Tag Archives: mortgage

How Am I Doing? An 8-Point Financial Checklist

How am I doing?A question that nags at many people is whether they are on track financially.  Even an average financial life can seem remarkably complex.  How does anyone know whether he or she is doing the right things?  A range of studies on how people manage their money suggests that many, if not the majority, are making choices that look decidedly sub-optimal.  Americans don’t save enough money and when they do save and invest, they often make basic mistakes that substantially reduce their returns.  More than 60% of self-directed investors have portfolios with inappropriate risk levels.  Almost three quarters of Americans have little or no emergency savings.  The solution to these problems starts with an assessment of where you are and where you need to be.

The key, as Einstein once said, is to make things as simple as possible but no simpler.  In an attempt to provide a checklist that’s in line with this edict, I offer the following questions that each person or family needs to be able to answer.

The first three questions focus on consumption and saving:

  1. Am I saving enough for to meet personal goals such as retirement, college education, and home ownership?
  2. Am I saving enough for contingencies such as a job loss or an emergency?
  3. Am I investing when I should be paying down debt instead, or vice-versa?

The next five questions deal with how you invest the money that you save:

  1. Is my portfolio at the right risk level?
  2. Am I effectively diversified?
  3. Am I aware of how much am I paying in expenses?
  4. Are my financial decisions tax efficient?
  5. Should I hire an investment advisor?

Anyone who can answer all eight of these questions satisfactorily has a strong basis for assessing whether he or she is on track. Odds are there are more than a few questions here that most of us either don’t have the answer to or know that we are not addressing very well.

Part of what makes answering these questions challenging is that the experiences of previous generations are often of limited relevance, especially when it comes to life’s three biggest expenditures: retirement, college, and housing.

For example, older people who have traditional pensions that guarantee a lifetime of income in retirement simply didn’t need to worry about choosing how much they had to save to support themselves during retirement.

The cost of educating children has also changed, increasing much faster than inflation or, more crucially, household income.  For many in the older generation, college was simply not a consideration. It has become the norm, however, and borrowing to pay for college is now the second largest form of debt in America, surpassed only by home mortgages.  Children and, more often their parents, must grapple with the question of how much they can or should pay for a college education, along with the related question of whether a higher-ranked college is worth the premium cost.

The third of the big three expenses that most families face is housing costs. Following the Second World War, home buyers benefitted from an historic housing boom.  Their children, the Baby Boomers, have also seen home prices increase substantially over most of their working careers.  Even with the huge decline in the housing crash, many Boomer home owners have done quite well will real estate.    Younger generations (X, Y, and Millenials), by contrast, have experienced enormous volatility in housing prices and must also plan for more uncertainty in their earnings.  And of course, what you decide you can afford to spend on a home has implications for every other aspect of your financial life.

In addition to facing major expenses without a roadmap provided by previous generations, we also need to plan for the major known expenses of everyday life. It’s critically important to determine how much to keep in liquid emergency savings and how to choose whether to use any additional available funds to pay down debts or to invest.  There are general guidelines to answering these questions and we will explore these in a number of future posts.

The second set of questions is easier to answer than the first.  These are all questions about how to effectively invest savings to meet future needs.  Risk, diversification, expenses, and tax exposure can be benchmarked against professional standards of practice.

What can become troubling, however, is that experts disagree about the best approach to addressing a number of these factors.  When in doubt, simplicity and low cost are typically the best choices.  Investors could do far worse than investing in a small number of low-cost index funds and choosing the percentages to stocks and bonds based on their age using something like the ‘age in bonds’ rule.  There are many ways to try for better returns at a given risk level, and some make far more sense than others.  Even Warren Buffett, arguably the most successful investor in the world, endorses a simple low-cost index fund strategy.  Upcoming posts will provide a number of straightforward standards for addressing these questions.

Investors who find these questions  too burdensome or time consuming to deal with may wish to spend some time on the eighth and final question: whether they should hire an investment advisor to guide them.  Investors may ultimately choose to manage their own finances, search out a human advisor, or use an online computer-driven advisory service.

While financial planning can seem complex and intimidating, our series of blog posts on the key issues, as outlined in the eight questions above, will provide a framework by which individuals can effectively take control and manage their financial affairs.

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One Advisor’s Approach to Income Investing

Guest post by Contributing Editor, John Graves.

Editor’s Note:  John Graves has been an independent financial advisor for 26 years. He is one of the two owners of The Renaissance Group, a Registered Investment Advisor based in Ventura, CA.  John’s book, The 7% Solution: You Can Afford  a Comfortable Retirement, was published in 2012.  When I read this book, I was impressed with John’s approach and thinking and I recommend it as a good read.  I contacted John and asked if he would consider contributing to this blog.  After we bounced around some possible topics, he sent me the following piece that describes his process for designing income plans for retirees.  Continue reading

What is Your Pension Really Worth?

Last week, we posted an article from Michael Lewitt, Vice President and Portfolio Manager at Cumberland Advisors called “The Pension Dilemma” that talked about how America’s largest pension fund, the California Public Employees Retirement Systems (CALPERS) reported an abysmal 1% return on its investments for the past year (ending June 30, 2012).

CALPERS has been in the news lately for several reasons:

  1. The California state pension is a bellwether for other state-run retirement systems across the U.S. that are also forced to face one of the most challenging periods in history: low interest rates, volatile markets and slow economic growth.
  2. CALPERS missed their own internal targets by more than 7.2% and then blamed their underperformance partly on picks made by individual investment managers (which CALPERS declined to name).
  3. The CALPERS underperformance has shaken the confidence that many investors have in their own pension funds.

What Does This Means for the Average Investor?

Retirement planning is a passion for us here at the Portfolioist. Yes, go ahead and laugh at the use of the word “passion” if you must—but that’s how we truly feel—especially in these turbulent economic times. Continue reading

The Collapse of the American Net Worth

Many of you are painfully aware of how many friends or family members are out of work, now under-employed, or who have lost their homes. Geoff Considine, a leading contributor to the Portfolioist, provides his take on what we’re calling the “collapse” in household net worth, starting with a recently published report released from the Federal Reserve called the “Survey of Consumer Finances” (SCF).

This study, performed every three years, provides an analysis of household income and wealth across America, and the results will astound you. The SCF is well-worth reading if you want to get a handle on the state of Americans’ finances—especially if you want to see how those same finances have changed dramatically in just three short years. Continue reading

Are We Hard-Wired To Make Bad Financial Choices?

Proper financial planning that provides for our financial needs in retirement is perhaps the prototypical example of willful blindness. We all know that most people have not saved enough to provide for a sustainable long-term income in retirement. The core issue here is that we (as a society and as individuals) are making consistently bad financial decisions that affect our futures, beginning with how we pay for Continue reading

Is Your Home Still A Good Investment?

Dr. Robert Shiller, the renowned Yale professor and creator of the S&P Case-Shiller Housing Index, recently made several dire announcements about the short-term and long-term prospects for the housing market. Asked for his prediction on housing prices in a recent interview, Dr. Shiller reported that prices might fall another 10% to 25% in the next few years. (Shiller also acknowledges that forecasting the direction of the housing market is as hard as predicting the weather and that we are in uncharted territory on a range of fronts.)

The Housing Market: A History of Poor Performance

Let’s set aside the short-term housing predictions and focus on long-term issues.

Dr. Shiller analyzed the financial benefits of home ownership from an investor’s point of view. His research found that housing prices did not outperform Continue reading