Faith Based Investing

The stock market is amazingly resilient. You might be surprised at how fast the stock market can change … for the better. Let’s look at how the market has recovered remarkably – and quickly – from some notable downturns.

2008-2009. The collapse of the subprime mortgage markets triggered a recession and made 2008 the worst year for stocks since 1931. The Dow Jones Industrial Average fell 10% in June 2008 and fell 10% again in October 2008, losing 19.12% for the year. On March 9, 2009, the major U.S. indices closed at 12-year lows with the S&P 500 at 676.53. Then the market took off. From March 9, 2009 to the end of 2009, the S&P 500 soared 64.83% while the NASDAQ gained 78.87% and the Dow gained 59.28%.

2001-2002. After the four-day closure of the stock market following 9/11, the Dow fell 685 points to 8,920 on September 17. It kept falling, losing 14.26% in a week to close at 8,235 on September 21. But what happened next? A huge gain! The Dow closed 2001 at 10,021 – a 21% rebound in less than three months. There were more challenges ahead. On October 9, 2002, the Dow had fallen to 7,286. But on Halloween, the Dow sat at 8,397 – a 10.6% gain in 22 days. As for the people who panicked and bailed out of the stock market, they ended up kicking themselves: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.

1987. October 19 was Black Monday: in a contagion of selling exacerbated by unchecked computer technology, the Dow lost 22.6% in one day, falling to 1,738, a 508-point loss. Then the recovery kicked in. During the next two trading days, the Dow gained nearly 300 points – and it closed 1987 at 1,939, gaining back all of the loss and ending up 2% for the year^. By January 1990, the DJIA was at 2,800. If you were fortunate enough to invest $1,000 in the S&P 500 index at the close of Black Monday and reinvested your dividends, you would have wound up with about $10,800 20 years later. If you had invested in the Dow stocks a week before Black Monday, you would have lost 30% on your investment in the crash … but if you held on, your investment would have gained 462% over the next 20 years.

1974. With investors fretting over rising inflation and the energy crisis, the Dow loses 30% of its value during the first three quarters of the year. Suddenly, the Dow gains 16% in October. In early December 1974, the Dow is at 577; in July 1976, it hits 1,011.

So while the markets have been through some rough periods, it is important to note that panicking is not the answer!

Are you marrying soon? Have you recently married?

As you begin your life together, it’s important for you to start planning your financial future together and putting your finances on the same page. Here are some priorities you might want to write down on your financial to-do list …

Step one: Manage debt. Many of us go through life shouldering five-figure or even six-figure debts. When couples marry, the danger is that one spouse’s debt will be seen as “his debt” or “her debt”. Arguments may start because “your debt” is hurting “us”.

Debt management should be a priority for any newly married couple. There are good debts which we assume on the way to a positive result (such as a mortgage), but there are also bad ones we assume through our credit cards and other channels.

Step two: Live within your means. An established, mutually-agreed-upon budget can be very helpful in this regard. Different people have different levels of thrift, and different perceptions of what a “bargain” looks like. This perception gap can result in some interesting financial moments in your life – your spouse may pick up a “bargain” that you would call an extravagance.

Step three: Save for college. If you plan to raise children, it’s never too soon to start. You can do it a little at a time, a little per month. You can open a college savings account using different investment vehicles – stocks, funds, or investments with lower risks. 529 plans in particular offer you some fine tax breaks.

Step four: Insure yourself. If you are under 40, you may not have any kind of disability or life insurance. You may feel you don’t need it yet. However, getting a policy early can be cost-efficient: if you buy a term life policy (or even a permanent life policy) when you are young and healthy, chances are you will pay less expensive premiums than people in their 40s and 50s who may be obese, diabetic, heavy smokers or drinkers.

Step five: Communicate to avoid surprises. No matter how much of a “we” a couple becomes, there is always the need for some private space, some individual pursuits and “me time”. That’s great, but that’s probably not the best approach when it comes to your shared financial life. When a spouse starts to hide a money-related matter or omit it from conversations, it may open the door to troubles. Open, frank conversations about money may be the best way to avoid problems in your finances (as well as your relationship.)

