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Keeping a Cool Head Can Earn You Money

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You’ve heard it before: Don’t let emotions get in the way of business.  Well the adage holds true for investing, as well – probably even more so.  It seems easy enough to do, but when you see the value of your savings falling like a botched Martha Stewart soufflé, your first instinct may be to sell, sell sell!  But acting out of emotion can often be the worst thing you could do when it comes to investing.  Here are some tips to prevent sabotaging your financial well-being.

  1. Make sure you have a specific financial goal (or goals) with a specific time frame in mind. Sounds pretty basic, right?  It may be, but the trick is to really give this some serious thought.  Very rarely are you saving for just one thing at a time.  Most of us are saving for retirement, future college costs, and near-term goals like buying a new car or house, a home remodeling project, or planning a big vacation.  The way you invest for a short-term goal is very different from the strategies you would use to meet a goal that may be 30 years away, like retirement.  Long-term goals require growth provided from stocks (equities), because you will need the money to outpace inflation.  If you put your retirement savings into CDs, after thirty years, your investment would be worth less than what you put in because inflation would have reduced its purchasing power.  Short-term goals require stability, because you plan on using the money soon.  If the stock market has a set-back, you can loose a substantial amount of your investment in an eye-blink.  Therefore, CDs, money market, or even short-term bonds would be a good choice for a shorter investment time frame. When I hear people say they want to make as much money as fast as they can – they need to know the reality is that the inverse holds true for that investment, as well.  If an investment can move up in value rapidly, it is volatile and it could just as easily (and swiftly) move in the opposite direction.
  2. Diversify your investments.  Yes, stocks are for growth and bonds, money markets and CDs are for income, but having a mix of investments can really protect your investments from times when the stock market may be volatile, or times when rates on CDs or money markets are anemic. Alternative investments, as a group might be risky, but when added to a portfolio (and combined in very specific percentages) can actually reduce a portfolio’s overall volatility.
  3. Start as early as you can, and invest regularly.  The earlier you begin investing for your long-term goals, the better, because time is on your side.  As your investment grows, you can take advantage of compounding, which is when you take whatever income or gains from an investment and buy more shares.  Investing regularly is another good strategy, because it helps remove emotions from investing.  By treating investing like a bill to pay every month, you stop thinking about how else you could spend the money.  Over the years, the money adds up and one day you look at your balance, and you can’t believe how painless it was to actually save.  Most mutual fund companies will even link payment to your bank so every month your bank account will automatically be debited and you won’t ever need to remember to write out and mail a check.  There is also another big advantage to making regular fixed investments every month:  it is called dollar-cost averaging.  Because there may be some months when the price of a fund is lower than other times, you will buy more shares, and during the months when the price is higher you will buy fewer shares.  The price, in effect, gets averaged out over time.  It helps protect you from sinking all of your money into an investment on a day that may happen to be a high.  Yes, this also means that you will not be buying on the absolute lowest day, either.  But, since the market is impossible to time, this is the most logical (unemotional) way to invest, not to mention it puts an element of discipline into your commitment to invest.
  4. The markets can be fickle, but don’t you be.  A well constructed plan needs to be followed out.  If you shift your plan as the market moves, you will forever chase performance and be a reactive investor.  Holding firm to your plan isn’t always easy, but deviating from it can prove fatal.

 Remember, like most things, the planning is the hardest part.  Once you’ve determined what your goals are, and how much time you have to reach these goals then you can begin selecting the right investments.  Then, you can let your money work for you.

Financial Aid: Know the Rules of the Game

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You would never jump into a game and wager thousands of dollars without first knowing the rules.  And yet, every year many parents do just that as they embark on the process of seeking financial aid for college costs.  The truth is if more parents understood how the information on the Free Application for Federal Student Aid (FAFSA) is analyzed, they would take steps to place themselves in the most favorable light.  Strategic positioning can really pay off if you know how the game is played.  Here’s what you need to know:

  1. How your data will be assessed:  The formula FAFSA uses to determine the Expected Family Contribution (EFC) considers the parent’s income, savings and investment assets (excluding retirement accounts and the primary residence), as well as the student’s assets and income.  On average, parents are expected to contribute about 5.6% of their assets and between 22% and 47% of their income (with a $20,000-$60,000 allowance based on their age) towards college costs.  Students are expected to contribute roughly 20% of their assets and 50% of their income (with a $3,000 allowance) towards the tuition bill.  Switching assets into a child’s name would not be a helpful strategy.  If your child is employed, consider opening a Roth IRA, as retirement assets are not considered assets.
  2. What time fame you are working with:  The FAFSA form is submitted during the student’s senior year in high school, based on data from the previous tax year (i.e., January 1 of the student’s junior year through December 31 of senior year), also called the Base Year.  Strategies that can be employed to reduce income or assets before the assessment period could prove very beneficial (e.g., sell non-retirement assets before the Base Year and use this money to fund IRA or Roth IRA accounts;  speak with your employer about receiving your bonus prior to the Base Year, or delay the bonus until the following year).  In addition, avoid liquidating any investment assets during the Base Year, as that inflow of cash would be considered as income.
  3. What counts against you:  Non-retirement assets are considered available funds, even though you may be carrying high credit card debt.  Prior to January 1 of your child’s junior year, consider taking some of your non-retirement savings or investments and using them toward reducing or eliminating this debt.
  4. What works in your favor: Roth IRAs, IRAs, employer-sponsored retirement accounts, Coverdell accounts, 529 plans, annuities, or the cash value of life insurance policies are not considered as assets for the purposes of FAFSA.  Prior to the Base Year, consider moving non-retirement assets (which FAFSA does count as assets) into one or more of these types of accounts.   

Remember, if your child is looking at more elite, private schools, the CSS form will need to be completed as well.  This formula assesses parents and students differently, and requires more of a contribution from both the parents and student.

After you submit the FAFSA form, the matter is out of your hands.  But, what you do beforehand, when the matter is in your hands, can be critical to the outcome.  Being aware of what you are up against may change your approach to the game and, hopefully, with a little planning, may help reduce the tuition bills.

Seize Control

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Years ago, when I commuted by train to New York City, I remember feeling powerless and frustrated by delays.  I would feel my blood boil if there was the threat that I would be late.  Once I accepted the fact that I was not in control of whether the train would arrive on time, and took responsibility for what I could change — my commute became downright productive.  I left myself more time to get to the station; I took an earlier train so that even if it ran late, I would still be on time; and finally, I always kept work or reading material at the ready to utilize the time spent commuting in a productive way.  Investing is a lot like the train ride.  It may be unpredictable and you may get anxious, so what can you do to make the most of this experience, instead of allowing yourself to be swept up in frustration? Plenty; but to be effective you can’t get emotional and you can’t panic.  Take this time to assess what you have been doing, and whether or not your strategy needs adjusting.  Here’s a step-by-step plan to empower you in these unsettling times:

1.  What do you own?  It is surprising how many people have tens or hundreds of thousand dollars invested, and yet they are not sure what they own, or what their portfolio is designed to do.  Looking at your asset allocation (how your investments are spread out in the investment arena) is quite important.  In fact, Ibbotson Associates, a leading authority on asset allocation, found that 92% of investment returns are determined by the types of assets owned.  Market timing (buying high and selling low) accounted for just 6% of returns, and individual security selection accounted for a mere 2% of returns.  Meet with your financial professional and discuss how your portfolio is invested not just between the broad categories, like stocks, bonds, and cash, but more specifically in what types of securities.  For example, stocks (ownership in a company) can be grouped by capitalization (size), as in large, medium, and small.  Stocks can also be classified by style:  growth stocks are those that are expected to grow quickly; value stocks are thought to sell for less than they are worth (a “marked down” item, so to speak).  Stocks can also be domestic (US), foreign, global, or from emerging parts of the world economy.  Bonds (a loan) also fall into many categories, and can be issued by the US Government (or other governments), corporations or state and local municipalities.  Alternative type investments, such as real estate, oil, or gold also can play a limited role in a portfolio and act as a hedge.  Make sure the mutual funds owned in all portfolios contain different types of securities, or you run the risk of weighting your portfolio too heavily in one area; a market correction in that area would affect your investment results twice as hard.  If you are not working with a professional, now may be a good time to consider working with a fee-only advisor,  because this analysis takes time and needs to be done thoroughly to consider and minimize investment risks.  Also, your situation may have changed since you constructed your portfolio.  Make sure your asset allocation strategy considers:

  • Your time frame/goals;
  • All investments in all accounts;
  • Investment overlap in individual stocks owned and in mutual funds;
  • Different asset classes (stocks, bonds, etc.), different market capitalizations (large, mid and small companies), different investment styles (growth, value) and different markets (US, foreign, emerging);
  • Where the investments are owned (in a taxable brokerage account, or in a tax-deferred retirement account) because investing without being aware of potential taxes can result in “giving back” your returns in the way of taxes; and
  • If the risks assumed are worth the potential reward.

