Personal Finance for Geniuses*

Pro-business vs Anti-business Presidents

noreply@blogger.com (John M. Scherer) — Wed, 23 Nov 2016 16:25:00 +0000

We are two weeks out from the presidential election, and as the world begins to adjust to Donald Trump's shocking upset win stock market investors seem to be feeling comfortable that his presidency will be good for business. All four major indexes reached all-time highs this week, and while rising rates have hurt bond prices in the short term in short order higher interest rates will mean more cash flow for investors in bonds and CDs as well. So it looks like the outlook for our investments is good for the next four years, right?

Not exactly. The chart below was published on Forbes.com this summer, and it shows that supposedly pro-business Republican administrations have seen S&P 500 returns significantly lower than their supposedly anti-business Democrat counterparts.

Or course this particular time frame includes horrible returns entering the Great Depression for the GOP and corresponding tremendous returns for the Dems coming out of that era. But even dropping off those two outliers, Democratic presidents still have had a historical annualized advantage of about 9% to about 6% in market returns during their time in office.

Is this proof that Democrats are better for the economy than Republicans...or did the pro-business policies of the Republican presidents come to fruition in the ensuing years of Democratic presidents?

Was George W. Bush a terrible president whose governance caused an eight-year drop in stocks...or was it that after four terms of returns in the mid-teens markets we were bound to have a pullback and Bush simply had the bad luck of being in office at that time?

Did President Obama rescue us from destruction...or was he fortunate to be president after an eight-year correction and simply presided over the inevitable comeback?

The answer for me is - and should be for your financial decision-making - that it doesn't matter. Whether you love or hate the current administration, the gains in the market during the Obama presidency are indisputable. And whether you are excited or fearful of the next administration, we should expect lower stock returns over the next four years...because that's what always happens.

We know that history tends to repeat itself.

And we know that predicting the future is impossible to do other than by luck.

If we can remember (and follow!) these two simple truths, a successful investment experience is bound to follow

The key to financial success is having a plan and sticking to that plan. That's easy to say but hard to do, especially when it's your own financial future on the line. If you think fiduciary advice with no product sales could help you achieve financial success, we would be happy to help.

Answer: A person you have never heard of who actually has a chance to be elected President on Nov 8.

noreply@blogger.com (John M. Scherer) — Tue, 25 Oct 2016 19:21:00 +0000

Question: Who is Evan McMullin?

A client turned me on to the website FiveThirtyEight (thanks, Jeff!), which has all kinds of data-driven articles. I subscribe to their daily 'Significant Digits' email with quirky figures and statistics, and find it an interesting diversion.

One recent article on their site explained how independent Presidential candidate Evan McMullin has a legitimate chance of becoming President. While they characterize his chances as 'slim-but-not-none', the article details how if the conservative, Mormon McMullin could win Utah he has perhaps as much as a 3% chance of becoming our next President. Not likely, but also not something you hear about in the mainstream news.

The article is a really interesting peek into the process and potentially arcane rules of electing our President. And at a minimum it's a welcome break from politics as usual!

Whether or not you would prefer that we elect an unknown quantity to either of the two known ~~evils~~ main candidates, knowing who Evan McMullin is and how the 12th Amendment could allow him to become our 45th President with only a tiny percent of the popular vote will make you the most popular conversationalist at your Halloween party this weekend!

Presidential Candidate Tax Issues - Net Operating Loss

noreply@blogger.com (John M. Scherer) — Wed, 19 Oct 2016 19:36:00 +0000

While there have been no shortage of splashy news stories during this year's presidential campaign, one major story has been about Donald Trump's $900 million business loss in the mid-1990's. A New York Times headline exclaimed that he 'could have avoided taxes for nearly two decades' and in the following article stated that he used 'a tax provision that is particularly prized by America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.'

To which I say: poppycock!

Any outrage against him for using a special loophole that only benefits the wealthy to avoid paying taxes for 18 years is simply uninformed. To help understand why, here is a little background on the rules for the tax strategy he used, a Net Operating Loss (NOL), from accounting author Steven Bragg, CPA:

The basic rules for using an NOL are:

Carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver.

Carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years.

After 20 years, any remaining NOL is cancelled.

Some version of the NOL provision has been in the tax law since 1918 and all Trump did was use it when he qualified to do so.

That's all well and good, but the fact that something is plainly legal does not mean it's not a quirk in the tax law that is 'prized by America's dynastic families.'

So then how, exactly, is NOL not a fat-cat loophole? Here is a simple example:

Consider a farmer who struggles in a year when corn prices are down and loses $200,000 that year. If farming is his family's only source of income, they pay no taxes that year but don't get any kind of a tax break for being out 200 large.

Then the next year corn prices spike because of a drought in Europe. His farm business booms, and he ends up making a profit of $300,000. After deductions and exemptions, it's likely that the farmer's effective federal tax rate is around 25% - or $75,000 on an income of $300,000.

Now look at this farmer's business over the past two years if there was no such thing as Net Operating Loss carryforward:

Income / (Loss) Taxes Paid

Year 1 ($200,000) $0

Year 2 $300,000 $75,000

TWO YEAR

TOTALS $100,000 $75,000

The farmer put $100,000 in his pocket over two years, not a great result but at $50,000 a year probably still a lower-middle class wage.

But his taxes on that income was $75,000 - a 75% effective tax rate!

No one in their right mind thinks this is fair. Which is where the NOL comes in.

Using NOL provision allows the farmer to carry his loss from the first year and apply it to reduce his profits in the second year, resulting in him being taxed only on the $100,000 he actually put in his pocket over the years. His effective tax rate would then be much lower at $100,000 of taxable income, but even at 25%, having him pay $25,000 on $100,000 of profits is at least a reasonable result.

The takeaway is certainly not that Trump should be exonerated on the issues that showed up on just three pages of one tax return. There are plenty of reasons to criticize Trump - running a business that loses almost a billion dollars is a failure of mind-numbing proportions, and as Allan Sloan pointed out in an article in the Washington Post, other entries on the pages which have been made public point to true loopholes at which the public should be legitimately incensed.

