Boost Confidence, Improve Your Finances


Which comes first, confidence or success? I believe that in most facets of life, confidence is a prerequisite for success. This is true whether you are a business executive, athlete, musician, teacher, or any other profession. Of course, there is a virtuous cycle where success reinforces confidence, but it has to begin with confidence in the first place.

Five Things To Do When The Market Is Down


When the market is down, it hurts to look at your portfolio and see your account values dropping. And when we experience pain, we feel the need to do something. Unfortunately, the knee-jerk reaction to sell everything almost always ends up being the wrong move, a fact which although obvious in hindsight, is nevertheless a very tempting idea when we feel panicked.

Even when we know that market cycles are an inevitable part of being a long-term investor, it is still frustrating to just sit there and not do anything when we have a drop. What should you do when the market is down? Most of the time, the best answer is to do nothing. However, if you are looking for ways to capitalize on the current downturn, here are five things you can do today.

1) Put cash to work. The market is on sale, so if you have cash on the sidelines, I wouldn’t hesitate to make some purchases. Stick with high quality, low-cost ETFs or mutual funds, and avoid taking a flyer on individual stocks. If you’ve been waiting to fund your IRA contributions for 2015 or 2016, do it now. Continue to dollar cost average in your 401k or other automatic investment account.

2) If you are fully invested, rebalance now; sell some of your fixed income and use the proceeds to buy more stocks to get back to your target asset allocation. Of course, most investors who do it themselves don’t have a target allocation, which is their first mistake. If you don’t have a pre-determined asset allocation, now is a good time to diversify.

3) Harvest losses. In your taxable account, look for positions with losses and exchange those for a different ETF in the same category. For example, if you have a loss on a small cap mutual fund, you could sell it to harvest the loss, and immediately replace it with a different small cap ETF or fund.

By doing an immediate swap, you maintain your overall allocation and remain invested for any subsequent rally. The loss you generate can be used to offset any capital gains distributions that may occur later in the year. If the realized losses exceed your gains for the year, you can apply $3,000 of the losses against ordinary income, and the remaining unused losses will carry forward to future years indefinitely. My favorite thing about harvesting losses: being able to use long-term losses (taxed at 15%) to offset short-term gains (taxed as ordinary income, which could be as high as 43.4%).

4) Trade your under-performing, high expense mutual funds for a low cost ETF. This is a great time to clean up your portfolio. I often see individual investors who have 8, 10, or more different mutual funds, but when we look at them, they’re all US large cap funds. That’s not diversification, that’s being a fund collector! While you are getting rid of the dogs in your portfolio, make sure you are going into a truly diversified, global allocation.

5) Roth Conversion. If positions in your IRA are down significantly, and you plan to hold on to them, consider converting those assets to a Roth IRA. That means paying tax on the conversion amount today, but once in the Roth, all future growth and distributions will be tax-free. For example, if you had $10,000 invested in a stock, and it has dropped to $6,000, you could convert the IRA position to a Roth, pay taxes on the $6,000, and then it will be in a tax-free account.

Before making a Roth Conversion, talk with your financial planner and CPA to make sure you understand all the tax ramifications that will apply to your individual situation. I am not necessarily recommending everyone do a Roth Conversion, but if you want to do one, the best time is when the market is down.

What many investors say to me is that they don’t want to do anything right now, because if they hold on, those positions might come back. If they don’t sell, the loss isn’t real. This is a cognitive trap, called “loss aversion”. Investors are much more willing to sell stocks that have a gain than stocks that are at a loss. And unfortunately, this mindset can prevent investors from efficiently managing their assets.

Hopefully, now, you will realize that there are ways to help your portfolio when the market is down, through putting cash to work, rebalancing, harvesting losses for tax purposes, upgrading your funds to low-cost ETFs, or doing a Roth Conversion. Remember that market volatility creates opportunities. It may be painful to see losses today, but experiencing the ups and downs of the market cycle is an inevitable part of being a long-term investor.

The Investor and Market Fluctuations

The Intelligent Investor

In 1934, Benjamin Graham first published his treatise “The Intelligent Investor”. Graham is considered by many to be the father of Value Investing and was a teacher of Warren Buffett. He wrote about the difference between investing and speculating, and devoted a whole chapter to “The Investor and Market Fluctuations.” I can do no better than to share this excerpt and to note that his advice is as true today as it was 80 years ago.

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high prices at which he certainly should refrain from buying and probably would be wise to sell.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks…

Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will “do better” than the rest over a fairly short period in the future. Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor… As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.”*

As much as markets have changed over the past century, what has not changed is human nature. That’s why Graham’s advice to never sell a stock just because it has gone down remains so relevant today. Be an investor and not a speculator; don’t think that you can predict what stock prices are going to do next. If you’re in it for the long-term, use market volatility as an opportunity to put money to work.