Step six: Build an emergency fund. You’ve probably watched or read a number of stories about couples who were hit hard by the downturn – nice, once-affluent people who suddenly had to live in their car or a motel. When things got rough, many had no emergency fund to sustain them and ended up homeless. Consider building up a cash reserve (gradually, if necessary) that you could tap into should something go wrong. You won’t regret having it around.

Step seven: Plan for retirement. There is a chance that decades from now, many of us who are currently saving and investing for the future might end up millionaires. Actually, we may all need to become millionaires.

Consider this: according to current Social Security Administration projections, the average 63-year-old in 2010 is projected to live until age 84.  So today’s typical retiree is looking at a retirement of approximately 20 years. Some of these people will live past 100 – many more than in previous generations.

Given ongoing advances in health care, how long might you live? Living to be 90 or 100 might become commonplace for the members of Gen X and Gen Y. Factor in inflation’s effect on the cost of goods and services, and you can see a possible scenario ahead where you might need, say, $100,000 or more a year for 30 years to have a nice retirement in which you don’t outlive your money.  This (strong) possibility means you may want to make saving for retirement NOW a higher priority.

In a typical couple, one spouse is more risk-averse than the other (sometimes dramatically so). So you need to agree on the investment approach you take, preferably with the help of a financial consultant who can help you determine how much money you might need for certain life goals or financial objectives.

Straight from the mailbag…

If you have a financial question, send me an email and I always do my best to get you timely and professional advice.   A question I often get is, “How do I pay for college and save for retirement at the same time?”

It can be done!

All across America, families are meeting a mighty financial challenge – the challenge of paying college costs with retirement potentially on the horizon. How do they do it? They go about it consistently; they also get creative.
First, make sure the priorities are in the right order. Strange as it may sound, your retirement may need to take precedence over your child’s college education.

Think about it. Your son or daughter might qualify for student loans or financial aid. By the time they are 30 or 35, they may have the earnings potential to pay those loans back. Do you see any ads out there for “retirement loans” or “retirement aid”? For most, it is much harder to earn money at age 65 than at age 35. Because of this, many choose to allow the younger generation to assume the debt.  Assuming debt isn’t always the wisest.

Each student should look at their desired field to see how viable it will be to pay off student loan debt.  Any time, debt is incurred, it should be viewed just like an investment decision: You should ask questions such as – how likely can I pay this loan off?  How much will this debt cost me (over time)?
Here are some short-term and long-term ideas you may want to consider if you have college costs on your mind:

1. Save for college monthly. While dollar-cost averaging is a useful way to build retirement savings, its merit often goes unrecognized when it comes to saving for higher education. If you could put $40 a month even in a basic savings account with a tiny interest rate, over 10 years that is approaching $5,000. That’s nothing to sneeze at, and will certainly help out. Move the money from a checking account each month into a savings account, or …

2. Consider a tax-advantaged college savings plan. Contribute to a 529 plan, which features tax-advantaged growth and tax-free withdrawals when the withdrawn funds are used to pay qualified education costs. Not all 529 plans are the same – in fact, some of them will even provide a small cash “match” or “sign-up” bonus when you start your plan. Some 529 plans are even “prepaid” – that means you may be able to secure future tuition rates at current prices, usually at in-state public colleges. Another advantage of the prepaid plans – they are often guaranteed by the state.

3. Exploit your credit card. No, don’t pay for college with it … well, at least not directly. Some credit cards give you a cash-back rewards option. You may as well put the rewards toward college. Some of the major banks let you do this and so do online shopping websites such as Upromise. Always read the fine print and never carry a balance on the card.

4. Keep your income as low as possible in the base income year. That is the calendar year that starts as your child is in the middle of his or her junior year in high school. That is the year when college financial aid departments start to look at a family’s earned and received income. If you can avoid taking capital gains or a distribution from a 401(k) or 403(b) in that year, that will keep your taxable income low. Will Roth IRA conversions raise eyebrows? Yes, they will.
However, don’t stop contributing to your own retirement savings accounts, and feel free to pay off consumer debts with the money from your savings and checking accounts – the assets in these accounts aren’t used in financial aid formulas.