But anyone who says that his use of the Net Operating Loss carryforward is an example of a loophole that only benefits rich folks is just plain wrong.

If you need someone to help you sort through the hype and find tax strategies that work for real people, we can help keep more of your hard-earned money in your own pocket. Schedule a phone call to talk with us today.!

Gold Will Still Double From Here!

noreply@blogger.com (John M. Scherer) — Tue, 27 Sep 2016 14:28:00 +0000

I was cleaning out my 'to read' pile recently and found notes I took at an industry meeting back in 2012. One of the notes I had written down was a quote from a presenter and read as follows:

Gold will still double from here, use GLD & gold stock mutual funds.

I have no idea as to the full context of the presentation - although unsurprisingly it was from a presentation by a firm that is a gold dealer - nor why I jotted down that particular comment. But it caught my eye as I reviewed my notes from that conference, and since we didn't take any action to include gold in our portfolios I decided to take a look at how gold has played out and see if we might have missed out on something.

We dug into some data and found that the exchange traded fund SPDR Gold Trust (ticker: GLD) traded in the $40-50 range throughout 2005 and then shot up over the coming years, topping out by spending most of 2012 in the $155-180 range. So GLD had tripled in the seven years preceeding the conference session when I had jotted down that pearl of wisdom, as it was right around $165 in mid-November 2012.

Over the last few weeks GLD has been hovering around $125*. . . meaning over the past nearly four years gold has lost 25%. ~~But at least investors have received some cash flow in the form of dividends.~~ And GLD doesn't even pay dividends, so that loss has gone right to investors' bottom line.

By contrast, the iShares exchange traded fund that tracks the S&P 500 (IVV) has moved from around $145 in the fall of 2012 to around $215 recently, a cumulative 48% capital gain. Plus IVV has paid a dividend amounting to something just under 2% per year of annual income.

Put another way, a $100,000 investment in GLD in November 2012 would now be worth about $75,000; the same investment in IVV with dividends reinvested would be worth around $170,000.

So, as it turns out, I'm not sad that we once again ignored a popular investment, we did not jump on the bandwagon and that we stuck to what works based on academic evidence. Although, in fairness to that speaker, and to make sure that the title of this blog isn't clickbait, I do need to circle back and say that I agree with him: I have no doubt that gold WILL double from where it was in fall of 2012 to over $300 and beyond.

It's just that I might be retired, sitting in a rocking chair with a shawl over my shoulders before that happens!

*Amusingly, when I googled GLD this morning, one of the headlines that popped up was "Gold's SPDR Gold Trust (GLD) Is Ready to Rally"! It was all destined to double at $165 and now six years later at $125 it's ready to rally...I guess gold bugs are counting on a broken clock eventually telling the right time!

One Retirement Housing Risk No One Talks About

noreply@blogger.com (John M. Scherer) — Tue, 13 Sep 2016 15:48:00 +0000

A recent discussion in the forums of the Alliance of Comprehensive Planners involved whether or not people should pay off their mortgages when they get to retirement. I've got my opinions on that, but one side of the argument I had never heard before came from an ACP colleague* and I thought it so important to consider I wanted to share a snippet of her response:

We are often called upon to bring up the subject of awful things that can happen. The "why you should have a mortgage" story belongs in this area. Several years ago my father-in-law bought a home in a half-built housing complex in central Florida just as the housing crash started. The subdivision had new houses standing empty, unsold, when he had a change in his health that required he move.

We had to sell in a terrible market, we had to sell under duress, he lost all his equity, but he didn't lose more than that. The mortgage on his house served as a stop-loss in that situation. The bank shared the risk.

Whether it's because enemy armies are tramping across your land, or the local nuclear power plant developed a leak, or you have a stroke: sometimes you simply have to get out of Dodge. Having a material portion of your wealth tied up in an illiquid asset is simply bad planning.

Like many things in personal finance, there is no one correct answer to this mortgage question, and a lot of it has to do with personal temperament and personality - as another colleague said 'I can calculate correct thing for you to do, but a spreadsheet doesn't have to sleep at night!'.

But it is important to consider as many sides of a question as possible before you can decide which answer is right for you.

* If you know anyone in New England who could use unbiased, fee-only advice from an expert in financial and tax planning, you'll be doing them a favor by sending them to check out Wendy Marsden of ProsperiTea Planning.

Be Like a Duck This Week!

noreply@blogger.com (John M. Scherer) — Tue, 06 Sep 2016 15:58:00 +0000

The official start of autumn might be a few weeks away, but everyone knows that summer really ended yesterday with Labor Day. That holiday is a touchstone for me on the calendar - the long, carefree days of summer are over; and fall means the start of a new school year, football season is back and beautiful fall colors (& hunting season!) are near. Then just around the corner will be "The Holidays" with Halloween, Thanksgiving, Christmas and New Year's packed into nine weeks.

But Labor Day also means that we still have 17 weeks left in the year - a full 1/3 of the calendar still ahead of us. Which makes it a great time to dust off those New Year's goals, and see what we can still accomplish in 2016.

So often we set a goal, make progress on it, and then when life takes over our goal falls to the wayside and doesn't get revisited. I had done a really good job early in the year of tracking the action items I needed to do on a daily and weekly basis to reach my goals, but then I lost momentum (see 'long, carefree days of summer' above!) and now it's been many weeks since I've looked at my goal tracking checklist.

Take some time this week to think about what you want to accomplish yet in 2016. If you had some New Year's goals for the year back in January, review them. You might be surprised at how much you've actually accomplished - human genetics means we tend to focus on the negative which often causes us to overlook the positive - and it's important to celebrate even little victories.

For me, one 2016 goal was to get my weight down where I felt better about it, and I had a specific number in mind. As of this week I'm about halfway to my goal, which is good - but I was 75% of the way there earlier this year but then gave some of my progress back (once again, see 'long, carefree days of summer' above!). This week I'm working on appreciating more the progress I've made so far and re-focusing my mindset on the little steps I need to take to be successful.

A great idea for this week is to be like a duck! Don't be afraid to adjust your goals to make them realistic - and this is a great time to do so. Learning taekwondo might not be achievable anymore this year, so you could scratch that off of your list and focus on your other achievable goals. Or you could make your goal be to sign up for a class and have taken a lesson by year end.

