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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. 

Market Timing Follow Up

The prequel to the three-part timing blog comes from real life.  It gives me the chance to offer you a peek behind our curtain on how the advisory business works when it works well.

In early February, a prospective client came in to see me.  He was very concerned about the steep market decline in January and wanted to know my strategy for waiting to buy until the market was about to turn up again.

I told him I didn’t have one.  He said he’d get back to me.

In early April, a couple (who did become clients) came in to assess our services.  He (always he) was concerned that the market had rallied too sharply and wanted to know my strategy for timing the pullback.

I tried not to smile.  If you know me, you know it didn’t work.

I told him I didn’t have one.

I added we would be purchasing a portfolio that was probably worth between 90 and 110 cents on the dollar.  It would take a year or two before we even knew that.  The object was to own securities with a reasonable chance of being worth more than either of those two numbers when the money was needed.

If they were already retired, I’d have said the object was to buy securities with a reasonable chance of producing the income they need and keep up with inflation.

Basically the same portfolio in both cases.  Maybe the yo-yo is low that month and we catch a break.  Maybe not. 

Here’s the one thing I absolutely know about market timing:  Markets couldn’t care less when people come to our door.  Bear markets make clients in damaged financial relationships more receptive but most folks come by because they just retired or sold a condo or moved here and want face-to-face service.  I often meet them though a happy client.

Now for the insight into my business:  I’m not betraying any sworn secrets here but this doesn’t come up in most conversations.

Well-run financial practices have defining disciplines for asset management.  It limits the range of the practice but to be good, you have to concentrate on the needs of core clients.

A broker just starting out will take almost any account under almost any condition.  If a prospective client only wants companies that start with the letter “S”, that’s what he gets.  When dad told mom to never sell their bank stocks, you’ll watch them for her.

Then the market drops 20% and you find out just how many plates you had spinning on sticks.  Notice I said “had”.

That night, you realize every minute you spent researching “S” stocks or watching banks crash that you can’t sell was time you didn’t devote to the people who believe in you.  You don’t sleep much.

The next day, many of us decide to do our very best for our clients.  We take ownership of the client experience. 

You feel reborn.

So the next guy comes in and says his brother-in-law thinks XYZ Corp. is poised for big gains.  He wants you to put 50% of his account in the stock and send him daily research bulletins.  You simply say you only follow companies in your carefully monitored investment discipline.  Straying from those guidelines compromises the care you owe your existing clients.

Either he decides he needs yet another inexperienced advisor who can’t refuse his reckless strategy or he realizes your advice is more valuable than his brother-in-law’s.

If you don’t get the account, you won’t miss it long.  One of your happy clients is about to introduce you to his best friend. 

This approach doesn’t leave much room for timing entry-points. 

At shops where you sell what you’re told, compensation doesn’t start until the money hits the account.  You turn the management over to people chosen for your client’s needs and they make the calls from there.

At shops like mine where we make the buy and sell decisions, we still can’t play hunches – ours or yours.  Everyone with the same objective gets the same basic portfolio.  Every holding has a reason to be there.

Happy long-time clients may have nice gains in positions that have seen their share of ups and downs.  Newer clients may have bought the same position at a recent top and wonder why our timing isn’t better. 

So now you know a little more about how successful advisory practices keep their focus.  We reach a point professionally where we have to dedicate as much time as possible to the people who trust us most. 

Be one of them.  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 assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC 

On Market Timing - Part Three

What do we do now?

In the first blog I focused on the perils of short-term market timing. 

In the second I made my case that making 30-year commitments to any asset class is dangerous.  If you are paying for investment management, get it.

My very best (and hard learned) advice is to find how long your cherished financial goals will take and build your strategy around that.

Let’s say your primary investment goal is to make a balloon payment in 18 months.  You could put your money in T-bills or an insured savings account.  You won’t earn much but the check will be ready when needed.

Another strategy (which I don’t recommend) would be to purchase short-term speculative holdings like coffee futures or lottery tickets.  You create an opportunity for higher returns but greatly increase the chance of severe losses.

Investing in long-term holdings like stocks or real estate might not make sense because the year-to-year results are too unpredictable. 

My last chart is from J. P. Morgan showing market returns for stocks and bonds when held for 1, 5, 10 and 20-year time periods.

The green bars show the S&P 500 going back to 1950.  On the far left, returns for any given year have fluctuated wildly.  A lot of those years are below the 0% line.  If you need next year to be a good year, you are market timing.

My domain is further right.  I believe you need a minimum five-year commitment to stock portfolios.  I’m expecting a great year, a terrible year and three somewhere in the middle.  Maybe a market timer can tell you which order that will happen – if it happens at all – but I won’t try.[1]

On the five year bar, we’ve averaged our great and rotten years.  Very few of the five-year holds are below the zero line.  On the ten year bar, the only losing decade was 2001-2010. 

Now let’s say your primary investment objective is to live a comfortable retirement over the next 30 years with a rising income.

Putting more than a couple years’ reserves in savings won’t work.  You can’t even keep up with inflation – much less earn any spending money.

I hope you aren’t thinking about speculating in coffee futures to make balloon payments. 

You have long-term needs.  Have a leisurely cup of coffee and look for long-term strategies – maybe one of those mature green bars.

Remember the little girl and her yo-yo.  You have thirty steps.  What the yo-yo does on any one of them doesn’t really matter. 

It matters to the man who needs a balloon payment in 18 months.

It matters to financial entertainers hawking their products.

It really matters to people who don’t know it doesn’t matter.

But it shouldn’t matter much to you.

That’s it for now.  Thanks for sticking with me for one of my more technical blogs.

If I can help, give me a call, 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] I keep a picture of a Lehman Bros. employee leaving their London headquarters with his personal possessions in a cardboard box.  Whenever I get full of myself and think I know it all, I pull that picture up and remind myself just how humbling this business can be.  sh 

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.

Good, Bad, or Unfathomable

Most of my short-term market indicators have gone green (positive) on US stocks. The medium-term indicators are still underwater since they have to overcome the sharp sell-off in August to regain their momentum. Long-term indicators have been bullish since 2011.

As long as the long-term indicators stay green, such market-timing as I ever attempt is limited to trying to find the strongest industries and right-sized companies within strong markets.

I’ve been calling clients this week to commit cash reserves. Conversations after a correction always bring out their political concerns. That’s when I explain that markets and politics almost never correlate. A country’s economic system (capitalist, socialist, communist, kleptocracy) matters – but guessing what politicians will do is a hard way to make money.

Barry Ritholtz (money manager, Bloomberg columnist and interesting man) has a funny story that says it well. He said when George W. Bush brought his tax-cuts forward in 2001 and 2003, his liberal friends said it would blow-up the deficit and sold their stocks. Stocks went up almost 100%.

When Barack Obama was elected, his conservative friends were sure this Kenyan socialist would destroy the economy and sold their stocks. Stocks went up almost 200%.

Long-story short – a stock only goes up for one reason: more people want to buy it than sell it. Good, bad or unfathomable, those people are entitled to their opinions. We’re more concerned about what they do than why they do it. 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

International investing involves special risks such as currency fluctuations and political instability and may not be suitable for all investors.

All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.