5. Let the college know if your financial situation has changed. Has the value of your home fallen? Is your business netting you far less than it once did? Financial aid departments should be willing to review these developments and may be able to adjust aid for your student accordingly.

6. Make it a family affair. In some cultures, it is common for all members of a family to pitch in on the down payment or mortgage payments for a home. Consider this strategy as your family saves for college. Close friends and family members may be willing (or even excited) to make ongoing contributions to a college savings plan for your child, and/or an annual “birthday” contribution. They may find giving such a gift to be much more meaningful and fulfilling than a mere toy or item of clothing.

7. Go hunting for every scholarship or alumni connection you can. First, make sure you find a great school at a reasonable price – that’s important. But it may be just as useful (if not more) to be both creative and consistent as you save for college. While it has always been a challenge, by putting some thought into it, most families and students can find ways to respond.  Scholarships and other “student opportunities” can help reduce what you owe each year!

All in all, saving for two goals at the same time is a challenge.  It takes hard work, discipline, and a prudent strategy.  Please let me know if I can help you plan and implement a strategy to tackle both objectives…

Just like magic

The purpose of a magic trick is to amuse and create a feeling of wonder; the audience is generally aware that the magic is performed using trickery, and derives enjoyment from the magician‘s skill and cunning. Traditionally, magicians refuse to reveal the secrets to the audience. They even take an oath to never reveal these secrets.

The Magician‘s Oath: As a magician I promise never to reveal the secret of any illusion to a non-magician, unless that one swears to uphold the Magician‘s Oath in turn. I promise never to perform any illusion for any non-magician without first practicing the effect until I can perform it well enough to maintain the illusion of magic.

Unlike the magician who relies on an illusion, many investors rely on true magic. They rely on what Albert Einstein described as the ―eighth wonder of the world‖- compound interest! Compounding, an investor‘s best friend, can certainly make you rich! It never ceases to amaze me when I look at the balances of some of my clients over the past fifteen years. What started with a few thousand dollars have become six figure accounts. Do you realize that some families thrive for generation after generation because of compound interest?

Money making more money

Trust funds, even invested conservatively, keep growing because with compounding, the trust earns interest on its principal, as well as on the other interest that has been accumulating. Getting started with investing as early as possible can make a big difference in how much wealth you amass. The benefits of saving early in life are greatly magnified by compounding. The power of compounding can make assets grow much faster. Where most investors make their biggest mistakes are using the wrong vehicles: taking too much or too little risk and paying too much in fees and taxes.

Being too conservative when you invest is detrimental to your wealth. I see many people become so fearful that they invest only in safe, guaranteed vehicles such as CDs, Treasury bonds, and money market funds. As life expectancies continue to rise, so do the probabilities that too-conservative investors may outlive their assets.

Being too aggressive is just as dangerous as being too conservative. Taking unnecessary risks and jumping into investments that are not understood are critical mistakes I see being made on a regular basis.

Too many people jump in and out of the stock markets at the absolute worst times. I see people finally get out at the bottom of the market only to get back in after a major recovery. I had a client that was notorious for his. I would spend hours with Phil. He would call to sell everything as the market was tanking and then call to buy back in after the market had a sharp rise. I had to remind him that the object is to “buy low” and “sell high”. Phil still calls me, but he has finally understood the concept the Warren Buffett describes best, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”

Some of my favorite Warren Buffett quotes:
1. “If past history was all there was to the game, the richest people would be librarians.”
2. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
3. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
4. “Only when the tide goes out do you discover who’s been swimming naked.”
5. “Price is what you pay. Value is what you get.”