*The Intelligent Investor, Benjamin Graham, `Revised Edition, 2006, pp. 205-206.

The Psychology of Volatility


We’ve had a rough start to 2016, with stocks dropping across the board. Today, we are within a couple of percentage points of retesting the lows of last August. You can’t pick up a newspaper or tune into a business show on TV without being bombarded with the “reasons” why the market is down.

The key to success for investors, I would argue, is not in understanding the economy, interest rates, or corporate earnings. Rather, it is knowing what to do in volatile times.

There are two types of losses: a temporary drop and a permanent loss. Enron was a permanent loss. Single securities (stocks or bonds) can go to zero, and this does happen from time to time, especially in high risk situations. However, if you are investing in a diversified fund, such as the Russell 1000 Index ETF, the impact of a single stock going bankrupt is very, very small.

Volatility is the reality that security prices do not move up in a straight line, but fluctuate up and down over the short to medium term. The challenge is that it is difficult for our brain to distinguish between a temporary drop (market volatility) and a permanent loss.

The anxiety from a loss can cause not just emotional stress, but actually trigger a physical response in our body chemistry. The evolutionary response to danger is to flee, which for investors, means the strong urge to get out of the market, protect our capital, and stop the pain we are experiencing.

Unfortunately, selling during a period of market volatility has the tragic consequence of turning a temporary drop into a permanent loss. Most investors under perform the overall market precisely because they sell during times of stress. It is essential to recognize that market volatility is just a temporary drop for a long-term investor and be willing to stay the course during these periods.

Here’s how we can use this behavioral understanding to our benefit:

1) Many investors would say that the past 15 years have been horrible in the stock market. The reality is not so bad; if you had invested in the S&P 500 Index ETF (SPY), you would have had a 4.97% annualized return over this period. That equates to a 107% total return, a little more than a double. That’s better than most would assume, because the agony of the losses we’ve experienced is much more intense and memorable than the gains we have actually received. This phenomenon is called loss aversion.

2) If we reframe market volatility as “opportunity” rather than “danger”, then we can profit by being willing to buy when the market is down. People love buying their holiday presents when stores have a 20% sale, but when the market drops 20%, no one wants to invest. If you view a drop as a great chance to buy stocks on sale, then you will realize that the past 15 years have given investors incredible opportunities to profit. And while we shouldn’t try to time the market, we can dollar cost average by making regular contributions to our accounts to take advantage of volatility.

3) We have each client complete a risk tolerance questionnaire before investing. Our goal is to choose an asset allocation which we can stick with, through the inevitable ups and downs that will follow. It’s easy to be aggressive when the market is moving up, but it’s better to invest with an understanding of how you will feel when the market does have a correction.

4) Many investors will create a long-term investment strategy and then proceed to evaluate their portfolio performance on a very frequent basis, such as monthly, daily, or even hourly. The more often you look at your portfolio, the more often you will be tempted by the thought of “Don’t just sit there, do something!” This is where we have to recognize that the emotional, physical urge to react is at odds with the rational process of sticking to a plan. If you want to act in a long-term manner, you cannot think in terms of short-term results. For many of us, it is better to look at your accounts less often, rather than more often.

No matter what you’re feeling about the current market volatility, remember that I am just a phone call away and happy to listen to your concerns, talk strategy, and share the opportunities available in today’s market.

Data from Morningstar, as of 12/31/2015

The Benefits of an Older Car


The average car on the road today is 11.5 years old today, according to USA Today. Today’s cars are more dependable and long-lasting than ever and yet for many consumers, transportation remains their second largest expense after their home.

Last November, I purchased a used car, and not the typical 2-3 year old gently used vehicle, but a 2002 Toyota 4Runner with 179,097 miles. I wanted a larger vehicle to transport my three big dogs and wanted something I wouldn’t worry about getting muddy or scratched.

Admittedly, I have been leery of older cars. What if they break down? The last thing anyone wants is to have unexpected large expenses trying to keep a dying vehicle on the road. And I especially do not want to have an unreliable or unsafe vehicle when it is 102 degrees in July or 20 degrees in January.

Well, I’ve lived with my old car for a year now and will give you a full report, including a breakdown of all my costs. I drove the car almost every day and put just over 11,000 miles on this year (the photo is my current odometer reading: 190,182 miles). During that time, it has been 100% reliable (knock on wood…). The car has always started and worked perfectly. I have had zero breakdowns and no unplanned maintenance.

As a student of behavioral finance, I think people’s car buying choices are interesting to study. Most of us buy what we want, but then create a rationalization that sounds good for why we “need” a new car. Oftentimes, it’s really about projecting an image of success or trying to fit in with others in the office, neighborhood, or group of friends.

