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http://helmswealthmanagement.blogspot.com/2017/03/what-to-ask-prospective-advisors_9.html

Life Insurance Reviews

What to Ask Prospective Advisors

Talking to Your Parents (or Kids) About Money

I got a great question the other day.   A client asked how to talk to her parents about their money.  I’m writing this as an answer for her but the message applies to both generations.

Some parents readily share their financial and succession planning.  Some don’t – either because they keep it to themselves or because they don’t have a plan.  

That puts you in a bind.  What your parents want but don’t say, they probably don’t get.  You could be asked for significant personal time and financial commitments.  Resentments arise from guessing on short notice when you could have had facts years before.

I recommend you ask forcefully enough to get their attention – maybe something like, “Mom, have you thought about what you might need from us down the road?”  Be tactful but let him/her/they know this isn’t idle chat.

Responses vary widely.  Sometimes, parents open-up and the family gets closer. Other times, dad just won’t talk.  Keep working at it.

This isn’t just about helping them.  It’s about protecting yourself.  Together, we crafted a plan for you to retire, educate your kids and meet your commitments.  It didn’t include ending your career to rummage through your parents’ basement for old tax records.  It’s hard on siblings too.  Usually the closest and/or best-heeled bear most of the load and they will resent it if nobody asked first.

These are sensitive conversations but you have to have them.  A botched succession can wipe-out years of careful investing and do irreparable damage to your family.  I’ve seen it more times than I’ve liked.

Let me help.  I can act as a facilitator with your family since I know a lot of the things you need to discuss.  I can also introduce you and your parents to legal and tax advisors when you decide who does what.  

Just call if you need me.  Skip 

PS  Ask me about a “Family Love Letter”.  sh   

Bonus blog:

Family succession is a business.  There are things of value.  There are things you need to keep going.  Personnel skills are not uniform.  Neither are expectations.  Some of the kids might benefit from remedial training before they inherit a multiple of their current net worth.  There may also be ambitious third husbands to manage.

You won’t get all of the answers in a day but start the process.  sh

As always, the opinions expressed here are mine and don’t necessarily represent the views of LPL Financial or anyone else. 

The Best Laid Plans

The Best Laid Plans   December 2016

A solid financial plan can make life easier.  It informs how you spend, save, invest and even imagine your future.  It’s a support system.

That’s what makes them so risky when done poorly or with the wrong intentions.

Wall Street offers financial planning for two reasons.  The first is to learn enough about a client to cross-sell them as many products as possible.  The nobler reason is to learn as much as you can so you can do what’s right for them.

The printed reports look the same.  If clients even notice, it will be through their planner/advisor’s constant commitment.  A plan isn’t a one-time presentation.  It’s a process.

Advisors need to update these plans frequently.  Your life will change.  Your money will change.  If he (or she) doesn’t keep track, you won’t know how you’re doing.

The plans themselves need periodic maintenance.  I reprogram the interest rates in my bond and cash forecasts.  That’s critical because the default interest settings in these software packages are two to three times higher than we can find in the market today.  Even new plans are much too optimistic out of the box.

This year I’ll stress-test everyone’s plans with a bond bear-market scenario.  That’s item one on our next meeting agenda – and every meeting from then on.  It makes for a long day but the most important thing I can ever do for the people I serve is keep them from trying to retire on income they won’t get.

Which brings us to your advisor. 

Interest rates are as low as they have ever been.  If he hasn’t dragged you in the office lately to explain how he recalculated your lifetime income estimate, reread paragraph 3 above.  It’s a conversation focused on the goal of not running out of money.   

You’d remember it. 

I review a lot of plans for folks who suspect their advisor hasn’t kept-up.  They’re almost always right.  I can usually tell them if their plan has any hope of hitting their goals very quickly.  Explaining why doesn’t take very long either.

The hard part is getting them to bring their plan in.

These impressive volumes still have defenses long after they are doomed.

·        It was a reputable firm,

·        He has credentials,

·        I paid four grand!

·        I’d introduce you but she already has a planner,

·        I’m sure my investment firm monitors my plan,

·        Wall Street will take care of me.

Have I mentioned paragraph 3 lately?

If your plan isn’t getting much love, bring it by the office for a quick check-up.  I can probably tell if you are on-track before you finish your coffee.  There will be no charge or obligation.  Spouses are encouraged and welcome.

Thanks for reading and please forward this to someone who has a neglected plan of their own.  sh

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

You Have To Watch The Commercials Too!

I don’t watch a lot of financial TV but a couple weeks ago, an economist I respect was on one of the two major financial networks.  I tuned-in a few minutes early.

While I was waiting, the channel ran four commercials from:

           

            a)     A reverse-mortgage lender,

            b)    A delinquent-tax negotiator,

            c)     A time-share liquidator and

            d)    Someone selling electronic patches for back pain.

I’m no marketing genius but I’d say the advertisers were targeting people who can’t pay their bills, can’t pay their taxes, make poor real estate choices and/or have sore backs.

That’s no accident.  Networks design content to target the customers their advertisers want to reach.  Time is not on their customers’ side.  You need to turn a quick profit or dump assets when the IRS is breathing down your neck. 

I hope my clients don’t use those products …

… except maybe for the back-patches.  We’re not as young as we used to be.

Our objective is to patiently own investments that mature in the fullness of time.  Time has a habit of smoothing the bumps.

Almost everyone is forgiven.  Viewers are hoping to learn something that improves their lives.  Advertisers and stations have the right to sell their wares.  My economist showcased his firm’s services to a national audience.

