Wednesday, September 21, 2011

The Threat from the Future: Boomer Retirement Concerns

Every second, a Boomer retires. This statistic alone should be a comforting thought. It is but not necessarily for Boomers. Billions of dollars of invested money will suddenly come under the direct control of this group and many simply don't know what to do. Yes they will want to ensure they don't run out of money. But they will have just as many opportunities to lose it all - in a scam that promises to make sure they don't run out of money.

On the Monday Financial Impact Factor Radio hosted by Paul Petillo we had Pat Huddleston, author of The Vigilant Investor: A Former SEC Enforcer Reveals How to Fraud-Proof Your Investments Mr. Huddleston is also a lawyer and CEO of Investors Watchdog LLC. As a former SEC Enforcer, he has seen more scams than you could imagine. With his new book, he takes those stories and the effect it has had on the victims and gives us the ultimate tell-all on how to spot what the people we may trust are actually doing - often right under our noses.

This is a must listen show for those on the cusp of retirement, those who have already retired and those who have elderly parents who are already retired. In other words, everyone stands to gain when they steel their hard-earned portfolios against a loss.

Friday, September 16, 2011

The Magic of Personal Finance is that there is No Magic


I wanted to talk a little bit today about illusions and our brain. No doubt most of you are familiar with magic. We call falling in love with the right person magic. We think of good fortune as magical. Yet, magic is based on three key principles and these are best illustrated with the simplicity of a card trick.

Although I am not a magician I do know that every kind of magic hinges on the ability of the magician to create something your brain wants to believe. And this precarious attempt to fool you depends on you wanting to be fooled. In fact, every magic trick is based on this belief: that the magician can fool you. But noted magician Penn Julliette of Penn and Teller fame also is quick to point out that any sort of illusion, designed to fool the brain is a disaster waiting to happen. Surprisingly, attitude has everything to do with the success of any trick – not you attitude, but that of the magician.

Mr. Julliette explains that in a simple card trick, the key is for the magician to act as if he doesn’t care. He could care less whether or how much you shuffle the deck and his attitude portrays exactly that. Then, when you return the deck of newly shuffled cards to the magician, he or she then offers you a card, any card. You do and this also doesn’t matter. But where you put the card upon returning it after memorizing of course, it does.

Now the magician’s job isn’t finished. He or she does care where you put the card and uses any number of techniques to get the card back to the top of the deck. But your brain believes that it has controlled everything up until this point. In effect, the unwilling suspension of disbelief has taken over our thought processes. Even when the magician offers to have you re-shuffle the deck, you won’t.

Now I have been writing about the state of personal finance for over thirteen years. Which means I have spent a great deal of time with people who are looking to achieve the same financial success in their post-work life as they may have in their pre-retirement life. But our brains are working and I fear that we aren’t doing a very good job talking to those brains.

As financial educators, we are well aware of what the people we focus on do with the information we have. In fact, most of us find some sort of information, latch on to it and actually look for confirmation of that thought. In 2007, researchers at the University of California – San Diego found that once we expose ourselves to information, it becomes an acquired memory. Not permanent mind you. Your brain doesn’t work that way. Instead it seeks out information that permanently fixes it in our heads. This is what brain folks call spaced repetition. Given the right info your brain performs impressively. Given the wrong information, and your brain still performs impressively.

Another bit of research points to what is called retrieval. Seems your brain performs better if the memory you have stored there is pulled and examined. Each time we do, the memory gains some importance. We as financial people fail here as well. We do make those we deal with think about what they want and how they think it should be once they get it. But inevitably, we add to the problem by giving them something they hadn’t considered. The memory of what we thought we knew is still there. But now we have something else to remember.

The last problem we encounter is as financial educators is the act of dumbing down. We fail to do what some educators have found is the most important of functions: interleaving. We try to explain things in so simplistic a way that we actually confuse more than teach. We tend to piecemeal our lessons, a bit about debt here, something about insurance there and perhaps a little estate planning antidote thrown in for good measure. Yet we define them as parts of a whole instead of a whole. They are intertwined and we make the mistake of suggesting all too often that they are somehow pieces to be taken at their own worth, an approach that doesn’t seem to help according to the journal Applied Cognitive Psychology. Those we are hoping to help, according to this august publication would do better if we lumped it all together, somehow tying it up in a neat bundle of problems and issues instead of giving the whole process a linear feel. It can’t be helped in books, as as any editor or writer knows. One thing needs to lead to another.