Many people prefer a new car, under warranty, to avoid the unpleasantness of having to pay for car repairs. This is known as “loss aversion”, which means that the pain of a $500 loss is much more intense and memorable than the satisfaction of a $500 gain.

Getting a new car every three years may cost $400 or $500 a month regardless of whether you lease, finance, or pay cash. With an older car, your depreciation can be very small, and instead your main expense is typically maintenance. You may end up spending $800 twice a year in repairs and upkeep. That sounds terrible, but which costs more: $400 a month, or $800 twice a year?

Having a used car may leave you on the hook for unplanned repairs, but the chances are good that those repairs will be a small fraction of the ongoing cost of getting a new car every three years. It’s loss aversion that makes $1,600 a year in unplanned repairs feel much worse than the fact that you might save $400 a month ($4,800 a year) by not having a car payment.

I paid $4,500 for my Toyota, and had to pay $316.75 in sales tax and registration fees. My biggest expense for the year was for a set of four new tires, $744.84. I did all the work on the car myself, including three oil changes, replacing the rusty radiator, hoses, and thermostat. I changed the fluids, including brake, transmission, power steering, and differential oil. I installed a new air filter, PCV Valve, and wipers, and cleaned the intake twice. In total, I spent $521.23 on maintenance, which was quite low since I did the work myself.

According to Kelly Blue Book, the current value of my vehicle is $4,044, so my estimated depreciation for the year was $456. Including depreciation, my cost for the year was $2038, which works out to 18.4 cents per mile (not including fuel). My insurance cost was much lower with this car; I kept the same high level of liability coverage as my other vehicles, but dropped collision. The annual insurance premium was $510.40, less than half the cost of our other vehicles.

What are the takeaways from this experience? A couple of thoughts:

  • A well-maintained vehicle can certainly last 150,000 miles or more. Your best choice is always to keep your current vehicle for as long as possible and remember that even if you spend a couple of thousand on repairs per year, that is a small amount compared to the costs of depreciation associated with the first 5 years of a new cars’ life.
  • Buying a used car is always going to be a bit of a gamble. Do your homework and choose a vehicle known for its dependability and ease of repair. Keep up with routine maintenance, using the manufacturer’s recommended schedule. Get to know a trustworthy independent mechanic.
  • I know that keeping a car for 10 years is a great idea, but for me, I just get bored with a vehicle after a couple of years and want something different. Knowing this preference, I can buy a used car every couple of years and not have the staggering depreciation costs of new vehicles.
  • It’s okay to spend money on cars, but if you think that retirement, paying down debt, saving for college, or growing your net worth are more important, than you need to make sure to prioritize those goals ahead of new cars. Every financial planner has met lots of people who have a new Mercedes but who “can’t afford” to contribute $5,000 a year into an IRA. Make sure your spending reflects your values and goals, and is not based on what you want others to think.

Reversion to the Mean


One of the more counter-intuitive financial concepts to embrace is reversion to the mean. Markets tend to behave in fairly consistent ways over the long-term. Wharton Finance Professor Jeremy Siegel examined 200 years of stock market returns and found that the average after-inflation rate of return of stocks, in all periods, was between 6.5% and 7.0%. This phenomenon has been named “Siegel’s constant” by economists. Even though the market can be down for 1 year or even 10 years, when we look at longer periods of 20 or more years, real returns have been remarkably uniform.

Investors are rewarded for their patience because returns do revert to the mean. This is an easy concept to understand, but the resulting decisions are often difficult to embrace, because they often require doing the opposite of what is currently working. When the tech sector was booming in the 1990’s, Blue Chip dividend stocks lagged, but that is precisely what you should have been buying in 1999 to avoid the subsequent meltdown in the over-valued tech stocks. This is obvious in hindsight, but at the time, it was very difficult to choose a lagging value fund, when you could have put your money into a hot sector fund that had returned 50% or more in the previous year.

One of the easiest ways to use mean reversion to your benefit is through rebalancing. When our positions deviate by more than 10% from our targets, we trim what has out performed and we purchase what has under performed. Besides helping us maintain our target allocation and risk profile, rebalancing can be beneficial by buying what is out of favor when it is on sale. The same benefit occurs when you dollar cost average in a volatile or declining market, or when you reinvest dividends over time.

A number of years ago, an analyst from Research Affiliates was visiting Dallas and dropped by my office to share a recent white paper they had produced on factors effecting index performance. They ranked stocks by factors such as momentum, and then tracked the performance of the stocks with either high or low momentum. Strangely, both the high and low momentum segments had a better long-term number the overall Index. At first, I thought this must have been a mistake, thinking both halves should equal the average of the whole index. But what was actually occurring was that the ranking process was in effect an annual rebalancing, dropping stocks from that segment when they peaked (in the high momentum category), and then adding them when they were out of favor (to the low momentum category). This annual rebalancing was actually a significant driver of investment returns.