But I’m on shaky ground.  If an idea I got here blew-up in my face, there would be nobody but Skip to blame.  My clients would rightly think so.

So when you watch financial TV, if the ads are for products you pray you’ll never need, remember who the content is for.

Ah!  My back feels better already!  Sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. Securities offered through LPL Financial, Member FINRA/SIPC

On Market Timing - Part One

“Buy Low, Sell High.”

Perhaps the most persistent fantasy in all of investing is selling a profitable position at the very top of its market cycle and buying it back at the bottom.  You keep all the profits, avoid all of the losses and look really smart. 

I can’t time the markets like that.  I feel a little better that some great investors have said the same thing.  There are people who can time broad financial markets but none of them have ever called to tell me how they do it.  When someone does offer to share their proprietary market timing strategy, we count the silverware.

Over the next three blogs I’m going to explore market timing; why it’s so hard, why we keep trying and what the average investor should know.  These are just my experiences and not the definitive work on the subject.  I hope you enjoy them and share them with recovering market timers.

Even I call tops and bottoms once in a while. 

Once doesn’t count.  You have to get the “buys” lower than the “sells” and you have to do it more than half the time.  The shorter the cycle you’re timing, the less you can be wrong. 

This is a chart I created that tracks two elements of the S&P 500 index.[1]

The blue line shows the earnings of the index going back to 1980.  Since this index represents about 80% of the US stock market, it’s a good proxy for our economy.  The bumpy ride reflects rough and smooth patches in our national financial health.

On the positive side, earnings in 1980 were about $15 a share.  Last year they topped $85.  That’s better than a five-fold increase and doesn’t include some handsome annual dividends.

Look at the blue line as a child with a yo-yo climbing stairs.  She drops and returns it with every step. 

If you measure yo-yo volatility by the step, the swings from high to low are huge.  If you measure it by the whole staircase, the yo-yo is much higher at the top than the bottom – even from the high on the first step to the low on the last.

The blue line was the easy one.  The red line is the price/earnings (P/E) ratio.  That’s the blue line divided by the price of the index. 

Over the long-haul, stock prices reflect earnings.  Day-to-day, prices are whatever investors are willing to pay for those unknown earnings, or the economy, or politics or their mother-in-law or whatever else consumes them at the time.  Their actions range from disciplined to blind panic.

To be a successful timer using only those two variables means correctly anticipating future earnings and understanding how investors will feel about them when they happen.  You also need nerves of steel and the discipline to take gains and losses without emotion.

A very famous continuous study by the Dalbar Company[2] called the “Quantitave Analysis of Investor Behavior” (QUIB) shows most investors do anything but “buy low and sell high”. 

They buy at tops.  They sell in panics.  They chase what’s hot.  They listen to their brother-in-law or, lately, internet gurus.  Then they do it all over again.

Ego plays a part.

Men always think they are great poker players and stock pickers.  I’m reminded of the old saying, “if you are playing poker and can’t spot the sucker in five minutes, it’s you.”

Individuals playing against institutional traders are up against formidable resources. 

We offer complimentary 12-step market timing withdrawal therapy with every new account.  I’m serious.  You know how you’ve done.

Next week I’ll talk about why we still try to time the markets anyway.  Thanks for visiting and I’ll see you then, sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy, such as asset allocation or diversification assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC

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[1] The S&P 500 index is an unmanaged index of 500 US stocks.  You cannot buy an index.  Indexes do not reflect fees, commissions or other costs.

[2] See Dalbar.com for their findings and methodology.

A Question on Bonds and Rates

Hello Mr. Helms,

On your podcast you said that bonds lose money when interest rates rise. I thought bonds always paid the same interest. How does that change?

You're right about the interest. The vast majority of bonds pay a fixed cash-flow during their life and return a fixed amount at maturity. Since those two things don't change, the only way markets can react to supply and demand for those payments is the price of the bond itself.

I've never done a good job explaining this. Rates and prices work inversely. It's like trying to cut your hair in the mirror.

But I've got a good example that seems to work:

Let's say you loan me $1,000. I agree to pay the owner $50 a year for the next 10 years and return the principal with the last payment -- basically a 10-year 5% bond.

A year later, you need to sell your bond. Unfortunately, the going rate for 9-year bonds has gone from $50 a year (5%) to $100 a year (10%). Nobody is going to pay you $1,000 for your bond when they can get twice the income for the same investment.

If you want to sell, you'll have to discount the price until the combination of the profit the new buyer makes in 9 years -- plus my $50 a year -- equals a 10% return. In the business that's called yield-to-maturity. Some of it is interest. Some is the gain (or loss) at payoff.

With a bond-price calculator I entered $50 a year for 9 years with $1,000 at the end at a yield-to-maturity of 10% and got a price of $712 for your bond. If rates had gone down, you could expect a profit instead.

And it isn't just your bond. Bonds are priced constantly in world markets whether they are for sale or not. That's why the values can change on your statement even with no activity.

As a rule, the longer an owner has to wait for his principal, the wider the price fluctuations because of market uncertainty. Lower-quality bonds usually fluctuate more than high-quality bonds for the same reason.

So the best answer to your question is that yields rise because bond prices fall. The new owner's increased yield comes from the old owner's wallet.

I used an extreme example to show the process. Rates doubling in a single year would be a disaster for the bond market and probably every other financial market in the bargain. Right now rates are historically low but don't appear to be in any hurry to go up either.

And advisors can't legally borrow money from clients. -SH


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.