2.  What is it costing you?  Having investments and not paying attention to the costs is a sure-fire way to handicap your potential returns.  If two portfolios own the same investments (such as the S&P 500 Index), but one’s fees cost 0.20% and you own the other, which costs 2.35%, immediately you have reduced your returns substantially.  In a volatile or down market, paying higher fees can make generating a reasonable return quite unlikely.  Most important, though, is what you forfeit over the long-term when you pay high fees.  As investments compound over time, the cost of high fees becomes more damaging.  Let’s assume these two investments each returned 10%.  After the deduction of fees, the returns are dramatically different: the high-cost investment returned 7.65% versus 9.80% for the low-cost fund.  After many years, these fees would really impact your bottom line.  If you invested $10,000 in each of these investments, after 30 years, the high-cost investment would be worth $91,289; and the low-cost mutual fund would be worth $165,222 – nearly $74,000 more than the high-cost investment.  Of course, this example is hypothetical and does not reflect past or future results for any investment. Click here to read more a more in-depth discussion about fees. 

3.  What is your plan?  Again, the power lies with you.  Maybe you have left your investments unattended and the stock portion of your portfolio is larger than it should be.  Maybe you have not left enough of a cash reserve to cushion the blows from difficult markets.  Perhaps you would benefit from a gradual reallocation of your assets towards a more palatable allocation that won’t keep you up at night.  Maybe you have kept too much in cash and are not earning anything and could benefit from buying low as opportunities arise in this volatile market.  Again, sit with your professional and really go over your objectives, time frame and tolerance for risk (keeping in mind, of course, that an all cash portfolio guarantees you a negative return in this low interest-rate environment).  It has been our finding in working with clients, that accepting 60% of the market’s gains is well worth the protection of declining 60% less than the market in times of trouble. We lean toward a more balanced portfolio allocation for our clients for this reason. 

Remember, until you sell something, you haven’t lost anything.  But looking for ways to buy low and adjusting your portfolio to assume less risk and to pay less in fees will certainly benefit your long-term results in a meaningful way.  The control is yours to seize.  You can choose whether to allow yourself to feel stranded, waiting for the train to pull in, or you can use this time to make sure you are ready to climb aboard when the opportunity presents itself.

 We’re here to help should you need guidance: contact ATI Investment Consulting, Inc. at 631.675.1420.

 

Think and Grow Rich – by Napoleon Hill

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Think and Grow Rich (Napoleon Hill) - Blogging...

Think and Grow Rich (Napoleon Hill) – Blogging Bookshelf (Photo credit: The Booklight)

This was a most amazing book. Andrew Carnie, of steel manufacturing fame, charged Napoleon Hill with writing this book. It was written in 1937, took 28 years to complete the research, and was the summary (I guess that’s a good word) of the 500 most successful people of that time including greats like Abraham Lincoln, Thomas Jefferson, etc.

What an impressive book. I’m going to provide just a brief summary and I do encourage EVERYONE to read this.

Most of the book is directed to the state of mind. I truly have realized, during my journey in my quest for quality of life, that our mind is what imprisons us, what causes us to become a victim. It’s most important for us to exercise as much control over the chatter that enters as it can totally bring us down.

Another component of the book was about “nay-sayers” that told some of the greats of our Country that things were impossible, could never happen, etc. Believe it or not, “Doubting Thomases” even told Henry Ford he could never be successful producing the automobile! I have learned, over the past years of my quest, and had reinforced through Mr. Hill’s brilliant work, that “the mind could produce anything the mind could conceive and believe” (p. 285). This book has helped me see that. I know I’ve been held back believing in people who have told me “no” or that “it can’t be done” or “why would you bother”. Although I feel bad that I let this happen, I know you can’t go back (you know, the Eckhart Tolle Power of Now philosophy – there is no past, there is no future, there is only the present). So, we move forward.

What do you want in life? Feel it, believe it. Write it down. See it. Make it happen.

In Think and Grow Rich Mr. Hill reviews 13 principles which lead to success. I considered going through and summarizing each one, but, as stated in the preface, “this book contains the secret, which as been put to a practical test by thousands of people from almost every walk of life. [Andrew Carnegie] believed the formula should be taught in all schools and colleges, and expressed the opinion that if it were properly taught it would so revolutionize the entire educational system that the time spent in school could be reduced to less than half.” (p. vi)

He noted that the secret will appear in the book as you read it if you are ready for it.

Therefore, I chose to not divulge it. 

The book is an experience, one that I am pleased to have taken part. It created clarity and pulled together ideas and education I have been acquiring during these past two years in my quest for quality of life.

A final thought from the preface, written by Napoleon Hill in 1937 (p. xi): “All achievement, all earned riches, have their beginning in an idea! If you are ready for the secret, you already possess one half of it; therefore you will readily recognize the other half the moment it reaches your mind”.

Hmm. . . does that wet your appetite?

Happy reading!

Doreen

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