The counter-intuitive part of rebalancing is that instead of buying what is working, you must buy what is lagging. This works for broad asset classes, but you should not apply this approach to individual stocks, lest you buy more of the next Enron. Stocks can go to zero, but categories do not.

And that brings us to today’s market. With volatility spiking in the third quarter, we have leading and lagging segments for 2015. Here are three categories of special interest today, in terms of reversion to the mean.

1. Growth continues to outperform value in 2015. Through October 16, the iShares S&P 500 Growth (IVW) is up 3.53% while the S&P 500 Value (IVE) is down 3.27%. The Growth ETF outperformed the Value ETF in 2014, 2013, and 2011. Over the past five years, the annualized return on the Growth ETF is 14.88% versus 12.52% for the Value ETF. Historically, Value outperforms Growth, and that is the case over the past 15 years for these two ETFs. Currently, Growth is in favor, but I think the smart approach for investors is to believe that the returns will be mean-reverting, and we will eventually, if not soon, see Value return to favor. Currently, Growth is benefiting from high returns from tech and health care sectors, which appear to be getting frothy. Value is being held back by energy stocks, which have been very weak this year. Our approach: we own a broad market index (iShares Russell 1000) which has both Growth and Value segments, plus we own a Value fund with a terrific long-term record of good risk-adjusted returns.

2. Emerging Markets have lagged Developed Markets. Through October 16, the Vanguard Emerging Markets ETF (VWO) is down 6.82%, compared to the iShares Russell 1000 (IWB) which is up 0.20%. The Emerging Markets ETF was also down in 2014, 2013, and 2011. Why would we want to hold such a perennial loser? Mean reversion, of course. While EM is currently out of favor, those stocks are becoming cheaper and cheaper while developed stocks are becoming increasingly expensive. Let’s look at a couple of metrics: for VWO, the Price to Earnings ratio is 11.75 and the Price to Book ratio is only 1.46. US Stocks (IWB) are much more expensive, with a PE ratio of 17.16 and a PB ratio of 2.26. The more concerned you are about US Stocks, the more you should want to own EM stocks. So despite a very difficult Q3 for Emerging Markets, we will continue to own the segment and will rebalance as needed in portfolios.

3. High Yield Bonds are down. The SPDR Short-Term High Yield (SJNK) is down 1.88% through October 16, while the Barclays Aggregate Bond Index is up 1.56% to the same date. As the price of high yield bonds declined this year, yields increased and the spread over Treasury bonds has widened, offering a better risk/return profile than previously. The yield on the 10-year Treasury remains around 2.1% today, while the SEC yield on SJNK has increased to 6.81%. That’s not to suggest that high yield bonds are risk-free, but the mean reverting approach suggests that the sell-off in high yield presents an opportunity relative to Treasuries.

Understanding the reversion to the mean is crucial for investors to offset the behavioral influence of recency bias. Recency bias is the natural tendency to mentally overweight the importance of recent events and to disregard a more rational decision making process. For example, if a coin turns up “heads” four times in a row, people are more likely to assume that the streak continues, even though the chance of the next coin toss remains 50% heads and 50% tails. The more coin tosses you make, the closer you will get to 50/50 over time. That’s mean reversion. If you understand this concept, you are less likely to make the mistake of assuming that last year’s hot sector, fund, or stock is the best place for your money today. Instead, you’ll realize that rebalancing is a smarter process than chasing past returns.

Data from Morningstar, as of October 18, 2015.

Behavioral Tricks to Improve Your Finances


I was saddened to hear of Yogi Berra’s passing last week. One of the great quotes attributed to him is “In theory, there is no difference between theory and practice. In practice, there is.” I’ve always thought this quote applied well to personal finance, where the academic expected behavior could differ significantly from the choices people make in real life.

The fact is that we all use our feelings, intuition, and past experience to make our decisions as much, or more, than we rely on logic, research, or an open-minded examination of evidence and data. Many academics take the view that any behavioral deviation from the theoretically optimal decision will lead to poor outcomes. And while that is definitely the case in many situations, my observation as a practitioner is that even the most successful individuals are not immune from this “irrational” behavior.

My point is that when theory and practice do deviate, there can still be good outcomes, in fact, sometimes even improved outcomes. Here are six ways you can use behavioral concepts to improve your financial situation. In theory, these won’t help. In practice, they will.