Either way, having a list of goals that are actually real, current goals can be a powerful catalyst for progress.

One of my 2016 goals was to blog twice a month, starting with a goal-setting post in February. That obviously didn't happen, and there's no way I can hit that goal now. But I can adjust that goal to make it achievable by the end of the year and turn a shortcoming into a success.

Remember a goal is most effective when it's SMART - Specific, Measurable, Achievable, Realistic, and Timed (has a deadline).

What does this have to do with personal finance? For one, many goals have financial implications - maybe you will want to set a goal of paying down debt, building up cash liquidity, or increasing retirement savings by the end of the year.

But more importantly for us, talking about goals is central to our mission at Trinity Financial Planning: helping people improve their lives. When we help people move toward their dreams - in the area of finances, family, health or otherwise - we are making progress on accomplishing that mission.

Let us know if we can help you or someone you know improve their lives.

Do You Own the 10 Best Dividend Stocks?

noreply@blogger.com (John M. Scherer) — Tue, 30 Aug 2016 16:41:00 +0000

Last week Barron's came out with an article that identified what it says are '10 companies with above-market (dividend) yields, below-market price/earning ratios' and other favorable characteristics that 'could reward shareholders in multiple ways in coming years.' The stocks they identified, in order of highest current dividend yield (4.3%) to lowest (2.4%) were:

Verizon Communications (VZ)
MetLife (MET)
AbbVie (ABBV)
Dow Chemical (DOW)
Qualcomm (QCOM)
Cisco Systems (CSCO)
Target (TGT)
Carnival (CCL)
JPMorgan Chase (JPM)
U.S. Bancorp (USB)

Despite the fact that 'expert opinions' are just as likely to be wrong than right, the description of these stocks certainly sounds appealing. Fortunately, at Trinity Financial Planning we don't have to worry about whether we should buy these stocks now or not.

Our clients all already own them.

It's reassuring to know that we own every one of those stocks as part of our globally diversified index-based investment philosophy.

And that when they get overheated from a run-up in their sector, we are selling them at incrementally higher prices.

And that when they sink because of market sentiment, we are adding more at attractive prices.

And we are doing that all through a disciplined investment process including systematic rebalancing - not in any way relying on predictions, forecasts, hunches or other guesses.

Do you already own these attractive stocks, or maybe are thinking of buying them with bond yields so low now? Leave a comment and let us know your thoughts.

Important Information About Incorporating Stock Market Projections into Investment Planning

noreply@blogger.com (John M. Scherer) — Tue, 23 Aug 2016 18:50:00 +0000

There is a lot of information coming at us every day about what is going to happen to the markets in the future and what we should do about it. This three-minute video gives some insight into how we view that information in the context of designing an investment portfolio.

As you can see, the most important thing about incorporating market predictions into an investment plan is - with apologies to Nancy Reagan - Just Say No.

If you agree that the evidence does not instill a lot of confidence in the conventional wisdom on Wall Street and you are interested in an approach where the academic evidence has shown favorable results, consider looking into how we work and who we serve.

If you disagree and believe that stock market projections have merit, let us know your opinion below.

Are Teachers Middle Class?

noreply@blogger.com (John M. Scherer) — Tue, 02 Aug 2016 16:33:00 +0000

The July 3 issue of Bloomberg Businessweek had an interview with President Obama. It was quite interesting, and I found myself surprised to be agreeing with a number of things the so-called ‘anti-business President’ had to say about business in America. One comment he made, though, really seemed way off base so I did some digging into the facts. The President was quoted as saying:

"Think about how difficult it is right now for young, idealistic person who wants to go into teaching to figure out how they're going to live middle class life as a teacher. There's no job that's more important to our economy than having really good teachers in the classroom, but right now, the way our economy is structured, it's very hard for young people to make that decision unless the parents are subsidizing them in a fairly significant way."

Coming from a family where both my parents were teachers, with my own college degree in teaching, and a number of very close friends and their spouses being teachers, I thought I had a pretty good handle on what that life is like. And while not the path to untold riches, teaching for everyone close to me has been the path to a comfortable middle class career. So I got to questioning ‘Is my perception of being a teacher and/or being middle class skewed?’

The data I found says no. According to the US Bureau of Labor Statistics, the national average of annual salary for teachers in middle and high school is about $54,000, with surprisingly elementary teachers averaging $60,000. Here in Wisconsin, information available from the Department of Public Instruction said that the average salary for a teacher in 2011-12 was around $55,000.

So teachers in my geographic area earn about as much as the national average. But are they middle class? CNN Money has a calculator that addresses that question by assuming that ‘middle class’ means incomes being between 1/3 less than and two times more than the median income in the county.

I live and work in Dane County, and when I plugged that into the CNN calculator I came up with middle class being defined as annual income between $40,418 and $120,652, which must mean that the median income here is about $60,000 per year. The income listed is for a three person household, which I assume to be two adults and one child, although I couldn’t find any definition of a ‘three person household’ anywhere.

That data means that a household in my area with one employed teacher is on the low end of middle class, and if there were two teachers in that household they are on the upper end of middle class.

Make no mistake – this has nothing at all to do with whether teachers are over or under paid, or any argument whatsoever along those lines. Most teachers I know are passionate, dedicated professionals and deserve their entire community’s gratitude.

It’s just that the idea of it being ‘difficult to figure out how to live a middle class life as a teacher’ doesn’t hold water to me. I always felt that growing up decades ago in a one income teaching household - my Mom stopped teaching to raise us kids - that we were solidly middle class; and the data above shows that a typical teaching household is middle class today, and perhaps even on the upper end of that.

This is an interesting topic to us, since one of the ideals we value at Trinity Financial Planning is that that objective, holistic financial advice should be available to anyone who seeks it regardless of how many zeroes are in their net worth. Let us know what you think about whether teaching can provide for a middle class living.

