Posts filed under 'Finance Education'
By J. David Lewis
I am writing to recommend a The New York Times, ‘Your Money’ column for anyone who expects college savings plans to provide all their children need to become independent. In financial planning, we see college savings plan discussions everywhere.
One of the more curious things I see is families who start paying for kindergarten with full expectations of funding the best in private schools through college – maybe graduate schools. While they are paying for the beginning steps, they often express concerns about saving specifically for college. It doesn’t seem to occur to them that they are on a steadily escalating annual education expense, with college only one more step on the long set of stairs. In my own case, when my son went from Webb School of Knoxville to The University of Tennessee, the annual direct cost of his education went down. His total support remained about the same, primarily because he moved out of our home.
Through the years, I have tried to convey these observations when discussing college savings. I remind people what they say on airplanes, “Put the oxygen mask on yourself before helping others.” People struggling with their own wealth accumulation, or even their monthly expenses, display considerable guilt that they may not save enough for their children’s first college pick.
These observations support my understanding that a sufficiently large and well structured net worth is much more important than saving for specific purposes. If you have a solid Net Worth Statement relative to your expectations; college, retirement, big weddings, travel and many other amenities of life are simply not problems. This is why we work to focus our client relationships on building assets (particularly investment assets) and reducing debts. Strong and growing net worth mitigates many financial concerns. Paying attention to its trajectory helps consider whether things we want are necessities, amenities or luxuries we really cannot afford.
With my observations as background, I came to an excellent ‘Your Money’ column by Ron Lieber of The New York Times – “From Parents, a Living Inheritance.” This quote, on helping adult children, really got my attention; “The parents of adult children don’t have good answers to this question; they simply write checks, if they can. Patrick Wightman, a postdoctoral fellow at the University of Michigan, points to data showing that nearly 60 percent of 23- to 25-year-olds report receiving some kind of financial assistance from their parents.” If you are worried about saving for your ten-year-old’s college, how does this feel?
Many times, clients have mentioned financial support for their children or grandchildren, with very little elaboration. We see evidence of support that is not mentioned. Again from the column – “Most people don’t like to talk about it, but the people you spend a lot of time with, the stories come out over lunch or a drink.” Apparently, something like 60% of young folks receive help from parents who rarely mention it to their friends. I wonder if parents would feel less lonely on this subject if they just talked as openly about it as they talk about college expenses.
Conversations about education funding have been silently replaced with supporting adult children. Ten years ago, these parents probably thought college expenses were an event on the horizon. How long should people expect to help their children? Another quote reads; “When they get in trouble, I don’t want them to go so far downhill that they’ll never get out.” How should we think about this issue when talking to young parents, who will have adult children someday, that may or may not need family assistance beyond college? How much should we warn them?
I asked Chris Brown, who is a Senior Finance Major at The University of Tennessee and a part-time employee of Resource Advisory Services, what he thought of Mr. Lieber’s column and “60% of twenty-something’s” receiving help from parents. He responded:
“I would say it depends on the capacity of the family’s financial ability to help the kids. If you’re talking mainly about parents who have the ability to help, I would think that 60% number would be higher. But I think that 60% shows how many parents CAN help as opposed to how many parents DO. In my experience, if they can they usually do. My generation seems to be spoiled more than most. That being said, I’m in the same boat as the 27 year old high school teacher. Being a first generation college student, my parents don’t have the means to help me and both my brothers. Like Ms. Wilson, I don’t resent those who do get help from their parents. I actually have a sense of pride in being independent and 100% accountable for myself. I feel like I’ll be better prepared in the long run. Probably a longer response than you were looking for, but you can imagine this is kind of a big dividing line between peer groups in the college atmosphere.”
A cynical view is that parents who can afford those “best schools” equal adult kids who get/need parent support for years after those schools. Parents who cannot afford those schools equal kids who live on the edge. Who knows who is better off? A short while before my mother died she said, “We just did the best we knew how to do raising you all. If we messed up, you have a long time to straighten it out.”