  1. The 15-year mortgage. In theory, you can make more in stocks than the interest cost of a mortgage, so you should get an interest-only loan and never pay it off. Home values generally appreciate over the long-term, and there is no additional benefit to having equity in your home. Although this is theoretically correct, I suggest that home buyers get a 15-year mortgage instead of a 30-year or interest only note. The reason that the 15-year mortgage benefits buyers is that it will force you to buy a lower priced home to be able to afford the higher monthly payment. If you start your house hunt with a 15-year mortgage in mind, it might mean looking for a $300,000 home instead of a $350,000 home. The lower cost home will have lower property taxes, insurance, utilities, and other costs. More of your monthly payment will go towards principal with the shorter loan, so you will build equity faster, which is very valuable if you should need to move after five or ten years. Having a higher monthly mortgage payment will also force you to save more. By that I mean that if you had a payment that was $500 less, you probably would not save an additional $500 a month; you’d probably save only a small part of this, maybe $100 or $200 a month, and increase your spending by $300 or $400.
  2. Set up your 401(k) contributions as a percentage. People are shockingly lazy with their 401(k) accounts. Many never change funds, and even more never change their contribution level. If you set up a $100 contribution per pay period, chances are good that five years later you are still contributing $100. If, on the other hand, you established a 10% contribution, your dollars contributed would have increased with your raises, promotions, and bonuses. If you can, increase your percentage contribution every year until you make the maximum allowable contribution, $18,000 for 2015.
  3. Make it automatic. We are creatures of habit and momentum and will seldom change established our course. If you give someone $100,000 to invest, they will agonize over the fund choices and try to time their purchases. If the market goes down, they’ll bail out and blame the fund or the manager or something else. It’s better to set your investing on auto-pilot, invest every month into your 401(k), IRA, 529 college savings plan, or other investment vehicle. And then do what is natural for most of us: nothing. Keep investing when the market goes down. Stick with a basic, diversified allocation. That’s why people who have a created a $100,000 account by investing $1000 a month are more likely to stay on course than the investor who puts in a lump sum. Already have your investing on cruise control? Take the next step and make your rebalancing automatic, too!
  4. Pay cash for cars. In theory, there’s nothing wrong with financing or leasing cars. However, if you get in the habit of paying cash for cars it will change your behavior for the better. It is incredibly painful to write a $35,000 check for a vehicle. If you pay cash for cars, it will force you to keep your current car for longer while you save for the next one. It will make you consider a used car or a lower cost vehicle. And it will be a strong incentive to keep your next vehicle for a very long time. Cars are often our second largest expense after housing. Most cars lose 50% of their value in five years, so would you prefer to lose half of $75,000 or half of $30,000? People don’t think this way when all they know is their monthly payment. When you pay cash for a car, you start to think like an owner and not a renter.
  5. Do less research. One of the mental biases facing investors is overconfidence; the more research we do, the more we believe we can predict the outcome of our investing choices. This can lead to people being overweight in their company stock, getting in and out of the market, or making large sector bets. These choices often lead to increased risk taking and quite often to long-term under performance. We’re also likely to suffer from “confirmation bias”, where we cherry pick the data or articles which corroborate our existing point of view and ignore any contradictory evidence. Overconfidence and confirmation bias don’t just affect individual investors, they are significant challenges for professional fund managers. Since the majority of professional managers cannot beat the index, I don’t hold much optimism that an individual can do better. So, cancel your subscription to the Wall Street Journal, turn off CNBC, and buy an index fund.
  6. Use “mental accounting” to your advantage. Money is fungible, meaning $1 is $1 regardless of where it is located. However, people like to divide their money into buckets for retirement, saving, spending, emergency funds, college, vacation, or whatever. In theory, this is meaningless, you’d be equally well off with just one account invested appropriately for your risk tolerance. Even though Academics would like to banish mental accounting, people are enamored with their buckets. While you should look at all your holdings as being slices of one pie, you can use mental accounting to your advantage. You are less likely to touch money when it is in a dedicated account. For example, if you put money in a savings account for emergencies, you may later be tempted to spend that money on a vacation or other splurge. If you instead put that money into a Roth IRA, you’d be much less likely to touch it. But if you did have an emergency, you could access the principal from your Roth, tax-free. The other benefit of buckets is that it may force you to do more saving when you have specific dollar goals for retirement, college, or other purposes. Then if you need to plan for a vacation, you know you will have to do additional saving and cannot touch the buckets allocated for other goals.

Use behavior to your advantage by making sure your choices are helping you get closer to achieving your goals. Investing can be simple; it’s people who choose to make it complicated. Stick to the basics and stay focused on saving and diversification. I’m not sure we can ever completely remove behavioral biases from our decision making process, but the more we are aware of those biases, the easier it is to step back and recognize what exactly is driving our choices.

Can Being Frugal Make You Happy?