Sometimes It's Good to Change Your Goals

noreply@blogger.com (John M. Scherer) — Thu, 04 Feb 2016 03:49:00 +0000

I was going to write a post yesterday on Groundhog's Day Goals*, as one of mine is to post on a more regular basis to this blog. But I got sidetracked - I found out that someone I know died of colon cancer Monday. He wasn't really a friend, more an acquaintance. Barely that, really - my company uses many of his company's products, and we'd emailed a number of times in the past year and I sat with him at breakfast at a conference last fall, but that was about it. Even though I didn't know him well, from all my interactions with him, and what I heard through colleagues, he was a great guy and for some reason his death really hit me.

Maybe it was the suddenness of it for me. I had no idea he was sick from any of our communications; seeing him at the conference I never would have guessed.

Maybe it was the suddenness for him. I found out that he had been diagnosed with the cancer just last April, and it was recently that the diagnosis was deemed terminal.

Maybe it was because he was younger than me and left behind a wife and small children, his kids maybe a bit older than mine but not by much.

Maybe it was because last week my best friend's sister-in-law died, at 54 older than me but still far too young. She, too, lost her battle with cancer.

Regardless of the reason, I spent the day thinking about what's really important in life and didn't get to the goal I had set for the day. But I'm not going to end with some trite catch-phrase by telling you to give your kids an extra hug or to call that friend with whom you've been meaning to re-connect.

What I am going to do is relate these thoughts back to financial planning though. While this post doesn't talk about money, it has everything to do with it. Remember that money itself is not a goal, it is a tool which gives us the time and ability to do what we love with who we love. Don't let yourself fall into the trap of reversing those priorities.

OH -- and give your kids an extra hug tonight.

* Yes, I'm serious and it will be coming soon. And if my impressions of J are anywhere close to true, he'd get a kick out of a post about him including Groundhog's Day Goals!

A Reminder of a Fundamental Truth about Investing

noreply@blogger.com (John M. Scherer) — Tue, 17 Nov 2015 15:20:00 +0000

Late Sunday night I received an email from a consultant to financial advisors which included a sample letter in response to the terrorist attacks in Paris over the weekend, with the suggestion that many clients will be asking Monday morning about their investment implications and this letter could be a useful proactive communication. I strongly believe in taking the long term view on investments, to the point that I tend to ignore short term, white noise 'news'. But with this coming from a person I've followed for years and for whom I have a great deal of respect, I read his information closely.

Included in his letter were these paragraphs:

Today, you will see the world’s investment markets open lower, and probably close lower, as the horror of the events in Paris are translated into uncertainty about the world we live in—and, therefore, the safety of our assets, reflected in our stocks. The markets always respond reflexively and negatively to threats to our safety.

But as the year proceeds through its last few weeks, the smart money always tells us that these downturns are temporary. Fears that global enterprises are somehow worth less because blood was spilled overseas will prove to be overblown.

Source: Chicago Tribune

I decided to not send this or anything similar out, but wondered if I missed a great opportunity to make myself look smart by being in front of a bad day in the markets. As the day unfolded, I was given another powerful reminder of a bedrock investment principle I have learned in my two decades in the financial business: No one can accurately predict the near future.

Yesterday the S&P 500 was up about 1.5%, with German and even French markets flat. Hardly a negative response to the legitimate threat to our safety, and nothing like a fear of global businesses being worth less, despite widespread predictions from non-reactionary experts that the response would be exactly that.

This has happened on a regular basis over the years. Just when I think I have some insight into what is going to happen, the market makes an opposite and sometimes powerful move in the other direction. Wall Street and mainstream media trains us to think that being able to forecast market moves are the key to financial success, and leaves us wanting to be able to predict the future. The truth is that patient, disciplined investing is the only sure way to have a successful investment experience.

The market looks poised to head north again today. Maybe in the next few days or next week the markets will move downward, but it won't be because of a fundamental change due to the terrorist attacks.

If market turmoil and headline news has you anxious about your investments or retirement readiness, we can help you separate the wheat from the chaff and help you have peace of mind about your financial future.

Should 56 be 74 for DiMaggio? If so, remember 84!

noreply@blogger.com (John M. Scherer) — Thu, 22 Oct 2015 12:30:00 +0000

Earlier in the summer we reflected on the greatest hitting season in the Major Leagues - 1941.

But getting hits isn't the only measure of offensive success -- as the old adage goes 'A walk is as good as a hit', right? With the World Series nearing, let's take a look at an arguably more impressive feat than Joe DiMaggio's 56 game hitting streak: Ted Williams' streak of reaching base safely in 84 straight games in 1949.

In addition to being married to Marilyn Monroe (and having fresh roses delivered to her grave twice weekly for two decades after her death!), DiMaggio is famous for getting at least one base hit in 56 straight games. But after game 57 when he didn't get a hit, he proceeded to get a hit in the next 16 straight games. But he also had a walk in game 57, and got walked in the game before the big streak started as well, making 74 games in a row that he reached base safely. Definitely impressive.

Williams' string of consecutive games reaching base is far less sexy - his longest hitting streak was 23 games in a row, and that came during the same '41 season that DiMaggio set the world on fire - but it is at least as impressive.

Starting on July 1 two weeks before the All-Star game, he was on base in every game until basically the end of the season! Hard to imagine that kind of efficiency.

Also consider that in the 65 seasons since Williams reached base safely in over half of the season in a row, the closest anyone has come to his record was in 2006 when Orlando Cabrera got on base in 63 straight games. That perspective drives home what an accomplishment Williams' 1949 was, and also how it's kind of funny that it doesn't get the same credit as DiMaggio's hitting streak.

While this might not have a lot to do with financial planning directly, it DOES have to do with one of the biggest obstacles to achieving financial success: perception. The perception in baseball is that hitting is more important (or at least more difficult) than merely getting on base, even though the truth is that getting on base regardless of how it happens is both truly valuable and truly difficult.

Similarly, conventional wisdom is that picking the right investments and predicting what the markets are going to do is the most important part of financial planning. But in reality, there are many more things (like how much you save and how much you pay in taxes) that have far greater impact on your financial success.

If you find yourself struggling to figure out the difference between truth and perception as it applies to your financial situation, we can help.