My 28 year-old son works freelance on video crews. I asked what he thinks his friends get from parents. He doesn’t seem to know much about the assistance they get. Generally, his friends don’t talk about these issues either, even with the parents supplying the aid. A conversation he described involved a young man who didn’t know how his health or car insurance is paid. The friend had reasonably steady work. All this failure to talk about these issues seems “out of whack.”
If the aid is given, without talking about what it means and where it is supposed to lead, the risk of helping the children remain dependent seems almost certain to increase. How can they become independent? A couple of years ago, I met three generations of a family on a remote Nebraska ranch. I bet those parents help their adult children in hundreds of ways and they all know what it all means to them.
When I have considered the tough decisions on assistance for my son, I have paid attention to how hard he works at making progress. I have been his business consultant over many lunches. This has kept me convinced his aid is probably moving him toward independence. His “gigs” keep getting more complex and frequent, with higher daily rates. His progress from two years ago is impressive. If he had a “day job,” he couldn’t develop the network so critical to this profession. He volunteered a few days on a movie, which lead to a series of his best paying jobs. Collecting from someone who didn’t pay an invoice was probably one of his better learning experiences. I hope he has time to straighten out whatever mistakes I have made.
It seems to still come down to the same fundamental solution. Build a strong Net Worth Statement, with ever increasing assets (particularly diversified investments) and decreasing debts. Along the way use tools like tax deferred retirement and tax advantaged education savings plans for efficiency. Be careful about burdening your enjoyment of life with “specific saving-purpose guilt.” All the while, find ways to enjoy your life. Make this philosophy the example for your children, so they can fix whatever you did wrong.
The Resource Advisory Services Mission Statement - Developing relationships that help people build and enjoy wealth, through our commitment to excellence in comprehensive financial planning services, where we gladly accept fiduciary responsibilities for understanding and serving each client with an exceptionally high level of ethical integrity.
Mr. Lieber finished “From Parents, a Living Inheritance” with mention of a family loan fund he more fully described a week later in another column titled “Borrowing From Your Family, by Design.” I look forward to meeting a family that wants to establish one of these resources for the future of their family and wonder if it might fit into my estate planning. We have five grandchildren now and who knows what they might need years from now?
Click here to read “From Parents, a Living Inheritance.”
Click here to read “Borrowing From Your Family, by Design.”
Contact J. David Lewis directly with DLewis@ResourceAdv.com. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 61283
October 11th, 2012
by J. David Lewis
Even in the days when our newsletters were paper, I promised myself I would not clutter readers’ lives unless I felt I had something significant to say. Some colleagues say we should buy content to contact people on-time every month. I don’t go along with the philosophy that writing takes too much time. Material written by others cannot really reflect Resource Advisory Services’ philosophy. Sometimes, I recommend something written by others, as I did in our last two newsletters – two months and four months ago. They can be found on the Resource Advisory Services Blog. The next may be in a few days or it could be awhile.
In a staff meeting last week, I was encouraged to describe my experience applying for Medicare. We hear a lot about concerns as people approach this process and little from people who have done it. I will get to that in a moment. The same day, I received the National Association of Personal Financial Advisors’ e-Newsletter with links to three excellent resources for finding financial advisors:
“The SEC just released a new resource entitled Investor Bulletin: Top Tips for Selecting a Financial Professional. The really exciting part is that they reference NAPFA’s Pursuit of a Financial Advisor Field Guide on the page of Additional Resources. You will note we are the only non-regulatory body mentioned.” The other link is CNN/Money’s “Ask How Your Financial Advisor is Paid” video. These links are worth sharing among people you know.
Now, for Medicare – Around June, a flood of Medicare supplement insurance offers began appearing in my mail. The vocabulary was foreign and the volume could puzzle anyone. They all implied that the decision on the plan is monumental. No wonder people feel overwhelmed with this stuff. I had heard that some prescribed drugs could lead to one company over the others but had little guidance otherwise.