Gen Y is bringing frugality back in style. As a financial planner, I’m delighted to find frugality is cool now. I’ve read their blogs (where else would they write?) with fascination and appreciation for their candor. I’m calling this the New Frugality, and you’ve probably heard or read about some of these ideas, including the Tiny House, where people live in a home often smaller than 200 square feet. Others are embracing Minimalist Wardrobes, creating a personal, seasonal clothing uniform (think Steve Jobs with his jeans and black mock turtleneck). This past week, there was an article in Forbes about the Frugalwoods, an anonymous Boston couple who is saving 71% of their income so that they can retire at age 33 and move to a Vermont homestead with their rescue Greyhound.

In these blogs, the authors are never afraid to share their personal stories, from big-picture motivations and life philosophies, to the smallest minutiae of their daily decisions. Along the way, we invariably learn of their challenges, missteps, and triumphs. The blogs are part diary, part instruction manual, and part entertainment for their friends and fans. Even with different goals and approaches, there are common beliefs.

  • The New Frugality believes that less is more, and does not buy into the modern American idea that “buying more stuff” can make you happy. They have a maturity (which takes some people 70 years to develop) that recognizes that happiness comes from rewarding experiences, positive relationships, and a work/life balance that includes a higher purpose.
  • They want off the financial treadmill. Some had large student loans or crippling credit card debt before having an epiphany about becoming debt-free. Others found their corporate careers unsatisfying and were brave enough to recognize that spending the next 40 years in a job they hate isn’t worth it just to be able to afford a big house and a fancy car.
  • While others may view their frugality as a sacrifice, they often find that simplifying their lives and eliminating clutter brings a clarity to their sense of what is truly important to them.

The New Frugality is about seeking the quality of life you want today, rather than believing you should wait until some future date, i.e. retirement, before you can really do what you want. It’s an implicit rejection of the old notion of working 50 hours a week until age 65, then never working again.

[In case you are wondering, I contrast the New Frugality with previous beliefs about frugality which were created by those who lived through The Great Depression and who raised their children in a different, frugal manner. While both the old and new approaches want to stretch each dollar, the old frugality was characterized by self-reliance, never throwing away anything you might need in the future, risk avoidance, and mistrust of financial systems. Some of those traits were largely fear-based, which does not resonate with the abundance mentality I embrace and believe is required to be a patient and successful investor.]

Does frugality make you happy? I think the most literal answer is no. By that, I mean that if you are unhappy, spending less won’t make you happy. If you really enjoy going to Starbucks every morning, cutting out that $5/day habit isn’t automatically going to improve your satisfaction, even if it enables you to save $1,825 a year. Frugality works for these bloggers because they were willing to embrace changes to their habits even though society was telling them to spend more money instead. There’s no doubt that frugality is financially beneficial, but the sources of happiness include a lot more than just your financial situation.

Reading their blogs can help you appreciate your own spending more as well as to feel good, and not alone, when you do choose a frugal approach. We are continually bombarded with advertising that suggests we’d be happier, cooler, and more attractive if we had the right car, clothes, or beauty products. We’re told that our current life would be better if we had a bigger home, nicer furniture, or luxury vacations. Of course that’s not true. We know that spending to increase our satisfaction is at best a fleeting pleasure which can leave consumers addicted to living beyond their means. Unfortunately, there are so few voices pushing back on the advertisers’ message to consume.

Even if you don’t want to live in a tiny house, reduce your wardrobe to a few pieces, or bike to work, you can still take frugal steps to ensure you are working towards true financial independence, which we define as working because you want to and not because you have to. Here are six lessons to take away from the New Frugality:

  1. Beware of lifestyle creep. Many of us were very happy in college, even though we may have had a rickety car, tiny apartment, and slept on a futon. It doesn’t take long after graduation to discover the urge to “keep up the Joneses”, as friends buy big houses and fancy cars. How can they afford it? Oftentimes, they can’t and they’re up to their eyeballs in debt. They’re more concerned about their image than their net worth, and that’s not something to emulate! If you increase your living expenses every time your income goes up, you aren’t ever going to become wealthy.
  2. Save at least 15% of your income. Set financial goals, including a “finish line”. If you are highly motivated (or just impatient, like me), you will realize that the more you save, the sooner you will reach your finish line. Saving then is not a sacrifice, but the fastest, most direct way to achieve financial independence. When your goals are more important to you than a new (fill in the blank), your spending decisions become much easier.
  3. Avoid impulse buys and emotional shopping, that is shopping to distract you from sadness, frustration, or boredom. Never buy on credit; if you don’t have cash to pay for something, it’s not worth going into debt. Be conscious and intentional about your spending behavior. Do your choices reflect your goals and beliefs?
  4. Buy used. There is a growing market for used items, often selling at a small fraction of the cost of new items. This is the Craigslist economy, which is growing around the country. You can often buy what you need without paying full retail prices.
  5. Savor success. There is a great deal of intrinsic satisfaction in becoming financially independent. Even taking the initial steps towards creating a positive cash flow are great confidence boosters because people feel empowered when they take control of their financial life. As every financial planner will tell you, the more you need to spend, the larger the nest egg required to be able to fund your future needs. Therefore, when you reduce your spending, you not only can save more, but you also reduce the size of the nest egg you will need to replace your income.
  6. Reduce stress. While money is not the source of true happiness, there is no doubt that being broke, in debt, or just knowing you are not setting enough aside for the future, can be a significant source of personal anxiety and marital friction.