The Five Fundamentals of Fiscal Fitness

noreply@blogger.com (John M. Scherer) — Thu, 24 Sep 2015 18:30:00 +0000

With the new school year in full swing and kids getting back to basics, this is a great time to revisit the basic building blocks of financial planning – what we call ‘The Five Fundamentals of Fiscal Fitness.’ We believe that financial success is 80-90% determined by how well a person follows these fundamentals:

1.   Save enough money from your paycheck into permanent savings.
2.   Have enough liquidity to manage the bumps in the road.
3.   Buy enough insurance to protect against catastrophe.
4.   Own the proper size house.
5.   Avoid consumer debt.

Let’s take a look at each of these in a little more detail:

Save enough money from your paycheck into permanent savings.

This means putting money away not for a future purchase, like saving for a car or a vacation, but into building permanent wealth off of which you can eventually live. For most folks, that means using your company 401(k) or 403(b) retirement plan.

How much is ‘enough’? Of course the specific answer for anyone is unique to each situation, but a really good place to start is to take your starting age minus 15 and save that percentage of your income. So if you start saving at age 25 and save 10% of income you’ll be in good shape. If you wait until you are 35 to start, saving about 20% of your income is a good general target. If you don’t start saving for retirement until age 45, you’re going to need to save about 30% of your income to reach your goals.

Have enough liquidity to manage the bumps in the road.

Again each person’s situation is unique, but a good place to start for employees is 10% of income in a checking account and 20% in emergency reserves like a savings account or CD’s. Double those amounts you are self-employed.

Buy enough insurance to protect against catastrophe.

Insurance isn’t intended to cover minor bumps in the road or common maintenance, the reason you have liquid reserves to handle those things. Insurance is needed to cover major, catastrophic events – like losing your ability to earn an income because of death or disability, being sued for a fatal accident or having surgery or other major medical care.

You probably need more life and disability insurance than you think. Your ability to earn an income is typically your greatest asset. Consider: if your house burned down and wasn’t insured, it’d be terrible but as long as you could keep working eventually you’d be able to buy another one. However if you lose your ability to work, there’s no way you could overcome that except for having enough insurance.

Own the proper size house.

For most folks this means owning a house worth between 1 ½ and 2 ½ your annual income. Not only does real estate provide a lot of enjoyment in addition to its diversifying effect on your net worth, with a proper mortgage and liquidity combination it gives protection against inflation that can’t be found in many other places.

Avoid consumer debt.

Consumer (bad) debt is any debt used to buy things that lose value over time, and is most commonly found in credit cards and auto loans. Good debt is used to buy things that increase in value like a house or an education, and is not what we are referring to here.

Spending above your means and always having an auto payment are two of the most crippling mistakes you can make. The old saying ‘If you can’t buy it in cash don’t buy it’ should be the rule, not the exception. Adhering to this Fundamental is one of the biggest things you can do to help yourself achieve financial success.

These five things aren’t very complicated, but like many recipes for success in life it’s the things that are simple-but-difficult that are the keys to success. If you’d like more information about building a strong financial future, or a checkup on how you are doing so far, please get in touch and we’ll be happy to talk with you.

72 out of 73 Ain't Bad!

noreply@blogger.com (John M. Scherer) — Tue, 14 Jul 2015 12:30:00 +0000

With the Major League Baseball All-Star game on deck for tonight, my mind is on baseball. Every year when I think of the All-Star game, I'm taken back to when I was maybe 7 or 8 years old and got to have a sleepover at my cousin's house to watch the game. The highlight that I still remember vividly is the camera panning the dugout and then giving us a close up shot of Pete Rose picking his nose. Maybe that will be a topic for a future blog post, but I thought today I'd focus on something a little more numbers-related!

Most baseball fans, even casual ones, know that Joe DiMaggio holds the Major League record for getting at least one hit in the most consecutive games at 56 games. Looking at that record a little closer, it's hard to believe that for over two months in 1941 (from May 15 to July 16) DiMaggio got a hit in every single game.

This feat becomes even more impressive when you consider what happened in the games after his streak ended. According to the Baseball Almanac, the day after the streak ended on 7/17/41 against the Cleveland Indians, DiMaggio began a new 16 game hitting streak.

That means that he hit safely in 72 of 73 games. Truly amazing!

What's also interesting to note is that at the conclusion of this prolific hitting season, DiMaggio's batting average stood at .357. Impressive, to be sure. But that didn't win him the batting title in 1941. It didn't even garner him 2nd place - that went to Cecil Travis of the Washington Senators who hit .359.

The batting champion that year was Ted Williams - 1941 was the year that the Splendid Splinter hit .409, which remains the last season that any major leaguer hit over .400. (You might be able to win a bet or two by knowing that Williams wasn't the league MVP the year he hit .400 - DiMaggio was!)

What does this have to do with financial planning? Other than the fact that both deal with numbers and statistics, there isn't a direct connection.

But it IS a reminder of what real financial planning is all about. The numbers and insurance and money and statistics are all just tools.

What it's really all about is the boys of summer and box scores, piano recitals and school plays, family trips and dinner with friends -- the truly important things in life.

What is the Single Biggest Mistake That Keeps Investors from Reaching Their Goals?

noreply@blogger.com (John M. Scherer) — Wed, 08 Jul 2015 21:02:00 +0000

Less than a month before he died in January 2012, founder & Managing Partner of Praetorian Value Fund Victor Fasciani was asked in an interview 'What is the single biggest mistake that keeps investors from reaching their goals?' His answer:

"In my view, the biggest mistake investors make is to deviate from their original plan. This is not to say that one mustn’t diligently monitor their investments to determine if anything significant has changed within their holdings, or re-examine their thesis if they have made a mistake. However, in a world with a 24-hour news cycle, multiple outlets for “news” and information, including the Internet (websites, blogs, videos), it has become more important than ever to discipline oneself to tune out the noise."

While he was an active investor who tried to beat the market by picking underpriced stocks and was likely referring to money managers when talking about 'investors,' his answer applies to any method of investing both as a professional and as an individual. It especially applies to the evidence-based model of asset class investing that we follow.

Let me repeat: "However, in a world with a 24-hour news cycle...it has become more important than ever to discipline oneself to tune out the noise."