Eventually, I decided to browse the Social Security website to educate myself a bit. Maybe I could learn how to read this stuff. That first visit didn’t give much useful information, except that I could apply for Medicare online. When I attempted it, I found I should wait until three months before my 65th birthday month – August for me. So, I turned to the insurance question.
I have probably had BlueCross BlueShield health insurance more than 85% of the time since I was first aware of health insurances – including my parents’ plan. So, I am inclined to stay with a company that has served me well. On the BlueCross website there were two Medicare plans that appealed to me. One cost nothing. The other appeared to be about $50 per month. Since I know the full cost of my employer provided coverage this was amazing. Yet, these estimates were without my prescription information.
There is a much more expensive BlueCross Medicare plan. Since I am satisfied I can handle the maximum out-of-pocket expenses for either of the less expensive plans, why pay someone to take this risk? Insure for the losses that would be devastating, not convenience. Sure, it will be inconvenient if events lead to spending the maximum out-of-pocket amount. I don’t know whether that will happen. If I elect to pay the higher premiums, those premiums are a certain expense.
I mentally set the whole thing aside, until the offers in my mail were more than normal one day and I was eligible to apply for Medicare. The link is www.Medicare.gov. On the opening page, two yellow rectangle buttons can get you started. “Apply for Medicare” should take less than thirty minutes. I don’t remember searching for information I couldn’t remember. Apparently most people can complete the whole application by following those steps. In my case, the last page said; “Your benefit application was received on … We cannot complete processing of your claim until we have received and verified all documents.”
They needed my birth certificate. The Social Security Administration was missing information from it. The young man helping me told me the information would have been collected if I had interacted with Social Security for almost anything in the past. He was very professional, almost caring. The wait to see him was reasonable, in a room that could handle many more than were there that day. I can remember Dad talking about my brand new Social Security card and signing it. I don’t remember ever going to a Social Security office. I still have the same cards, but they sent me a new one. It doesn’t look much different. The Medicare card should arrive soon, after which I can apply for Medicare supplement insurance. I was there about thirty minutes. It could have been much longer if that waiting room was full.
The young man also told me there is a tool for comparing supplement plans on www.Medicare.gov. This is the other yellow button on the opening page. Following it is easier than comparing plans on the BlueCross website. The tool needs basic information I could remember, plus data from my prescriptions. I breezed through it faster than the Medicare application. At the end, there was a list of the insurance companies and policies, with very clear information about total annual cost estimates, including out-of-pocket and premiums. For me, three vendors were obviously better than the rest. BlueCross was there with the two plans I found earlier. Premiums were slightly higher. I can sign up on that page as soon as I get that coveted Medicare Card.
I hope this will help calm those who approach the application. If nothing else, it should help you, or someone around you, toss all that useless mail.
Added as of October 13, 2012:
A client responded to my Medicare application story – “David, Welcome to the over 65 age group. Medicare can be a very confusing subject for a lot of people – what plan to take and which way to turn. If I had what AARP wastes on paper I could smoke those big cigars and drink the best wines.” So, I am adding a few words.
I came home one evening to find that someone had actually come to my house to “help” me decide on a plan. They left a brochure and business card. There had been a similar offer by phone. I wonder how much commission there is in selling these plans.
My Medicare card arrived and I apply for a supplement online. The application was straightforward. On this visit, I discovered my Medicare monthly premium will be more than the $99 I expected earlier. Income from work gets me one of those “tax breaks for the rich.” The supplement is still $50.
Amazingly, mailed brochures seemed to stop very soon. A curious one was from the company I chose online – for their more expensive choice. I first though it was paperwork to be completed, which may have inadvertently “upgraded” my application. The next day a letter from the correct plan and a three-page form arrived, to verify I would not be covered by other health insurance. There was also a 1 ½ inch stack of six booklets – postage over $5. The package tells me more current information may be available online.
I also received several pages of questionnaire from Social Security Administration, to determine whether I qualify for Medicare premium assistance. This is an adventure. I can’t wait to see what happens next.
