I hate disagreeing with people, but in finance, that's more or less the norm at times. Courtesy of Google Images

Zvi Bodie, who is the Adele Barron Professor of Management at Boston University is one of my favorite authors and speakers. His textbook, "Investments" is renowned around the world and is used in the certification program of the CFA Institute and the Society of Actuaries. 

With all that said, sometimes, even Zvi just gets it dead wrong.   

In a recent BU video titled "Three Crucial Tips" Professor Bodie offers some "salient" advice on matters of personal finance. I take exception to just about all of them, here's the skinny on each

1. Take No Risk

Professor Bodie notes that he hates to lose money more than anything and to that end, he takes virtually no risk with his investments. He further notes that [a] he is much more concerned about loss than he is about gains and [b] taking risk is dependent on how you're going to feel if you lose the money. 

Well, first off, Professor Bodie is a professor of management so we can assume safely I think, that he's probably paid more than most people and being grounded in management, he's  a bit more comfortable confronting his financial issues than most are. To that end, he likely started saving early and often with reasonable deposits. If most people were to operate that way, saving early and often, the need for "risky" investments would naturally diminish over time. After all, once you've accumulated enough to fund your goal, it's funded. Enough said. 

As to concern about losses, behavioral science tells us that there is no difference between professors and the general population, everyone counts losses more than gains. That's why people prefer to buy into the stock market at 12,000 on the Dow (when it's expensive) instead of at 8,300 when it's cheap. Amazingly, we're so scared of losses that we inadvertently wait till they're the most likely to happen in our effort to avoid them. That's part of the problem. If that seems irrationale to you, let's shift the "consumable" from stocks to socks. If you needed to buy a supply of gym socks for your year long workout regime, better to buy them at $3.00 a pair or $1.00 a pair? I thought so. 

2. Trust No One

Professor Bodie contends that "no one knows you better than you know yourself." Again, enough said on that, and simply stating the obvious doesn't, in my way of thinking, present a cogent argument on why to either do or not do something. 

At point of fact, we don't even really know ourselves all that well. If we did, we'd have a better understanding about our goals, vision and dreams for the future and we'd be doing something to make them a reality. 

While it's true that no one knows you better than you know yourself, you can in fact, work with an advisor who will know you almost as well as you know yourself and, who should be able to motivate you to do something to make some progress towards your hopes and dreams. 

The Professor did note that if he had to take his car to be fixed, something he'd trust someone else to do, he'd ask a lot of questions of that person. That's good advice, when people seek out a financial professional to help them, they too, should ask a lot of questions. To the best of my recollection, both the FPA and CFP Board have consumer materials on their website listing questions to ask your advisor. 

3. Get Guarantees and Read Some Books

Oh boy. Really? We're sort of back at square one. There aren't many investments out there that come with guarantees. There aren't any investments out there that come with guarantees that are in and of themselves going to enable you to reach your goals. Remember when Jimmy Carter was president? The yield on 30 year treasury bonds was 14%, unfortunately, the core inflation rate was about 16% which meant you were locking in a guaranteed loss of 2% in purchasing power. Is this the type of guarantee that Professor Bodie had in mind? I think not. 

The good professor also notes that finance isn't that hard and that there are many books out there that can teach you about finance if you'd read them. 

There are as many books out there about weight loss and yet we live in a world of largely large people. Cooking, wine, golf, scores of books producing woefully bad results. If reading about something meant that you'd automatically inculcate what you read into your life and times, what a wonderful world this would be. 

And, yes, personal finance is easy if for no other reason than what ideal life you aspire to has nothing to do with financial matters, since;  [a] your goals financial and otherwise should be based on your wishes, dreams and building a life that makes you happy, [b] you can delegate the complicated part to someone who will make that ideal life the centerpiece of everything you do and each decision you make, and lastly; [c] all you have to do is start and then keep up with it, in concert with a trusted advisor to guide you and help you make interim course adjustments. 

Finance should work like the Apollo mission. JFK said we were going to send a man to the moon and bring him home safely before the decade was out. (Note: This is a GOAL, clearly defined and stated.)

