Category : investing

Don’t Sacrifice Your Future

Don’t sacrifice your future: retirement vs children’s education

Every parent, at some point, has made a decision to put their children’s needs ahead of their own. Starting from the moment your child becomes a part of your family, you’re putting aside your need for sleep, to feed and comfort your tiny bundle of joy…Every. Two. Hours.

And, this continues throughout parenthood with decisions to miss that once-in-a lifetime concert because your little one has a fever or to buy the minivan over the sweet two-seater you’ve absolutely fallen in love with. We make these “sacrifices” without regret because we love our children unconditionally.

There is one decision, however, where your children’s needs should not supersede your own…that’s the decision between saving for your retirement or saving for your children’s education. For many the decision normally comes down to which one to save for, not how much to save for both. When you’re pressed with making a choice between the two – your children’s future or your own future – placing yourself first will give your family a long-term benefit.

In a 2016 Parents, Kids and Money survey conducted by T. Rowe Price, more respondents had saved for their children’s college than saving for their own retirement. And, in this same study 16 percent of those questioned indicated they used their retirement savings to pay for their children’s education.

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The “F” Word in the Financial Industry

What is this whole fiduciary thing and why is it important?
Overhear the word “fiduciary” from across the room and you might think someone’s throwing around off-color insults. The Urban Dictionary definition isn’t exactly a term of endearment, but the real meaning with regard to your finances is pretty simple: A fiduciary is someone that is working for YOU and puts YOUR best interests ahead of their own (or their firm’s), at all times.

Believe it or not, this is not a requirement for the vast majority of the big brand name institutions in the financial services industry. Nearly anyone can call themselves a financial advisor in some form or another, but that doesn’t mean the “advice” they are providing is anything but conflicted. And what does this mean to you? It means money in the form of fees going into your advisor’s pocket instead of your portfolio.

You may have heard about the latest update to the fiduciary rule, released last week by the Department of Labor (“DOL”). It’s been anticipated for quite some time now and has had most of the industry pretty freaked out that they may have to change their entire business to start acting in their clients’ best interests. For Registered Investment Advisor firms like blooom, which always has been and always will be a fiduciary, a stricter standard on the industry as a whole was something we were pretty excited about. After all, one of the reasons our founders created blooom was to disrupt the industry and shine a light on the largely ignored segment of our population that truly needs non-conflicted advice from someone they can actually trust.

Good or bad, the end result of the new DOL rule thus far has left the non-fiduciary side of the industry breathing a huge sigh of relief, and even popping champagne I would imagine, since the rule is not nearly as strict and comprehensive as originally intended. But regardless of the impact the new 1,000+ page rule (yawn) will or won’t have on the industry and you personally, the good news is that all of this shines a bright light on a pretty important problem and a question that every investor must ask before trusting any professional with their hard earned money – How do I know my advisor is truly looking out for me and my family?

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The Single Most Important Piece of Financial Advice

There is no shortage of advice on this topic. A quick google search on “ financial advice ” reveals roughly 65 million hits on the topic. I intend to share the one piece of financial advice that – if followed – will have the single largest impact on you becoming financially independent at some point down the road. This advice comes from my years of working with investors as they approached their own retirement.

Prior to blooom, I spent 20 years advising, planning, and managing investment portfolios primarily for baby boomers. Most of these clients were 55-65 years old and almost all of them had more than $1million in their portfolio. Often times I would meet these folks when they were within 5 years of the finish line and were looking for someone to help them plan out the financial transition from work-life to retirement. With just a few years (or months) left until retirement, there wasn’t a whole lot I could do to alter their ability to retire. Most of these folks had, for the most part, “won the race to financial independence.” Candidly, I was not their advisor when they were younger and working towards their retirement. Rather, I stepped in to help them make the transition into retirement and captain the management of their finances from that point forward.

But that begs the question…how did they amass this wealth? How did they arrive at the point in their life where they could stop earning an income and live on their accumulated savings? The answer is simple. They lived below their means during their working years. Translation – they spent less than they made. It wasn’t an inheritance, it wasn’t a big salary (as most of my millionaire clients NEVER made more than $100,000 per year) and it definitely wasn’t because they knew how to time the market. Rather, it was the simple in concept but hard to execute lifestyle of buying less “stuff” than their incomes allowed. These were the kind of people that would go to take out a mortgage in their early working years and buy a house that they could afford to buy, not the house that they could qualify to buy.

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3 Lessons Your Ruined March Madness Bracket Can Teach You About Investing

And so it begins…the one month of the year where a single college basketball tournament costs employers a collective $1.2 Billion for every hour of lost productivity. And it’s fantastic!

At blooom, we’re big believers that we can find investing lessons in nearly every aspect of our lives, which brings me to my point in writing this. Regardless of what your tournament bracket looks like right now, as the surviving teams march on toward the Final Four, there are several lessons on investing that we can take away from all the madness.

1. Analysts are as Clueless as Everyone Else

No one can possibly have enough time to watch every regular season college basketball game. Unless they get paid to. Expert forecasts are a trusted source for anyone filling out a bracket. But if the pros are always getting it wrong, how can the casual fan have any hope? That’s the point.

The financial media has made millions on the ancient art of fortune telling. No matter how many times they get it wrong, market analysts have made careers out of making random predictions that are usually very wrong. It seems like it takes just one correct guess to achieve the prestigious “guru” title on CNBC. A great example of this is the rise of Marc Faber, aka “Dr. Doom”. He’s a regular on CNBC that is best known for his ability to accurately forecast major market downturns. However, the funny thing is that he has been wrong far more often than he’s been right. If you repeat the same gloomy predictions over and over again, of course you’re going to get it right and cash in big at some point. Does that make him a prophet? No. It makes him a great salesman. 

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Keep It Simple

The biggest trick in all of finance: simple is often the most sophisticated thing you can do.

It is counter intuitive, but we as humans are trained to believe that the more we pay for something the better it must be. We assume that there is a correlation between high prices and high quality. But when it comes to your personal finances, the opposite in fact usually turns out to be true. Researchers have shown over and over again, that the higher you pay for an investment, the worse-off you do, net of fees. So why do we pay for complicated and expensive financial products and strategies if they almost always do worse than simple, transparent ones? Large companies are spending billions of dollars on advertising to convince you that expensive and complicated must be better and more exclusive. Don’t buy the hype. Let’s dispel a few scarily common myths that an entire your-money-as-entertainment industry is trying to convince you of (Think of: every show on CNBC, every E-Trade commercial, new apps for your phone advertising free stock trading).

Here is the hard truth: 90% of professional money managers fail to beat the market over any sustained period. That’s right: those people who have spent their entire careers, and in fact get paid (by you and the investing public), get it wrong 90% of the time over sustained periods. Why would you even try to buy and sell stocks, and “time the market” if experts lose 90% of the time?

We have been trained as a culture to believe that stock trading is a skill, like being an engineer or a doctor. We know by now that it is not a skill. By all means, buy and sell stocks, but do it as a fun game with very small amounts of your money, recognizing that it is for fun. Do not do this with your nest egg. Anyone telling you that you or they can beat the market is selling you false hope, and perpetuating a myth that this is even possible over the long run. For the most part you would be way better off watching the History Channel than CNBC. You will certainly learn more.

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