Here are five biblical reasons God wants you to invest:

1. To be a good steward. Money and possessions are on loan to us from God. By learning about the various options that are available to us, we can make the best decisions. Careful study, prayer, and education are necessary. If you were buying a car would you buy the first one available? Most people will do some research, compare features, options, and prices. You would possible test drive various models and shop different dealers to select the right vehicle. It involves many steps. It is the same with investing. There are several steps you need to take to educate yourself on all of the possibilities so that you can narrow in on the type that is most beneficial. God expects us to be wise in the area of finance. If we do not desire to do this, we are expected and commanded to seek wise counsel. Like the thief who pleads ignorance, the judge will still sentence him as this is no defense. We are called to do the best with the resources that God provides.

2. To learn to defer gratification. By saving and investing we are able to delay things that we want today in preparation for tomorrow. This has been a real sore spot for many. They wrestle with the faith versus reason battle. It’s the chicken or the egg dilemma! If we do not save for our futures, we impose on someone or something which drains resources. I have this friend, Tony, who has a great heart for the Lord. He would often get in bitter disagreements with his friend Jeb over where faith and reason separate. Tony, who was taking care of a family of four, often would purposely not bring lunch or money to work, in hope that ―God would provide‖. Jeb saw this and grew angry as this appeared to be using a lack of reason and disguising it as faith. It nearly tore apart their relationship. We need to be careful that we are not so close to the edge that we blinding cry out ―faith‖ when reason could solve the problem. At the same time, we cannot take God out of the picture and always claim reason. By praying and carefully examining our options, we can begin to achieve the correct balance. Delaying our immediate wants allows God to provide for our needs and prepare us for bigger things to come.

3. To provide for our family’s needs. (ie: college, a home, etc.) As a father, I have the tremendous pleasure of providing for my families, physical, mental, spiritual, and financial needs. As the sole bread winner, Karen and I decided early in our marriage that when it came time to have children, she would stay at home with them. This was a clear and easy decision to make. We wanted that close relationship to be at home until the children went off to school. As a provider of the family, saving and investing allows for me to provide an adequate back-up plan for my premature demise. I have faith that God would provide, but why drain resources when I can use the skills and resources God provides today to prepare for tomorrow.

4. To become more effective long-term givers. As we strive to reach the ideal saving plan, we begin or continue to give to God what is rightfully his (10%) and build up a reserve for future callings by the spirit and prepare for our future. These new found habits, create a longer-term perspective. This prepares and teaches us how to be better long-term servants.

5. To prepare for our own retirement needs. Without planning for your future, you rely on others to take care of you- the government, the church, your family, your kids. If you have the means to save now for the future, it makes sense when combined with the other two parts of the savings plan. This is not hoarding, it is wise and careful planning.

The Ideal Saving Plan

Here is a safe plan to consider:

“The Three Tens”

10% to God first

10% for a rainy day or future blessings account

10% to savings for the future (retirement, college, etc)

This allows for us to have a starting plan in place to align our faith with our finances. By paying God first, saving for emergencies and opportunities God provides, and saving for our future and our family’s future, we have clear defined goals. We are ready and awaiting God’s future instructions and ready to walk into the marvelous light. What if we were all prepared and ready to assist when others were in need. Sin would lose its power, death would lose its sting ,we would obey God’s word. The impact that we could have for the kingdom would be overwhelming and abundant.

What are your thoughts?  Am I on target?  Did I miss any?

Fees, Fees, Fees!

Over time, those little mutual fund charges can really pinch you.

Mutual funds often come with hefty fees. In fact, so do IRAs, 529 plans, brokerage accounts and many other types of investments. Over time, the impact of these little fees is significant!
Back in 2006, the Government Accountability Office (GAO) studied 401(k) plan fees and found that just a 1% increase in these fees could whittle a worker’s 401(k) savings down by 17% across 20 years.1 How would you like to have 17% less retirement money?

Fees are inevitable, but it pays to shop around.

When you think of the compounding and potential annual gains that 1% or 2% of your current fund balances could enjoy over 10 or 20 years, you see how fees matter. No mutual fund or retirement plan is going to operate for free, but trying to minimize fees could help you save more and retain more for retirement and other goals.

Expense ratios.