He had the vision about what he wanted and then he turned it over to the people that he trusted to make it happen. 

Then it happened. Enough said. 

Were there not the details of life, were we all blessed with all the understanding and money we needed, personal finance might be easy. 

Steve Jobs was rumored to have told his designers and technicians at Apple to build the best phone the world had ever seen. 

Then he too turned it over to people he trusted to make it happen. 

Here's the the real three topics you must learn; 

1. Say what you want (set appropriate goals)
2. Turn it over to someone who will help you make it happen 
3. Trust the process  

When will you?   

First off, I think that "Rules of Thumb" should be renamed to "Ruse of Thumb" and with good reason, all we need do is look at the dictionary definition of the word "ruse."

ruse (noun) an action intended to deceive someone; a trick; Eleanor tried to think of a ruse to get Paul out of the house.

And that's pretty much what a "rule of thumb" is in most instances, a deception. in personal finance it is at least. 

How do "rules/rues of thumb deceive you you ask? Well, the deception lies in their simplicity and seemingly accurate, global application as "policy." 

Here's some popular examples of "rules/ruse of thumbs:  

"when you retire, subtract your age from the number 100, the answer will tell you how much of your portfolio should be investsed in stocks"

"you need 10x your income in life insurance"

"cash is king"

And there are many more. Part of the deception lies in the fact that the "ruse of thumb" leads you to believe that it's an effective substitute for work. You don't have to analyze anything, do any research, consider personal circumstances (either actual or uknown) you just simply pull the "ruse of thumb" out of your toolkit and whamo! You're done. 

The problem is that largely, "rues of thumb" aren't true. They're widely enough touted and largely enough quoted to make you think that they're true and that they represent mainstream thinking, when in fact they are neither true or mainstream thinking. Since they are deceptively simple they are almost always foisted upon the uninformed by someone who will directly benefit by the application of them. 

And yet, "ruse of thumb" do have mass appeal for sure. Why? Because the majority of the population would rather take the easy answer to it's questions, rather than to ask the tough questions. We're hard wired for "fight" or "flight" so our brains like simple solutions, going back to the day when, in sum and substance, there were only two answers, run like hell or fight to the death. 

In his article; "Should You Seek Yield For Retirement Income," David Loper of Wealthcare Capital explains in susinct terms why the popular and oft used "ruse of thumb" that when you retire, you should invest alter or arrange your investments in such a way so that it maximizes your post retirement income. 

For sure, many who will read this article will resolve that it just can't be that way. Many investors will contend that they're doing just that, seeking yield and they're doing just fine. They've got friends that are doing it and have done it and they're doing just fine too. Like most "ruse" it seems like a logical tact to take. (For the record, I've got a few friends who still smoke, still eat badly and never get a medical exam. For the record, they're fine too, at least for now.) But in the longer view, it's clearly not the right method.  

Digging in and doing the hard work of planning a financial policy grounded in research, thoughtful conversation and deliberate strategy selection isn't as easy as pulling out your "ruse of thumb." Planning however is infinently less likely to fail and in reality, cheaper for most. And, planning is a cheaper option in absolute terms, both today and tomorrow. 

How To Move Through Uncertainly To Opportunity

What are you practicing today?

Just this week, Seth Godin, who's blog I frequently refer to, wrote asking us "what's the first thing that you when you sit down at your computer each morning?" That struck a familiar chord with me because Seth managed to go on to ask if our first effort was emails, Facebook and social media, which largely at times mine is. I hadn't realized that I'd been practicing those activities as my first step, but I had been and true to form, I'd gotten pretty good at it.

What are you practicing today?

To my dismay, Seth went on to note that surely, there must be something I could be practicing that had more to do with moving my company or my life forward a bit. Perhaps focusing on advancing an important initiative, growing our corporate culture or relationships, or creating some other value in the world. And for me at least, there are all of those and more. Are there similar options for you?

What are you practicing today?

In her blog, "How To Develop A Creative Practice (And how it actually makes you more creative)" Justine Musk tells us much more about the power of our intention. She artfully and adroitly shows us how our intentions, once "stated" summons us to notice those things in our lives that support our intentions and advance our cause, while allowing for us to ignore the things that don't.