As a bonus, you will find great common sense financial planning tips on these blogs. What are the Frugalwoods doing with the 71% of their income the save? They maximize their 401(k) contributions and invest the rest in the market. They write: We’ve done well because we invest in boring index funds and we don’t sell when the market is down. That’s a great recipe for success!

Reading about the New Frugality is entertaining because many authors are willing to take their frugal habits to quite an extreme. Even if we don’t adopt their spartan lifestyle, they can remind us that we don’t have to spend money to be happy.  

The Best Way to Get in Shape

Hop, Skip, Jump

In December, after years of good intentions and a couple of false starts, I finally joined a gym and hired a personal trainer. I meet with my trainer once a week and workout two or three times separately. Previously, I thought I could just get in shape on my own, but it was always too easy to find an excuse why today wasn’t a good day to exercise. And then days become weeks, you find other demands more pressing, and you just never get around to it.

Working with my trainer, Clint, has been great. I’m getting in shape and feel very confident that I’m now on the right path. Looking back, my only thought is that I wish I had gotten started much sooner with this process. Why are people more successful with a personal trainer than on their own? Here’s what a coach has to offer:

1) Knowledge. Clint has spent thousands of hours in education and his certifications demonstrate commitment to being qualified and skilled to help others. As for me, I have neither the time nor the interest to learn this information. Since you don’t know what you don’t know, it’s smart to seek out expert, objective advice.

2) Experience. Clint has worked with many clients and knows what works. While everyone’s individual situation is slightly different, a professional trainer has probably seen a lot of clients who have similar needs to mine.

3) A written plan. We started with a physical assessment to document my starting point, and after discussing my goals and commitment, developed a plan unique for me. Now I know what I need to do on a daily basis in order to reach my long-term goals.

4) The right tools. My trainer selects the most appropriate equipment for me to use and makes sure I use them correctly for maximum benefit and to avoid injury. When you combine discipline and consistency with doing the right things, good results happen.

5) Motivation. We have a workout schedule which has become a habit and routine. It’s rewarding to see our plan working, and when there are occasional set-backs, it’s helpful to have Clint’s patience, support, and encouragement to get back on track.

While I certainly suggest others take good care of their health and bodies, here’s what I want people to recognize: just as using a personal trainer is the best way to get in shape physically, using a financial planner is the best way to get in shape financially. What we offer is very similar. As a CFP(R) practitioner, I help individuals accomplish their financial goals, bringing professional knowledge, years of experience, a written plan, the right tools, and ongoing motivation.

Can you get in shape on your own? Of course it’s possible, but you’re more likely to be successful with professional guidance. You can be sure that athletes and actors always have a personal trainer or a team of trainers. Likewise, many of the most financially successful individuals I’ve met, including multi-millionaire entrepreneurs, board members of Fortune 500 companies, and Harvard-trained surgeons all use a financial advisor. It’s not a question of whether or not they’re not smart enough to do it on their own, it’s that they recognize the value in hiring an expert and the benefit that relationship can bring to their financial well-being.

If you are like I was, having good intentions, but procrastinating getting going, it’s time to give me a call. We will put together a financial plan you can understand and I’ll be there in the months and years ahead to help you stay on track with accomplishing your goals. If you’re waiting for tomorrow, don’t. Aside from yesterday, today is the best day to get started.

Win by Avoiding These Mistakes


This week, I heard an orchestra conductor say, “It’s not simple to make it sound easy.” While he was talking about music, I was thinking how this applies to investing, too. The more we know about investing and the more experience we have, the more we recognize the benefits of following a very straightforward approach. You don’t have to be a genius to be a successful investor, you just have to avoid making a couple of big mistakes. The game of investing is not won by brilliant moves, but rather by patience and avoiding the common pitfalls that lure investors in year after year.

It’s easy to recognize mistakes in hindsight. The challenge is to anticipate these outcomes in advance, so you can prevent these these errors whenever you are tempted to make changes to your portfolio. Is your decision based on a logical examination of the facts, or an emotional response or ingrained bias? You can be successful over time by following a smart plan, even if it is not complicated. Let the market run its course and know that your plan will work best when you don’t get in the way! Here are three of most costly mistakes I’ve seen investors make in the past 15 years and the solution for you to avoid these each of these missteps. These are real, actual people, but I’ve changed the names here to protect their identity. Learn from their losses!