The proper name for a mutual fund fee is the expense ratio. (The expense ratio represents the total operational cost of running the fund.) You can find mutual funds with expense ratios as low as 0.1% … and you can find others with expense ratios above 3.0%. Hence the popularity of exchange-traded funds (ETFs), which commonly have expense ratios in the 0.1%-0.7% range. ETFs also have no minimums, while you can find mutual funds with minimums of $50,000.

Why are some mutual fund expense ratios so high?

Here are some contributing factors:

1. 12b-1 fees: Most investors have no idea what these are, but they are common even among funds offered through discount brokerages. A 12b-1 fee is a fee used to pay the company or brokerage through which you buy fund shares. Mutual fund investors paid around $9.5 billion worth of these fees in 2009. An example: let’s say you happen to buy into a fund via a discount brokerage. You may be assessed a 12b-1 fee, usually 0.25% (though it can run as high as 1.0%). Charging you a 0.25% fee helps to cover the typical 0.4%-of-shares cost that the fund pays out to the brokerage. A “no-load” fund can still have up to a 0.25% 12b-1 fee.

2. Loads: In addition, many mutual funds ding investors with loads. There are front end loads (entry fees) on A share mutual funds and back end loads (surrender charges) on B share mutual funds.
Transaction fees. Brokerages commonly charge these fees when they get a buy or sell order. These fees often run $10-50 per trade at a full-service brokerage, less at a discount brokerage. If you aren’t selling or buying big, these fees can really pinch you.

3. Custodian/account fees: IRAs charge custodian fees (to help them pay for IRS reporting expenses) and mutual funds can charge annual account maintenance fees. Annually, these charges are usually under $100 in each instance – but think how much even $30 or $60 could grow and compound through the years.

4. Statement of additional (SAI) fees: Request this report from your mutual fund and you will be shocked!  This report highlights all the other fees NOT included in the expense ratio.  Trading expenses are difficult to determine, but in 2007, an analysis by researchers at Virginia Tech, the University of Virginia, and Boston College found the average fund, based on a sample of 1,706 U.S. equity funds from 1995 to 2005, incurred annual trading expenses of 1.44% per year during that period.

Bottom Line: Read that fund prospectus. It isn’t exactly light reading, but you can usually find the expense table in short order. Fund fees are always worth checking out – and if you don’t understand what a fee represents, ask a financial advisor.

Why bad advice is like the soda ban

A couple of years ago, I wrote The Santa Factor that was read by thousands of people like you!  This book covered 7 lies that keep people from getting wealthy.  Why do I bring this up?

I was reading about how ridiculous the San Francisco Anti-obesity law, the “soda ban” is.  Too often, people believe things that simply aren’t true and worse yet, they make foolish decisions based on the misinformation!

Here is a sample:

“Gavin Newsom’s executive order forbidding soda machines on city property from hawking sugary soda is interesting for three reasons. One, the next photographer to snap a shot of Baby Montana with a soda is famous. Two, it warrants mentioning that Newsom doesn’t seem to think city workers are up to making decisions on what they should drink — when they are up to making decisions on, you know, running our city. And, third, a nutritionist tell us that, while Newsom is pitching this as an anti-obesity move, it clearly fails in that measure.”

I would agree.  Why not ban all sugar?  It is not a scalable solution and by the way the soda ain’t the problem! Overeating and a lack of exercise are!  Why not arrest people who aren’t following those rules?

It’s the same way with our finances.  Too often we believe lies.  We don’t know they’re lies, we just believe misinformation because so many people have told us it was the “truth”.   Here are a few that I’m talking about:

1) My success comes at the price of others

2) You can have principles or profits, not both

3) My retirement plan at work is the best place to invest

4) Money is the root of all evil

5) Paying off my home mortgage is always wise

6) Mutual funds and stocks will make me rich.

7) Buy and hold investing is the way to go

While some of these may have some truth to them, they do not, nor should they be applied to all people.  Yet, people believe this “generic advice” applies to them and they take it.  Later, they find out what a mistake they made.  Instead, have a professional coach or advisor double check each financial step you make!  It could save you thousands or even millions of dollars over your lifetime!

What other misguided financial advice have you taken?  What did I miss?  Should San Fran ban soda?