Financial Planning Program – Improving Portfolios

When my firm looks at our customers’ portfolios to develop a financial planning program, we look at four places to improve them:

1)      Can we reduce taxes?

2)      Can we add compounding interest to the portfolio design?

3)      Can we reduce fees?

4)      Can we increase returns?

Now, the fourth element of a financial planning program is fundamentally different from the other three.  I can make certain kinds of guarantees to my customers about the first three.  Customers in badly designed investments come to me, and I can say with certainty that I can improve their portfolios in those areas.  If investors aren’t taking full advantage of changes in tax laws, or their fee structure is too high, I can help them fix that.

Things get fuzzier when we talk about returns in a financial planning program.  If I guarantee my client that I will improve their returns by some percentage, I’ve just become legally responsible for making sure that happens, or else I’m a liar.  Either way, it’s a bad spot to be in.  What I can do is design investment structures for my customers that maximize their chances of increased returns.  That’s a long way from making guarantees about returns.  So what can we do to really have an impact on a portfolio?

Let’s look at some financial planning program math.  If you put $10,000 per year in an investment with compounding interest at the impressive interest rate of 25%, and let it compound for 40 years, you will walk away 40 years later with $75,231,000.  That’s a lot of money.  Now, take that same investment, but have it earn a paltry 24% over the same 40 years – just 1% less.  That same investment 40 years later is worth $54,559,000.  That 1% factor in the interest rate reduced the value of the investment by more than twenty million dollars!

Now obviously, it’s bold to expect 24% and 25% returns from your financial planning program, but do you get my point?  Would you get up off the couch to run to a store that was having a 1% off sale?  Doubtful.  But what a remarkable difference that 1% factor can make in a portfolio over 40 years.

Has your financial advisor been downplaying the impact of fees on your financial planning program, explaining them away because “everyone’s got to pay them”?  Trust me; there are ways to drive them down.  Did your advisor tell you that compounding interest really only works in your favor before retirement?  That’s not true either.  Or maybe you’ve heard this one: “The only two things that are certain are death and taxes”.  That’s partially true, but the tax code provides lots of ways to avoid needless taxes.  That’s not tax evasion; tax evasion is illegal.  A good financial advisor can help you learn tax avoidance, using the tax code to your benefit, ensuring you avoid paying taxes that are not required of you.

Scrutinize your portfolio, and you’ll find changes you can make today to get that 1% factor.

Dallas Financial Coach – Rational Optimist

One of my roles as a financial coach is to inject optimism into an otherwise gloomy world. I don’t believe in a “Polyanna” type of optimism. I believe in a rational optimism based on the time we live and the history of the world. The recent book written by Matt Ridley is amazing and I have just started it! It will help me be a better financial coach and it will make you more coach-able.

Check out his web site/blog. Or if you want something that has the same perspective, but funnier go to yesterdays post, here.

Check out this intro video below.

Dallas Financial Coach – Everything is Amazing

I thought I had posted this before, but I couldn’t find it and based on many discussions I have had this week I think we need to put the world in perspective. Nothing does this like a little humor. — John Pollock

Financial Planning Tool – Benefit from Inflation

One of the most important numbers in the financial world is called the CPI – the Consumer Price Index – and understanding it is an important financial planning tool.  It’s vitally important in government, too, because lots of different kinds of government spending are hitched to the CPI.  If it goes up faster, the government spends money faster.  If it goes up slower, the government spends money a little less fast.

The financial planning tool called the CPI is a number that reflects how much the cost of products that you and I buy has changed over time.  It’s tracking the price changes of things like bread, milk, gasoline – you know, every day stuff.  The higher the number is, the faster the prices of things you and I buy are rising.

People get worried when they see that number rising – because if everything we are buying is getting more expensive, it doesn’t take a financial planning tool to see that people start spending less to save their money.  Governments worry when that number starts rising too – mostly because they are first to get blamed if the economy goes bad.