1) Lack of diversification. 10 years ago, I met Peter who was a client of another financial advisor at my firm. Peter was an engineer at Nortel, and like many employees at tech companies in the 90’s, he received substantial stock options. For years, the stock would double and split every 18 m0nths or so, which meant that anyone who sold their stock options regretted not holding for longer. Peter had more than 12,000 options when Nortel hit $90 a share in the spring of 2000, giving his options a value of over $1 million. At every meeting, they discussed exercising his options, selling his shares and diversifying, but Peter wanted to wait longer. The stock fell to $85, and Peter finally agreed to sell, but said that he had his heart set on a higher price and would sell as soon as it got back over $90 a share.

Unfortunately, the stock never regained the $90 level, and instead lost 90% of its value over the next nine months. His options were now worthless and his hopes of retiring in his 50’s lost forever. Nortel went bankrupt in 2009 and his division was sold to competitor. Peter had the majority of his net worth in company stock and the loss truly decimated his investment portfolio and derailed his retirement plans.

It is often said that diversification is the only free lunch in investing. By being diversified, you can avoid the risk of having one stock wipe out your plans. And I should mention that this also applies to bonds. I met another investor who had $100,000 of Lehman Brothers bonds for their portfolio. As I recall, I believe the investor recovered only about 25 cents on the dollar after the Lehman bankruptcy in 2008.

Solution: Don’t let company stock – or any single stock – comprise more than 10% of your portfolio. Even better, avoid single stocks altogether and use ETFs or mutual funds. For bonds, I’d suggest keeping any single issuer to only 1-2% of your portfolio. The potential benefits of having a concentrated stock position are outweighed by the magnitude of losses if things go wrong.

2) Trying to Outsmart the Market. Luke considered himself a sophisticated investor and enjoyed reading and learning about investing. He had an MBA and felt that with his knowledge and a subscription to the Wall Street Journal, he should be focused on beating the market. He looked at his portfolio almost every day and would be very concerned if any of his funds were lagging the overall market. As a result, he wanted to trade frequently, to put his money into whatever sector, fund, or category was currently performing best.

Funds typically include the disclaimer that “past performance is no guarantee of future results”, and yet, so many investors are focused on picking funds based on their most recent past performance. In Luke’s case, his insistence on “hot funds” meant that he was often invested in sector funds. His performance over time was actually worse than the benchmarks, because in spite of all his research and knowledge, he was focused on looking backwards rather than forwards.

Solution: stay diversified and don’t chase hot funds. Typically, 65% to 80% of all active managers under perform their benchmark over five years, which means that your safest bet is to never bet on a manager’s skill but to bet on the house. Using index funds works, and adopting an index approach means you can focus on what really matters for accumulation: how much you save. Luke’s portfolio was relatively small, under $100,000. Ironically, investors with smaller accounts are often the ones who believe that they need to outsmart the market to be successful. When I worked with a client with over $100 million, he had no qualms about index funds whatsoever.

3) Timing the Market. Angelina retired in 2007, a year before the stock market slumped. In early 2009, the market was down nearly every day, sometimes losing 5% in a session. We had conversations previously with Angelina about market volatility and had implemented a diversified, balanced portfolio. On March 6, 2009, Angelina called and insisted that we exit all her equity positions. It was that very day that the S&P 500 Index put in its intra-day low of 666. In hindsight, she sold on the actual worst day possible. Luckily, we were able to convince her to buy the equities back by June, but by then, she had missed a 30% rally.

Market timing mistakes aren’t limited to selling at a low; you can also miss out when the market is doing well. Last year, while the market was up double digits, some investors had significant capital in cash, fearing a drop or hoping to profit from any temporary pullback. Those with large cash positions under performed those who were invested in a target allocation. Having looked at hundreds of investors’ performance, I have yet to see anyone who has improved their return through market timing, except from random luck. Trying to get in and out of the market gives you more opportunities to make mistakes.

Solution: Choose an appropriate asset allocation and stick with it. Invest monthly into a diversified portfolio, and don’t stop investing when the market is down. If you think you will wait until you get an “all-clear” signal, you’re going to miss out on gains like Angelina. Rebalancing annually creates a discipline to sell your winners and buy the losers, which is difficult to do otherwise!

Investing should be easy. People have the best intentions when they load up on company stock, invest in a hot fund, or try to time the market. The reality, however, is that the more complicated strategy you adopt, the more likely you will hurt rather than enhance your returns. Our goal is to help investors gain the knowledge, confidence, and discipline to recognize that your most likely path to success is to stick with a simple approach that is proven to work.

Want to read more? Check out Winning The Loser’s Game by Charles Ellis.