It's hard to put enough emphasis on how important this concept is to a successful investing experience. Words of great wisdom that would all be wise to remember.

Especially these days with the situation with the Greek economy coming to a head and a computer glitch stopping trading on the NYSE - as important as those things seem right now, they're all just noise for a long-term investor.

Investing Patience is a Virtue in More Ways than One

noreply@blogger.com (John M. Scherer) — Mon, 29 Jun 2015 22:10:00 +0000

Each year at the end of June the Russell indexes rebalance, making sure that the mix of stocks each index owns continues to represent the slice of the market it was designed to represent. While the list of companies being added and subtracted was announced earlier this month, on Friday the additions and subtractions to the Russell indexes took place.

This delay between the announcement of the changes and the actual changes themselves can be a bit of a problem for index funds, since they need to sell the stocks that leave their index and buy the ones that come in on the same day. Meanwhile, traders know that there are going to be huge sales of some stocks and huge buys of others, and they know exactly which stocks will go through those trades and on exactly what day, so they can load up on the ones that will be in demand and go short on the ones that will be losers on rebalancing day.

It hasn't been a huge problem, but one that can add up over a lifetime of investing. Now large brokerage firms are putting more pressure in traditional index funds as well. According to a Reuter's article from Thursday, many have cut discounts that they make available to index funds because too many other institutional and retail investors are front-running the index rebalancing.

Unfortunately, the Reuter's article incorrectly lumps Dimensional Funds Advisors in with the major index fund companies as being affected by this. In fact, one of the reasons we like using DFA funds is that they DO NOT strictly follow any one index, and weren't forced to buy or sell any stocks on Friday. This flexible approach has added real value to portfolios, but it can be hard to explain how value can be added without any market predictions or stock forecasts. As a friend of mine said:

"Telling the Dimensional story can be difficult because they don’t fit the traditional active management model since they don’t rely on forecasting to attempt delivering market beating returns. And they aren't like an index fund because they do not outsource their investment decisions to a benchmark that delivers its stated objective on the day of reconstitution only to immediately drift from its target because prices change daily."

We've posted a short video to our website explaining some of the differences between traditional index fund trading and DFA's flexible approach to investing - it's worth the three-minutes to watch it.

Does Your World Look the Same from Your Windshield as Your Rearview Mirror?

noreply@blogger.com (John M. Scherer) — Thu, 28 May 2015 12:29:00 +0000

Vitaly Katsenelson has some of the most cogent thoughts on investing and financial behavior currently available. I was reviewing a piece I had saved that he wrote in Institutional Investor in early 2012 about the runup the previous year in cyclical stocks such as heavy equipment makers Caterpiller and John Deere. He noted that with companies like this, because a large portion of their costs are fixed, profit margins go up disproportionately when sales are up (as they have been recently). And conversely when sales drop (as they must at some point) profit margins drop disproportionately because those fixed costs once again remain the largely the same.

His comments are specific to cyclical stocks, but the concept applies to most investments:

Today investing in deeply cyclical stocks is not unlike a game of musical chairs. If you own these stocks, you are coining money while the music is playing. We know what will happen when the music stops: These stocks will plummet.

Of course, it’s difficult to know when the music will stop — tomorrow, six months from now or in two years. Bubbles don’t follow the timetables established by their prognosticators, even when their collapse is being predicted. If you think you possess perfect pitch and will hear the music stop and be able to grab a chair before everyone else, don’t kid yourself. The dot-com investors of the ’90s thought they could, and very few of them got to sit down gracefully.

I think those last two sentences describe one of most important lessons an investor can ever learn: the siren song of beating the market always looks good through the windshield but rarely looks good in the rearview mirror.

What do you think?

One Simple Rule That Non-Financial People Need to Know

noreply@blogger.com (John M. Scherer) — Fri, 22 May 2015 16:00:00 +0000

We like to keep things as simple as possible. And one of the most useful rules of thumb in finance, the 'Rule of 72', is exactly that. It states that compound interest causes money to double when the number of years (Y) times the interest (I) equals 72.

Pretty simple, right? But pretty powerful as well. We can use this Y x I = 72 formula to do some quick calculations to help take a look at what the future might hold or what has happened in the past.

For example, if you put away $10,000 for your daughters education and you invest it at 10%, in seven years it will be worth $20,000. And then in 14 years it will be worth $40,000. And it then follows that in 21 years it will be worth $80,000.

Or if you got a $15k inheritance from your avid outdoorsman uncle and want to set the money aside until you can afford to buy a $30k boat because that's something that would really honor him, how long will it be until you can afford it? If you earn 10% it will take just over seven years (10I x 7.2Y = 72). If you earn 12% it will take six years (12I x 6Y = 72). If you earn 4% it will take 18 years.

How about calculating how your old 401k has done? When you left your old company a dozen years ago it was worth $60k, and now it's worth $100k...up more than 50% seems pretty good, but how well did you really do? Since you had no contributions affecting the calculations, you can use the rule of 72 to estimate what kind of return you've gotten. Since its been twelve years, and twelve goes into 72 six times, we know that if you had earned an average of 6% per year your money would now have doubled to $120k. It would take some more detailed calculations to figure out the exact rate you earned, but we know that it was something a little less than 6%.

You can also do some quick time value of money calculations. If your parents bought their house for $55,000 in 1979 and we assume inflation of 4%, since 4I x 18Y = 72 we know that every 18 years the inflation-adjusted value would double. So in 1997 dollars they paid $110,000, and in 2015 dollars they paid $220,000.

When you have financial decisions that require detailed calculations and expert advice, we can help. But even people who cringe at the sight of interest rates, tax table and dollar signs can be quite financially proficient by just keeping the Rule of 72 handy.

The Guts of Investing

noreply@blogger.com (John M. Scherer) — Fri, 01 May 2015 22:00:00 +0000

Last post we looked at the 'lost fifteen years' in the Nasdaq composite index, which started in 2000 at 5,048 and ended this spring when the Nasdaq finally got back to that level. The takeaway was that by dollar cost averaging into the market like the vast majority of people should be doing, investor returns would have been north of 9% per year as opposed to the 0% that the major news outlets would have us believe.