Justine talks too about the interconnectivity of personal exploration, spirituality and personal finance. I find a normal connection between spirit and finance, understanding as I do that the goal to have a great life is what leads to the best financial decision making. Decide what you want your life to be (state your intention) and the financial decisions become pretty easy from there.

What are you practicing today?

The financial planning process as Carl Richards denotes in his diagram above is only as good as the conversations that give it life. If you could work with an advisor who focuses you more on your intentions and less on the market or buying products, you would do better and be a lot happier. What if you could work with someone who would help you figure out what your "great life" is and give you the things to practice that would get your there?

The financial planning process is truly the epitome of "the whole" being greater (by magnitudes I might add) than the sum of it's parts. A properly designed financial plan tells the world what your intention is. It sets out who it is that you intend to be, not by deciding on investments or insurnace, but rather by declaring, "this is who I am, this is what I value in life, and this is the life I want."  If you're like most people and continue on the roller coaster of financial bliss and dissapointment your answer lies in where you intention is focused. If that focus is on products and markets, then your happiness will rise and fall along with them. But if you instead start by defining your life's goals and let the rest of it flow from that, you'll experience great peace and a plan centered on you, not markets.

Is is surprising that doing it the other way around, where we put things before our intention, doesn't work for very long, if at all?

Absent that properly drafted plan, let me ask: "what are you practicing today?"

(Special thanks to Leo Babauto of Zenhabits for inspiring this blog post)

Mike's blog is a word to the wise for personal development devotees, self help gurus, planners and clients of planners alike. 

Enjoy.

"5 Lies Personal Development Gurus Like To Tell You"

We work with people all the time on the correct way to set goals. Goals need to be defined, specifically. You need to be able to state in specific terms how much you’re going to need, how much you ‘ve saved and/or can save, and how long you have to go until that goal needs to be met. Sending your oldest to college isn’t the same as: “I need to have $50,000 set aside eight years from now and I’ve already got about $7,000 and can save another $100-$200 per month.” Typically, clients come to us with the former rather than that latter. It's our job to change how you look at your goals. 

With a specific goal in mind, you’ve got clarity about what must be done. It’s a transformative process and takes what had only really be a wish and converts it to a goal. Now progress can be measured, you can tell if you’re on or off track or not and you can adjust along the way. With specific goals you have to commit to an action and only once you’ve committed to an action, can you tell how you’re doing. Absent specifically stating goals the end result is likely to be our continued ability to avoid confronting our lack of progress. After all, why bother assessing progress when that progress can’t possibly be measured?

There’s a lot to be said for knowing where you are relative to a goal.  Should you continue to put away money to reach it or has the market given you enough return that funding can be scaled back? Tuition went up? Not a problem you can tell how much you have to adjust either your return on your money, your funding or both. As advisors, one of our primary responsiblities is to monitor progress towards your goals in very specific terms. Appropriate goal setting brings you both comfort and clarity because the effort is defined in measurable terms.

A good example is paying for college costs. Absent specific goals, parents tend to avoid the matter entirely or only put the bare minimum towards paying tuition costs. That’s why a recognized expert has said that “college funding isn’t a college problem, it’s a retirement problem” because lacking the proper context; many parents raid their retirement plan to pay for college. And, they do so at the worst possible time, when markets are down or when they’re relatively close to retirement age.  Missing one importatn goal in order to pay for another can be avoided with the clarity that comes with proper goal setting.

So get a pad and something to write with and list each of the financial goals that loom on the horizon and ask yourself the simple questions that will make the biggest difference:

1.      How much will I need
2.      How much do I have
3.      How much can I save
4.      When do I need it by

That’s how to tackle your goals head-on instead of just hoping for the right outcome.

When we work with others in collaboration and dialogue, we win when we've arrived at clarity. 

As this blog from Leadershipfreak suggests, clarity must come before decisions. And so it is in the planning profession. Without clarity, client's have a hard time finding a space for effective decisions. 

In your life, in the time with your family and friends, as we counsel those around us and as we engage in that persistent conversation with our own self; seek clarity. 