Contact J. David Lewis directly with DLewis@ResourceAdv.com. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 61112
October 3rd, 2012
Note from J. David Lewis – This excerpt is from the New York Times article that should be good reading for anyone who thinks about the meaning of their resources to future generations. It has clear connections to our slogan – There is more to money than money®.
“What heirs should know and when is the question every parent wants answered, Mr. Williams said. “The biblical story about the prodigal son was really about a son who wasn’t prepared,” he said. “It’s the same problem today.”
The better question parents should ask themselves, he said, is what they want to accomplish with the money. Waiting may result in a higher tax bill but could avoid generations of family discord.” – By PAUL SULLIVAN; Published: July 20, 2012
Read the full article via What to Tell Children About Their Bequest and When – NYTimes.com.
July 31st, 2012
Our Comment by J. David Lewis - There is more to money than money®. And, there is more to investing than picking one (or a few) indexed mutual funds. There is still art and the need for judgment in putting together a good portfolio, no matter what instruments you use.
By Jason Zweig
“As a result, investors are equipped with the itchiest trigger fingers ever in one of the touchiest periods in history. To blame the rise in correlation solely on indexing, they argue, is shortsighted.
With active stock pickers still stinking up the joint, indexing remains the cheapest, most convenient and most reliable way to capture the returns of just about any market.
But if the only index fund you own is linked to the S&P 500, too much of your money may be riding on stocks that move in lock step. Think beyond the S&P 500 to baskets like the Russell 3000 index or “total stock market indexes” tracked by Dow Jones, MSCI, S&P or Wilshire, which hold a much broader selection of stocks.
Next, no matter how diversified you are, you probably arent as diversified as you think.”
Read the full column via The Intelligent Investor: Are Index Funds Messing Up the Markets? – WSJ.com.
Contact J. David Lewis directly with dlewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.
February 24th, 2012
Our Comment by J. David Lewis - As Zweig often does, this column helps his readers put the current investments events into a much longer and more meaningful context than most people are able to see.
By Jason Zweig
They might not have had a choice. The investing mind comes with built-in machinery that sizes up the future based on a surprisingly short sample of the past. Neuroscientists say the human brain probably evolved this response in a simple environment in which the cues to basic payoffs like food and shelter changed slowly and rarely, making the latest signals most valuable—nothing like what todays investors face with electronic markets in a constant state of flux.
Experiments led by neuroscientist Paul Glimcher of New York University found that cells deep in the brain calculate a sort of moving average of past events, giving the greatest weight to the most recent outcomes.
When the latest rewards turn out to be better than the long-term pattern, these neurons fire unusually quickly, spreading a burst of dopamine—the neurotransmitter that triggers the pursuit of reward—throughout the brain. Thus, after a decade of mostly dismal stock returns, even a month or two of outperformance might prompt you into an impulsive
Read Jason Zweig’s column via The Intelligent Investor: This Is Your Brain on a Hot Streak – WSJ.com.
Contact J. David Lewis directly with dlewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 57739
February 12th, 2012
by J. David Lewis -
There is more to money than money®. Investment performance is only one of many factors that influence growing financial strength. Even during the best market conditions, the far more significant influences for improving wealth are investment contributions, withdrawal management and debt management. No investment return can produce meaningful progress without these disciplines. This has been particularly true since 2000. Yet, we know people who have surprisingly good financial growth through these years. In How Financial Advisers Get Clients to Take Action – WSJ.com, a Wall Street Journal article highlighted Resource Advisory Services’ unique methods for helping clients with this sort of thing. I wrote about tools you can use yourself to manage these factors in “A ‘One Task a Year’ New Year Resolution”. I will now discuss a couple of our investment performance observations that appear to be at play recently.
We describe our use of actively managed mutual funds on our website in Investment Philosophy. We believe carefully selecting these managers can produce returns that exceed the expenses within the mutual funds. They “fine tune” the asset allocations for us. Our rebalancing is generally less overt than it would be with indexed mutual funds. By this, we mean a large part of our rebalancing is accomplished by having mutual funds pay cash distributions instead of reinvesting. We can then make conscious reinvesting decisions. This year, Bryan Hankla and I have been discussing a subtle and interesting asset allocation phenomenon that has been developing for a good while.
