolio whose securities are all highly correlated with each other.”

A preferred asset allocation should be based on your investment goals, risk tolerance, age and your time horizon. A portfolio of all stocks or all bonds may not be appropriate for you. A balance of many asset classes is ideal.

Should retirees be putting their low (or no) interest yielding cash into stocks or bonds in order to generate some return? Absolutely not.

Even getting a sad-sack 1% return is better than exposing all your savings to higher levels of risk, says Alan Moore, founder of Serenity Financial Consulting in Milwaukee.

“I look at cash as market insurance,” he says. “When the stock market takes a dive, (retirees) don’t want to be in the position of having to sell stocks to fund their lifestyle.”

So if stocks and bonds aren’t the answer, what about annuities?

Many retirees buy an annuity in hopes of getting a safe stream of income. Low rates undercut that strategy, Moore says.

“The problem is that the monthly income a client receives from their fixed annuity is based on interest rates at the time they purchase the annuity,” he says. “With interest rates at all-time lows, annuity payouts are also at all-time lows.”

Meanwhile, Moore urges investors to avoid purchasing annuities until rates climb.

“Another option is to buy a smaller annuity today, such as 25% of what (investors) would normally buy,” he says.

Doing this several times from different companies over a few years allows you to buy at various interest rates, he says. Plus, buying from separate companies protects you if one of the companies goes bankrupt.

While many retirees still have pensions, they may not be the safe bet we all thought they were at one time.

“It is hard to know if clients can depend on them for their retirement income,” he says. Workers who are worried about their company’s pension plan must take action now. “They need to save more or work longer, as well as delay Social Security, to maximize the benefit they will receive.”

When markets take a turn for the worse, investors look at previous downturns to see what investments fared well. The issue is, rarely do the same asset classes do well in successive bad markets.

Moore believes the danger lurking in today’s supposed safe havens presents a lesson that investors should remember in all markets.

“Safe-haven investments have never truly been safe,” he says. “Investments that did well during one market downturn may do awful in another.”

Click here to read the entire article.

At the intersection of economics and psychology lies the exploding research on behavioral finance. This field of study often focuses on so-called heuristic biases that are observed when humans consistently make different decisions than a robot.

People strongly prefer avoiding losses to seeking potential gains. This preference is called loss aversion. Psychologists Daniel Kahneman and Arnos Tversky tested this behavioral bias by asking their students and colleagues to participate in a number of probability games. One test offered a 50% chance of losing $100 and a 50% chance of winning a variable amount.

Assuming that humans are economic robots (or “econs,” according to Prof. Richard Thaler), you would expect that most would play if the winnings were just positive enough (perhaps $110) to make the time and energy of playing the game worthwhile. However, most humans are much more risk adverse than we might expect.

Kahneman and Tversky estimate that the pain people experience from a loss is nearly 2.25 times worse than the pleasure of a gain. On average, participants needed a winning purse of $225 to accept a potential loss of $100. Ouch, those losses really hurt!

To see how this would affect investors, I analyzed four years of S&P 500 data. During this same period, building from the depths of the Great Recession, a $10,000 investment would have grown to nearly $20,000.

However, the perception of this growth would have been perceived quite differently by loss-adverse investors. For this test, I looked at four kinds of investors: the first group views their accounts annually, another quarterly, the third monthly, and the last group frenetically checks their account balances every day.

As you can imagine, those who check more regularly are more apt to see a negative return during that time period. During the last four years, investors who view their portfolios daily witnessed 435 negative returns, whereas those who viewed their portfolio annually only witnessed one small loss.

And when do most investors check their account balances? Do we check when the markets are on a steady march upward? No, we race to log in to our investment accounts as doom and gloom is spreading from the Middle East or Eurozone. This test does not include a preference to review finances during financial distress which would only exacerbate the disparities between perception and reality.

Assuming that each loss is felt 2.25 times as much as a gain, here is the perceived satisfaction of portfolio performance for each group of investors:

Holding the very same portfolio, those who viewed their accounts more often were much less satisfied with the performance of the market. In this test, those who viewed monthly and daily were less satisfied than when they started, which occurred during a period that this investment nearly doubled in value!

One way to balance against the tyranny of short-term market downturns is to always keep long-term performance in mind. Financial advisors typically report long-term performance numbers alongside the quarterly performance to help provide some balance to the negative perceptions of short-term market volatility. However, these anchors do not help those who have just joined a new investment manager and cannot rely on the solace of a long-term history.

Loss aversion and daily pricing of the stock markets explain one of the reasons why many people have more positive associations when thinking about their house as an investment than they do investing in the stock market. Most houses are only loosely valued once a year for property tax assessment. Meanwhile the stock market is calling out for buyers and sellers every second. You can bet that you wouldn’t feel so stable about your house value if at every moment you were being fed the value of the highest willing but erratic bidder.

I also think it is interesting to consider the effect of daily pricing and loss aversion on investment managers. I expect this group would be more powerfully affected by loss aversion than those who do not have vocational responsibilities to receive market feedback in fractions of a day, hour, or minute. Perhaps this is one reason that many wealth managers recommend portfolios that are routinely more conservative than research would recommend at each given risk tolerance profile.

Like most other human dispositions, our goal should not be to change what’s baked into the cake. Simply understanding these strong impulses can help prepare you for the emotional anxiety that market downturns are sure to provoke. As an added layer of protection, I often wonder if the most significant reason to hire an investment advisor is to have someone else to redirect the distress caused by inevitable market downturns.

Summer is always a great time to slow down a bit, but sometimes we can just get downright complacent.  Here are few to-dos to keep your summer humming along smoothly…financially that is.

Update your Passwords

If you’re still using old passwords you set up years ago (you know….the ones easily cracked by your 8 year old neighbor), it might be time to make a change.   Privacy and protection is a huge part of our every-changing world, and protecting your assets is a necessity.

If you struggle with password creation and retention, you might look into using  a tool like LastPass.com to help you out.

Memorialize Household Contents

It seems every time you turn on the TV, a new story breaks about another tornado or explosion causing millions of dollars in damages.  Now is a good time to memorialize your household contents. One way to simply do this is to video tape the contents of your house. Obviously, if you have valuable items (these items should have a separate insurance rider) you might consider documenting them in more detail.

Once you have a video, that video should be saved in the cloud. There are many ways to do this through cloud based portals and backup tools. A few examples are Dropbox, Sharefile, and Crashplan

Update Beneficiary Designations

This to-do item is one that often gets overlooked but is so important.  It’s a great time to make sure your beneficiary designations are up to date and valid.  Many times I see clients with their spouse set up as the one and only beneficiary.  It’s vital to have a contingent beneficiary named just in case.

Create a Master Account List

It’s always valuable to have a master list of your financial assets in case something where to happen to you.  If you die, become sick, or incapacitated, would your spouse or financial caregiver know where everything is located and how it all works.  This is one of the many benefits of working with a financial advisor; everything is documented and organized.

While these to-dos will not give you a short-cut  to a Beverly Hills mansion, they will make your afternoon nap in the hammock a little sounder.  It’s important to remember the details when it comes to our financial well-being….even when the details may seem trivial.