I want to make sure, however, that I don't mean to infer that I think the Nasdaq, S&P 500, or any other market measurement is overvalued, undervalued, or anything in between. I proudly and with a clear conscience proclaim to have no such insight. ( I prefer to do my gambling and guessing on the blackjack and dice tables.). Rather, my intention was to make some of the same philosophical points as always:

Smaller stocks have higher historical returns (and higher expected future returns) than large stocks because small stocks are both more volatile and more risky, which are most certainly not two way of saying the same thing

We have successful investment experiences not by guessing the future, but by having the fortitude to stick to our plans while riding out the wild swings in markets

In short, we get paid to have guts. Warren Buffet said "I want to be greedy when others are fearful, and fearful when others are greedy." We've seen nearly four out of five dollars that were invested in Nasdaq stocks disappear from peak to trough. And yet more than doubled our money by being fully invested through that.

So the question is not "Will this happen again?" or "Do time honored strategies still work?" It will and they do. The question is "Will you have the guts to rely on history or give in to the fear of speculation next time?"

We can help you do the former and avoid the latter.

The Secret to Investment Returns in a Flat Market

noreply@blogger.com (John M. Scherer) — Fri, 24 Apr 2015 12:30:00 +0000

The Nasdaq index is making headlines this week as is closes north of 5,050; closing at a new all-time high close for the first time since 2000 - according to USA Today "fifteen long years" after reaching its zenith of 5,048 on March 10, 2000 during that epic peak of the great dot-com bubble.

Source: Bloomberg.com

Back at the end of 2008 when the credit crisis was at its nadir, there were abundant articles and news programs (60 Minutes even had an expose) decrying the 'lost decade' in the S&P 500 after it had dropped 40+% in the previous 15 months. These 'lost fifteen years' of the Nasdaq must surely have been worse, given its much steeper drop (down 78% between 2000 and 2002 to it's low of 1,108) and much longer recovery period.

Let's take a look at how bad it was.

If an investor had started near the peak and begun investing $1,000/mo in April 2000 into the Nasdaq composite index, by April 2015 he would have of course invested $180,000. If he did this every month - sticking to his plan, ignoring the credit crisis, second gulf war, housing bubble and simply investing month after month - his account value after the 'lost fifteen years' of the Nasdaq would have been just north of $390,000.

If you're keeping score at home, that's an annualized return of around 9.75%.

Hmm - I guess 'Nasdaq Index Goes Nowhere But Nets Investors Nearly 10% per Year' doesn't make very good headlines. But the fact is that consistent dollar-cost-averaging into stocks remains a sure way to have a successful investment experience regardless of what the market does.

It's good for us that the people we serve care more about facts then headlines!

Are YOU Middle Class?

noreply@blogger.com (John M. Scherer) — Tue, 21 Apr 2015 15:50:00 +0000

With tax season behind us, income is fresh in our minds. The term 'middle class' gets thrown around a lot, and we all feel like we know what it means but defining that concept can be difficult. For one thing, most of us don't feel like we are particularly rich, regardless of our income level. Plus there can be a big geographic difference - a $100,000 salary in Lancaster WI allows a much different lifestyle than the same income in San Francisco or even Madison. A Business Insider article recently reviewed a Pew Charitable Trust analysis of incomes from 2013. In the study Pew defines 'middle class' as households with income between 60% and 200% of a states’ median income.

They produced a list for all 50 states of the median income, and then based on their definition of middle class the upper and lower boundaries of who could be considered middle class in each state.

source: Pew Charitable Trusts via Business Insider

Surprisingly, at least to me, is that both Alaska and Hawaii have median incomes in the top five nationwide, while both California & New York fall outside the top ten. And being middle class in Minnesota requires 20% more income than here in Wisconsin. Also interesting is that there is a nearly 100% gap between the highest and lowest income states. Which further illustrates how being 'middle class' is at least as much mindset as it is hard fact.

Check out the full article here http://www.businessinsider.com/middle-class-in-every-us-state-2015-4

Worried About the Deficit? Stress Testing the Government is the Solution

noreply@blogger.com (John M. Scherer) — Fri, 18 May 2012 21:45:00 +0000

The following twenty sentences were part of the most recent Monday Morning Outlook by Brian Wesbury, Chief Economist of First Trust. If I added my comments they would merely repeat the eloquently stated facts below, so I will merely add my emphasis in bold to his words.

Ultimately, what matters is how much of the nation’s resources are being spent by the government. Spending is the key…it is what crowds out the private sector.

The deficit itself is huge, but interest rates are very low today, emerging market countries have a huge appetite for US debt to back their own expanding currencies, the US has a massive asset base ($150 trillion in the private sector alone), and a budget which freezes spending could eradicate the deficit in five or six years.

In other words, right now the deficit itself is not the problem. It is, however, indicative of the problem – that leaders (of both political parties) cannot control their spending habits. This is not about the economy. If spending created wealth, Greece, Italy, Spain, or even California, would be booming. But they aren’t - they are falling apart.

California recently announced it’s looking at a $16 billion deficit, not the $9 billion it forecasted in January. The new projected deficit is about 18% of revenues. California already has some of the highest tax rates in the country. It’s not taxes or the deficit that matters, it’s the spending.

And the problems go deeper than just money. Big government tends to erode the character traits – motivation, thrift, self-reliance – that make progress and economic growth possible. The bottom line is that the last thing the economy needs now is more government spending.

In light of these budget issues, it’s interesting that a recent series of bad trades at JP Morgan generated a current loss of $2 billion for a company that earned about $5 billion last quarter. The stress tests forced on big banks suggested that losses like this could be absorbed and they were right.

But the federal government is running a deficit of more than $3 billion per day, European countries are going bankrupt and California is falling apart financially.

Instead of arguing about deficits, why don’t we stress test governments? And then get spending down to fix the problem.

For more common sense thinking about the economy, follow Brian Wesbury's research.

Constitution 101

noreply@blogger.com (John M. Scherer) — Mon, 20 Feb 2012 15:04:00 +0000

A reader (thanks, Jim!) notified me of a college course which is being offered for free online by Hillsdale College (www.hillsdale.edu) starting today. Hillsdale is a liberal arts college in Michigan about halfway between Kalamazoo and Ann Arbor. I don't know anything about the college or this course other than what is below, but I know Jim to be an independent thinker and based on his recommendation want to publish this information for other readers.