If you look at a chart of CPI over the nation’s history, CPI has spiked at some very high numbers, and at other times it has dropped so far that prices for goods actually declined.  Charts on this kind of data can be a valuable financial planning tool – they give you a sense of what the market is like.  I’ve got a graph here in front of me that shows the history of the CPI’s values.  But this particular chart has an interesting feature to it.  Toward the right part of the graph, where the official CPI trend line is going down, there’s another part of the graph – a grey region, with a trend line going up.  This shadowy area of the graph is trying to show where its author, John Williams, believes the CPI should, in fact, be.

Does John Williams have access to some kind of financial planning tool that the rest of us don’t?  What’s going on here?  Well, it turns out that the government has changed the set of products that are part of the CPI calculation several times over its history.  Recent changes have included the cost of steel and asphalt in the CPI.  Steel and asphalt?  How many of you picked up some extra steel and asphalt last time you were out running errands?  Are any of you building a bridge?  I didn’t think so.  Now what happens when you add these things to the CPI basket?  It pulls down the CPI.

Now, I’m no conspiracy theorist – I’m a financial planning tool jockey, and I can’t tell you if the current CPI number is right, or if the number before steel was added is right.  July 2009 inflation was reported at negative 1.43 percent.  But if the government had used the old way of calculating CPI, that inflation number would have been 6 percent – more than 7 points higher than the official government number.  Even if we speculate that the truth is somewhere in the middle of those two numbers, that puts inflation at 2% – much higher than negative 1.43.

I’m worried about what my financial planning tools are telling me about inflation risk.  I think it’s climbing now, and with current government spending and fiscal policies, I see an inflation tsunami coming our way.  Is your portfolio in a position to weather crippling inflation?  If your portfolio is only going to give you 5% until the end of your life, what will you do if inflation stays at 6%?  Or better yet, have you set up your portfolio to actually gain from high inflation?  Talk about it with your financial advisor, or visit my blog at JohnPollock.tv.

I ran across this piece in Senior Market Advisor a magazine written for Insurance Agents and specializing in the Baby Boomer market. I don’t read much in this magazine that I agree with, but this article from Matt Thornhill the Founder and President of the Boomer Project is excellent, short and dead on right. Hope you like it!  – John Pollock

Mark Patterson writes the “Tough Money Love” blog, which offers retirement advice. The man obviously knows the boomer worldview, and in a column he penned for US News & World Report he lists five “attitude adjustments” necessary for retirement success.

1. Your retirement is more important than your kids’ college education. “We must learn to accept when our parenting obligations are complete,” writes Patterson. If you are sacrificing your retirement nest egg to pay your kids’ college education, he says, you have the wrong priorities.

We agree in part. Parents have a powerful instinct to nurture their offspring. The decision to subsidize a child’s education depends on what he or she is getting out of it. Earning an engineering, IT or business degree will do more to help kids enter a rewarding career than applying feminist theory to deconstruct 19th century English novelists.

2. Your retirement is worth more than your kids’ lifestyles. Do not pay your adult child an allowance, do not pay for his cell phone, do not make her car payments, Patterson urges.

Here, we totally agree. If adult children cannot afford to support themselves, they can live at home with free room and board–and they can help out around the house while they’re at it. Subsidizing the kids’ lifestyles saps their motivation to improve their condition.

3. Cut costs in retirement. Patterson correctly observes that a penny saved early in retirement is worth two pennies of income later in life. Live beneath your means. Buy less stuff. Downscale your residence, drive older cars, drive fewer cars, eat out less and learn to enjoy the simpler pleasures of life.

4. Debt is your enemy. “Entering retirement with debt is like swimming upstream with one hand tied behind you,” writes Patterson. Our advice: Pay off the credit cards first, then the auto loans and then the mortgage. Then take the amount of money you spent on payments and invest it; don’t spend it.

5. Retirement is a journey. Retirement is not just quitting work and going on long vacations–it is a new phase of life in which you have the financial independence to redefine a new purpose in life, whether it is pursuing a hobby, starting a business, getting active in the community or helping those around you. If you have something to be passionate about, the money is almost incidental.

MATT THORNHILL IS FOUNDER AND PRESIDENT OF THE BOOMER PROJECT (WWW.BOOMERPROJECT.COM).