The mutual fund data service, Morningstar, attempts to classify mutual funds according to many traits – probably too many to be useful. Two of the major divisions are the growth investment style versus the value investment style. In reality, each of these styles is defined by philosophies and methodologies of investment managers. Growth investing is about finding companies that have grown in the past, with a high probability they will continue that growth. Value investing is about finding companies that have underlying value greater than the current stock price reflects. One would be hard pressed to prove either method is better than the other over the long term. In the short term, one or the other often prevails. There are outstanding experts using each style. Very few are able to effectively shift from one style to the other. So, we like to keep a balance of mutual funds committed to each style.
Instead of attempting to quantify these abstract approaches, Morningstar attempts to consider some companies growth and some value using mathematical techniques. Then, they deduce the growth or value mutual fund management style by the preponderance of these styles in mutual funds. It is not at all uncommon to hear investment managers adamantly object to the style Morningstar has assigned it. We follow the “corporate personalities” of mutual funds we use enough to judge whether we believe these objections are well founded. They usually are.
For at least a year, we have noticed that Morningstar has been reclassifying a number of mutual funds from value to growth. Have these mutual fund managers changed their management disciplines? Have companies Morningstar once considered value companies become growth companies? Should we sell and buy mutual funds to restore our allocations between growth and value based only on Morningstar assignments?
I have not forgotten a couple of dinners with Chuck Royce, in the 1980s, when his mutual fund offering was much smaller than now. He talked about the importance of developing a style and methodology that you can believe strongly enough to stick with it through thick and thin. For him, it was small cap value. More than twenty years later, his firm seems to have never drifted from that approach, although it has been severely out of favor at times. Other managers we follow appear equally committed to their unique styles of management. If we believe one changes its philosophy, we are more skeptical than we are after a year or two of weak performance relative to the general market.
So, when we see that Morningstar has moved a mutual fund from one category to another, we pay more attention to whether the manager is still approaching its job the way we expect than the label given by Morningstar. To be sure, we pay attention to the Morningstar categories. We also pay attention to other sources of information about our choices. A dose of judgment is important. We want to know as much as we can about the mutual fund managers’ investment styles and let those professionals do the job our clients’ pay for in mutual fund fees. This is a reason Bryan has visited a few mutual fund companies in recent years, to see how committed they are to their styles.
There is another interesting asset allocation observation we have not heard discussed. It is the difference between performances for U.S stocks versus international stocks. At the end of October, the twelve-month return for the S&P 500 Index was +8.09%. The comparable return for Vanguard Total International Index Fund was -6.54%. This helped us understand how much impact our international mutual funds were having on total portfolio returns. By January 31, 2012, the disparity of 14.63 percentage-points had widened for a couple of months and then narrowed slightly to 13.20 percentage-points. It was 4.22% for the S&P versus -8.98% for international stocks as of January 31, 2012. How should we feel about our allocations to international stocks?
There is substantial market history that speaks for long term international investing. We continue to believe it is important to maintain appropriate international allocations. Since January 31, 2002, the S&P 500 Index return was 3.52%. This compares to 7.11% for the Vanguard Total International Index Fund – roughly double the S&P return. Other evidence clearly indicates one-year performance is a very poor predictor that a category, like international stocks, will continue the same trend through the next year’s performance. So, we continue to believe we should maintain international allocations essentially as we have in the past.
My years of experience with this sort of thing have convinced me that Chuck Royce was and is right on the matter of maintaining discipline. To the extent investment performance has influence on net worth, our tendency to use international, mid-cap and small-cap funds in larger percentages than the S&P has helped our clients’ net worth over the longer-term.
Contact J. David Lewis directly with DLewis@ResourceAdv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 57427
February 6th, 2012
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