Here's to a great Holiday Season and I hope that you find this blog something to ponder as the New Year approaches. 

15 Potent Strategies for Fighting Confusion

"Fund managers like these guys who are underperforming are going to want to make themselves look good for the rest of the year and make up for lost ground. There's going to be an effort to pull out the year in the last month."

So says a recent CNBC.com article. 

It seems to me that you should be the key person in your investment relationship. 

It would seem fair and appropriate I think, that your goals, and your interests should be the ones first served. 

The statement from CNBC.com seems to portend that active investment managers now know what had escaped them for the first eleven months of the year, namely how to make money in this market. 

That would of course, beg the question, "what changed?" Since the only real change is the focus of your investment manager, you might ask, how many boundaries will get crossed, how much additional and unwarranted risk will get taken, and how many "policies" will get overlooked in the interest of "pulling out the year?" Are those actions that are being taken something that you signed on for? Are they policies that you approved? Are they risks that you agree with? Doesn't seem to matter does it? No, because this isn't about you, its about them. 

If you're investing (not gambling) then contrary to their belief it's ALL about you. It should be about your willingness to take that risk, your willingness to minimize unnecessary transaction costs and taxes. But in the world of active management, it's much more likely to be about what they want, not what you want. 

We control very little in our lives anymore. We don't get to set economic policy and we don't get to decide on the direction or velocity of the stock market. That being the case, we should control what we can control, namely how our investment professionals respond to the fact that we exist at all. This fact, that it's your money, is something that should never be overlooked or trivialized. 

When the focus becomes "pulling out the year" understand that the effort, while likely doomed to fail before it even starts based on any reasoned objective measure, is being played out with your retirement/college fund/kids wedding money.

So if December becomes the month that a strategy worked, you might want to ask yourself how that happened and what changed? Why wasn't that the strategy employed throughout the year?

If it fails, you might want to consider who'll be harmed when it doesn't work?

One of our core beliefs is that investors should always pay attention to the expenses of their investments. Every dollar needlessly spent chasing returns is a dollar that should be in your pocket not someone else's.

Reducing the money that you have at work by paying costs that don't directly result in bottom line benefits to you will hurt your chances of meeting your long-term goals.

A strategic decision for every investor is the passive v. active decision and this is where one decision can save a lot of money over time. And, because we're talking about expenses, the savings are a sure thing.

In theory, investors pay for active management because a manager will use their skill in security selection to outperform and index such as the S&P 500. Well, the cost of trading, research and such all raise your bottom line costs, perhaps to an unconscionable level.  

Does this additional cost result in additional returns? No, according to CNBC.com in this recent article "Market Pros Had a Bad Year, So Why Not Buy and Index Fund?"

Are you paying too much for your current investment program? Want to find out for certain if you are or not? Use our Connet With Us form to let us know, we'll contact you to arrange a mutually convenient time to meet. Our evaluation is done on a no-cost, no-obligation basis. 

Don't worry, things will get better.

At least until they fall apart again.

We live under a great misconception; that there's a path in life that leads to an evenness of things. We're confident that during that time when most if not all of the tumult is gone, that we'll do our best work, accomplish our biggest goals and gain the foothold we need to make genuine and worthwhie progress.

Reality is that life won't ever be in that place for more than a fleeting moment. Just as assuredly as things will come together is the knowing that at some point, they'll all fall apart again. It's the cycle of life that we all face.

Our peace and resilience comes not in finding that special place where it all fits, but rather in learning to prosper in the search for it, mainly because the search for it is our lives.

We can forestall progress and growth forever waiting for the day that it all fits or we can build our lives in spite of the fact that it won't. If we can learn to focus and do our best work when it's hardest, then we'll just be that much better when the brief time comes when it's all seemingly hanging together. Ever hear a singer/songwriter or author talk about how they do their best work during times when it's all coming unglued?

Bottom line is, don't wait. Don't wait till you have things all lined up before you start whatever it is you need to get started on, whether it's investing, saving or abandoning an old strategy in favor of a new one.

As hard as it might be to believe, our peace lies amidst the chaos of change.

Planning for transitions is imperative because our lives will be almost nothing but them.