Each lecture is pre-recorded and lasts about 40 minutes. For 10 classes that's less than 7 hours of lecture time -- so for the equivalent of less than one work day you can listen to a semester's worth of college-level constitutional theory. If you spend one hour on your own reviewing the materials for every hour of lecture, we're talking two working days.

Isn't the document which is the foundation of our great country worth two days of your time once during your life? Register for Constitution 101 on the Hillsdale College website.

The information below is from the Hillsdale website:

About Constitution 101
“Constitution 101: The Meaning and History of the Constitution” is a 10-week online course presented by Hillsdale College.

Featuring an expanded format from the “Introduction to the Constitution” lecture series with Hillsdale College President Dr. Larry Arnn, Constitution 101 follows closely the one-semester course required of all Hillsdale College undergraduate students.

In this course, you can:

watch lectures from the same Hillsdale faculty who teach on campus;

study the same readings taught in the College course;

submit questions for weekly Q&A sessions with the faculty;

access a course study guide;

test your knowledge through weekly quizzes; and

upon completion of the course, receive a certificate from Hillsdale College.

You must register in order to participate in Constitution 101. Even if you have already signed up for a previous Hillsdale webcast or seminar, we ask that you complete the simple registration process for Constitution 101. There is no cost to register for this course, but we ask that you consider a donation to support our efforts to educate millions of Americans about our nation’s Founding documents and principles.

The American Mind
Larry P. ArnnMonday, February 20

The Declaration of Independence
Thomas G. WestMonday, February 27

The Problem of Majority Tyranny
David BobbMonday, March 5

Separation of Powers: Preventing Tyranny
Kevin PortteusMonday, March 12

Separation of Powers: Ensuring Good Government
Will MorriseyMonday, March 19

Religion, Morality, and Property
David BobbMonday, March 26

Crisis of Constitutional Government
Will MorriseyMonday, April 2

Abraham Lincoln and the Constitution
Kevin PortteusMonday, April 9

The Progressive Rejection of the Founding
Ronald J. PestrittoMonday, April 16

The Recovery of the Constitution
Larry P. ArnnMonday, April 23

Anti-Business Politics in Action?

noreply@blogger.com (John M. Scherer) — Tue, 31 Jan 2012 16:46:00 +0000

I'm hardly a fan of the socialist leanings of the current administration, but when I hear from clients, friends and associates about how President Obama's policies are anti-business I need to question their emotions versus the facts.

A look at the chart below, taken from the 2012 Bespoke Report, shows a very different picture than I would expect from an anti-business President. Obviously three years is far too short a time period to infer success or failure of any policy, and I personally don't agree with much of what's being done in Washington with abuses of the Constitution such as nationalized health care. But it's hard to argue that the Obama Administration has been bad for business, at least as measured by stock market performance.

Assessing Obama's anti-business agenda as measured by unemployment also shows a different picture. Unemployment has also stopped skyrocketing and begun to decrease since Obama took office in January 2009, as noted by this chart from the Bureau of Labor Statistics.

Again, I'm not personally a proponent of the current administration, and my message is not that we should re-elect President Obama because he's been good for business. On the contrary, I think that these metrics would have reflected similar improvements had John McCain won the last election -- and perhaps they'd be even better.

However, to say that this administration has been bad for business doesn't hold water, at least thus far.

My message is this: don't believe everything you hear simply because it supports your ideas or attitudes -- think critically and independently about important issues.

Five signs the investment article you are reading is B.S.

noreply@blogger.com (John M. Scherer) — Fri, 09 Dec 2011 22:52:00 +0000

I keep getting emails from a particular contributor to Kiplinger's with headlines like '5 Reasons to Buy Gold Stocks', '5 Best Low-Risk Stock Funds' and '5 Great dividend-Paying Stocks to Buy -- Even Now'. He used to be a Kiplinger columnist, but now is an independent investment advisor and uses the columns to generate business. I don't know why I even bother looking at such drivel, but apparently it's like a car-wreck that you can't help but look at.

The most recent one was so laughable I had to share. It was titled "5 Formerly Top-Performing Mutual Funds to Sell in This Market'. Here is some of the insightful writing:

Legg Mason Value - "Over the past five years, Value lost an annualized 9.4%, while Standard & Poor’s 500-stock index was roughly flat (all returns in this article are through December 6). Recent results have been so pathetic that they make Miller’s long-term record look like the work of an amateur."

Longleaf Partners - " Longleaf lost 64.8% in the 2007-09 bear market, compared with a 55.3% drop for the S&P index. Despite good performance since, the fund has lost an annualized 3% over the past five years and ranks in the bottom 10% among its peers for that period."

Bridgeway Aggressive Investors 1 - "The 2007-09 bear market was Bridgeway Aggressive’s Waterloo. It plunged 64.4%, 9.2 percentage points more than the S&P. Over the past five years, the fund lost an annualized 6.4%, an average of six percentage points per year worse than the S&P."

So these funds ruled the investment world, but in the last five years have tanked and now we should get out. Thanks for that look in the rear-view mirror. Might've been nice to have told us that BEFORE they crashed.

CGM Focus - "Over the past ten years, Focus returned an annualized 7.8%. That’s an average of 5.1 percentage points per year better than the S&P and good enough to place the fund in the top 1% among large-company-growth funds. He has beaten the market only twice in the past five years. Over that stretch, the fund lost an annualized 1.7%, including a 22.7% loss so far this year."

Fairholme Fund - "Over the past ten years, the fund returned an annualized 7.5%, an average of 4.8 points per year better than the S&P. But so far in 2011, it has tumbled 27.9%."

So if a manager underperforms significantly in one year dump him. Apparently the recommendation here is to not think long term for your investments, but instead act on short term results.

In fairness, the author did say in 2010 he didn't like the direction manager Bruce Berkowitz was taking the Fairholme Fund. But articles like this serve as reminders of the folly of active management and trying to beat the market.

The smart money still indexes.