And far too often, we break that linear explanation of money into something like this: hope, fear and confidence.

Unfortunately, hope for something better is dashed by the fear of what we don't know and ultimately, your confidence begins to wane. This is problematic for anyone who attempts to try and describe what they know, How do you parse the necessary information amongst the thousands of messages out there and make it meaningful across all readers?

Perhaps boiling it down, removing the illusions, forgetting the magic might work. Personal finance is no magic trick. It involves challenging what you know; not simply believing what you need to know. You need to save and invest and yet, even as you commit to those hopes, you are challenged by what you hear and this creates fear. Fear that perhaps you haven't done all you could do. Perhaps confidence stems from doing what you can with what you have to achieve what you are capable of. Lofty goal setting aside, you are the magician looking at the trick. Tell yourself what the magician tells you.

You are probably better off than you realized. You are probably capable of fixing the small things which in turn lead to the bigger solutions for the problem. Be the magician against the markets. All you need to know is how to your card on top.

Thursday, August 25, 2011

Now What: A Plan for Surviving Your Investments


While many of you want to believe that you are on track for retirement - and many of you actually are, confidence is not something you are comfortable with. It wears like a wool sweater on a summer day: protects you from the sun while melting what you are protecting in the process. In other words, there is no happy medium anymore. It seems to have simply left the arena. Or has it?

Ironically, those of you who were able to answer the questions in the previous post, "Now What Retirement?" will probably not be able to do the same in the next segment of our look at "Now What?" as we grapple with investments. Yet retirement involved investing. Didn't it?

In some ways, retirement or the near proximity of it is a form of investing. You did, in all likelihood use the same place where investors flock: bonds, stocks, commodities, perhaps and in many instances, that access came via your 401(k). This is, for the average American, the extent of their investment exposure.

You might argue that your home is an investment. In the truest definition, it is not. It is neither liquid nor accurately valued at the end of each business day. The process for buying and selling is neither seamless or efficient. In fact, every dollar surrounding the buying and selling of a home seems to be a waste. So no, your home is not an investment. Unless of course, it is lumped in with your retirement plan. But the parameters have changed in that event and it becomes more asset than investment asset.

But the not-so-near retirement planners consider each move they make to be investment driven. Then drive as if it were. And in taking the proverbial investment wheel, you need to know what the rules are.

In a skittish market seemingly set off by the slightest hint that all is not so perfect (and when has it ever been?), the temptation to follow all of the bad investor habits we have discussed here over the years is multiplied tenfold. You want to sell when everyone else is selling and buy when they shift course. You worry that what was once a good decision is no longer as good, even though little has changed. Sure, the news is the news and is fluid. But the news is much of the same, recast.

So, as the siren of sell sings in your ear, remember this: Consider risk, not performance. Risk is basically a four letter word for "diversifying your assets across as many classes as possible". While you may not be able to buy individual assets in each of the major asset classes in quantities enough to make diversity work well, you can buy the indexes. In times of turmoil, parking your money in the broadest based places - and they should have been indexed in the first place, protects your money in the same way the wealthy tend to protect theirs.

The smartest investors are not the ones who are all-in. In the case of smaller investors, the emergency account you have built up is similar to the cash reserves that the wealthy might have. If you don't have to sell anything, and that temptation is there when the market begins to slide, because you have money on the sidelines, you can wait it out. And that is why those who consider themselves more savvy as investors still know the real value of a portfolio is the cash available. Even if the only opportunity is surviving until there is one!

No investors ever folds. The investors who have been in it for the long-term know that even if the market news is bad, even if the gyrations seem to be getting closer rather than farther away, even as the concerns have become more global, panic has never gotten anyone a profit. But patience has. You may sell a loss but for tax purposes. And you may sell a gain perhaps because of out-performance or rebalancing. But the wisest investors never sell based on fear.