Very interesting post over on grownchildren.net (what a great title, btw).  The gist of the post is the importance of having “The Chat” with your kids.  I’m squimish when it comes to discussing adolescence but for some reason, I find financial discussions to be easier.  Not so for most people.

So, it got me thinking about 3 important reasons to discuss finances with kids:

1. logistics: it happens that parents pass away without ever telling children where their assets are located.  In my job as a financial planner, I see this occur with more frequency than you’d expect.  Children spend the time post-mortem looking for and tracking down assets.  Bequeath the assets or give them away but don’t lose them.  Keep your kids in the loop.
2. ethical inheritance: use these discussions to impart your values on your children.  Let them know why you worked so hard all your life.  Explain to them how you manage the work/life conundrum.  These discussions, however awkward, mean a lot to your children, while you’re around and after.  AS Penny mentioned in the article linked to above, it’s also a great forum to explain divergence in inheritances between family members.  I remember my grandfather, OBM, showing me his mother’s will which effectively left nothing to him and all to his siblings because he had done well in business.  He understood what he mother meant by her actions and in fact, respected her for such decisions.
3. wealth transfer: how frequently we see new clients coming into money for the first time in their lives while in their late 50s and 60s.  Their parents lived to a ripe age and left money for their middle-aged children.  Frequently, as we see the baby boomers retire, this requires the children receiving inheritance to learn basic asset management skills and/or shop around for an advisor.  The sooner the children are brought into the circle of trust, the sooner and quicker they can start scaling the knowledge curve required to manage money responsibly.

I’ve been spending a lot of time with financial planning clients recently and discussing retirement. The discussions focused less on what my clients wanted to have in the bank at the end of their plan but focused more on how to get there. I gave them my usual spiel: how important it is to diversify asset classes and geographies.

The next step is how to diversify. Modern Portfolio Theory states that with diversification comes smoother gains but how to best diversify. Depending on the theme, geography or industry, professionals frequently use mutual funds and more and more, investors are beginning to use exchange traded funds (ETFs). Like a mutual fund, through purchase you get a basket of stocks, but unlike mutual funds, ETFs are priced and traded throughout the day.

I was reading some financial literature on Yahoo Finance when I hit upon an article: Mutual Funds are for Losers. Great title (before you get to the content) and it captured my attention.

I don’t want to get personal, but I thoroughly disagree with this article. Phil Town, advisor and author, has recently published a book “Rule #1,” that amounts to: “Don’t lose money, find great companies, know their worth and acquire them at 50 percent off. Beyond that, he says the traditional advice — invest in mutual funds, diversify, buy and hold — is strictly for losers.”

Well, it may sell books but his advice is off the mark. I’m all for buying companies at a good value but what does 50% off mean? Off of what? Trying to buy companies at huge discounts to their book value doesn’t happen much these days. Instead investors have to find different ways of assessing value (see Magic Formula Investing) at more modern valuations. In this article, Town doesn’t define what “on sale” means. That’s important. How is my father supposed to know what to do with that information?

But what really struck me was the author’s contention that investors would be better served by buying a couple of good companies and just sitting on them. While I agree that to maximize the potential for hitting an investment homerun, concentrated bets are the only way to have huge returns — the problem is, for must of us (including professionals), there is only one Warren Buffett. What if my analysis isn’t correct or there is a huge credit crunch which no one — I mean no one — aptly predicted to occur to some of the US’s best banks (Merrill Lynch, Citigroup, et al.) What if Johnson and Johnson (one company Town names by name in the article) has a factory blow up in New Jersey? Or that Exxon Mobi, previously one of the world’s largest firms, is supplanted by PetroChina, the world’s first $ trillion company? Taking concentrated single-stock picks is really risky.

I’d like to posit that instead of swinging for the fences, something responsible advisors would never advise to do, most investors ARE best served by diversifying though mutual funds and ETFs. With the US dollar falling and investors wondering what to do next with their retirement dollar-denominated nest eggs, diversification is the only way to go. I don’t mind paying management fees (something Town discourages) if I get something in return. Sometimes its geographical exposure I can’t get with a passive indexed ETF. Sometimes, its active management of bond portfolios (something that ETFs don’t really capture.)

Do your homework and don’t follow every new author who publishes a book contradicting decades of financial and academic research.

[Image source: AntiGallery on flickr]

Summer is quickly approaching. Many people will start planning their summer vacations. Tremendous time and effort will go into the planning to ensure a joyous vacation for all. You will probably speak with a tour company, get recommendations from friends, gather information and research the best attractions.

Fiscal Fitness

Believe it or not there is much in common between weight loss, physical fitness, and financial well-being. Unfortunately people tend to bite off more than they can chew. The key to successfully losing weight is discipline. Cutting back on what you eat and adding exercise to your lifestyle will help you shed those unwanted pounds. It’s when we say, “I want to lose 20 pounds” without a plan how to do it, that we tend to get in trouble. Budgeting is the same. If you create an unrealistic budget, you’ll likely save less than what your budget calls for, become frustrated, and resort to your old ways.

I’m Young; I Don’t Need to Plan Now

Another common excuse used is that, “I have my whole life to save, I don’t need to start now. I’d rather buy a new car and in a few years I’ll start.” Each year that passes with no investment, will affect your retirement. Assuming you have 30-40 years until retirement, every year you forego saving or investing money today will subtract 1-5 years from your retirement. Along the same lines, I often hear people in their 50’s, when speaking about retirement planning say,” I don’t worry about retirement because I’ll just keep working.” Sounds good except what happens if you wont be able to keep working. I recently met a man in his early 50’s who has worked as a house painter his whole life. He told me it’s getting hard for him to paint for a full day because all the hard work has taken a large toll on his body. Thankfully for him, he started saving at a young age.

Rich Aunt Molly

Sadly, many people plan for retirement by dreaming that some long lost wealthy relative will die and put them in their will, and they will turn into millionaires. Such far-fetched fantasies are common. I read recently that a full 25% of Americans polled, actually thought that their plan for retirement was to win the lottery!

Time to Make a Plan

In our day-to-day lives we are always making plans. We plan what to have for dinner; we plan which parent is going to pick up which kid from school; we plan vacations. We are constantly planning. We tend to have a goal, and we initiate a plan in order to reach that goal. The same should hold true with our finances. Making a financial plan is essential to start preparing for your future. Since we are not prophets and we can’t predict the future, a solid financial plan can guide you through the uncertainties that lie ahead, and help you in achieving your retirement goals.

Just Start

The fact is that if you don’t have to be wealthy to start investing. Let’s say you start at 25 years old by investing $15,000 and in addition you manage to scrape together $2,000 a year to add to your account and everything is invested at 5.5%. If you were to continue this disciplined investment approach until retirement (65 years old) you would have over $413,000. If you were too add some risk to your investment profile in the hope of getting a higher return, your nest egg at retirement would grow even more substantially.

If you take control of your own finances and start saving early and stop delaying, you can retire without having to worry about old age unexpectedly catching up with you.