As featured in Forbes
In Forbes‘ ”Investment Guide,” December 6, 2010 edition, 5 Wisconsin based firms were selected to be featured in the Wisconsin Financial promo section (just past page 148). We are pleased to announce that we are one of those firms. Below is a copy of our portion of the piece.
Data Collection: Good Intentions Gone Wrong
As members of the finance industry we receive a lot of financial focused marketing material. This particular piece (“Make More Money with eMoney” (click the title to view)) was from one of our vendors, and illustrates the kinds of pieces that anyone in our industry might receive on a given day. The idea behind this piece is good: help people ‘fix’ things that are broken in their financial lives. The delivery, however, startled us.
While determining a business model, we knew that we wanted to be as unbiased as humanly possible for clients. Because, it is our belief that advice should be tailored to the client; not to us, not to a fund company’s needs, not to someone’s brother’s sister-in-law’s greatest scheme, but to the client. As a result we chose to be fee-only financial advisors, only receiving income from the clients. This removed the ability for us to place products, and thus, any ability to be paid from another source. So, most of the time, we ignore these pieces and move on with our daily routines.
However, what if we were able to sell products? What if we received a good portion of our income from the placement of products, and not solely from fees? Wouldn’t a piece like this drive us (or at least tempt us) to collect your personal data and enter into “financial planning”? Doesn’t this suggest that I could likely increase my bottom line if I collect your personal documents and then present you with a “plan” that has output that just so happens to recommend a specific product? This is what caught our attention.
This is not to say that products are bad. Or even that all brokers or people in this industry that place products are bad. We believe that both have a very good place in the industry and are both very necessary. Our point is that the moment a product sale enters the picture the financial advisor is no longer unbiased. And it is our belief that it is important for people to have a resource that can provide an outside, unbiased, look at their financial lives in order to receive the most benefit. That is why we are totally committed to avoiding any involvement with the receipt of income from the sale of products.
Bond Market Volatility
The recent securities market turmoil appears to have been rooted in uncertainty about debt instruments issued by or backed by governments, government agencies, or banks. The instability of debt instruments that previously were thought of as very stable and secure has been unsettling. The trouble started with complex packaged mortgage securities and now extends to securities that are the direct obligation of governments (referred to as sovereign debt). The level of knowledge about debt markets and how they work is little-understood, which compounds the uncertainty for many. Here is some information that may be the start of a basic understanding.
Debt securities can take many forms, but the most common form is called a bond. A bond is similar to an I.O.U., i.e., a piece of paper that represents a promise to repay a debt on a future date. Bonds add a “rent” feature. The borrower is in essence “renting” the borrowed money for a fee which must be paid to the lender periodically until the borrowed funds are repaid. At times lenders, like borrowers, want to prepay, recover or refinance their debt. That is not possible to do with bonds, as the borrower’s agreement to repay commonly sets a fixed date in the future. If, therefore, a lender wishes to refinance, he or she must go to the bond market and find a buyer for their bond.
Bond markets are less transparent and more complex than stock markets. After issue, bonds are sold primarily in the so called “over the counter” market. This market is made up of securities dealers that trade bonds with each other on behalf of their clients. The dissemination of current and historical trading data associated with bond transactions is limited, as there are no “trading symbols” for bonds. Once cannot watch a “ticker tape” of transactions to get an idea of the value for a particular bond. That makes the bond market a theater of operations best left to experienced traders. The market attempts to address some of these issues with bond-rating agencies that assess issuers’ strength in the form of a “credit rating” (actually, a debt rating) and with a more transparent auction-style market (for example, the New York Stock Exchange) for some bonds. Despite these measures, the inherent nature of the bond market is that it provides more surprises.
Debt issued by governments has provided more security for investors due to the fact that the governments of developed countries have the resources to pay their bills through taxation or printing money. The economies of developing countries have a less well-off populace and therefore fewer resources to draw on.
To summarize, debt markets lack transparency and are dominated by institutional investors. Debt issued by developed governments has been considered a safer investment for smaller investors due to their immense ability to repay. When the US government debt markets (primarily agency debt) were revealed to have much lower repayment ability than thought, financial markets were destabilized. The US debt market was the safety standard for the world. If the US could have problems of this scale, what about economies with a far lesser ability to repay debt? The European Union admitted countries that barely qualified for admission and now, similar to the US Government bailout of its agencies, their more developed members must provide capital to stabilize them. When one puts things in perspective, the entire economy of Greece is between 3% and 4% of the sum of its more developed EU co-members (Germany, Britain, France, Belgium, Sweden, Norway, and Switzerland). Disturbing? Yes. Catastrophic? No. But securities markets hate uncertainty, and will likely over-react. We will be discussing debt and debt markets in more depth with our clients in the days to come. However, if you have any questions, please feel free to reach out!
Too Many Acts?
After a long, good, rant, about the multitude of “Acts” within the securities industry, and how over-regulation has almost led to no-regulation, I’ve decided to share my thoughts, and the following conversation (held by myself and Bill over a cup of coffee and book one: ‘Financial Planning: Process and the Environment’). My struggles begin with the fact that regulations are not logical. As a logically minded individual, the math makes sense, the process makes sense, the ethics make sense, the regulations, well those are a completely different story. When I attempt to recall the underlying facts and then place them with the name of the act, I come up with nothing. For a while, that frustrates me, but what I have come to realize is that the titles have no meaning to me because when I dig into the meat of the act, I find very little.
Take, for example, the Investment Company Act of 1940. According to pages 10.9 and 10.10 (feel free to borrow the book next time you swing by; I will happily hand it off for a day or two), ”The act regulates the organization of companies, including mutual funds that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis.” Good so far, right? Seems like a logical Act….let’s go on, “The focus of this act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.” Well, here is where I start to drift off. Simply because something MUST be disclosed it does not make it objective. Take the disclosure of the fund, even with the information presented, it is often so complex that the general public doesn’t know whether to make heads and tails of it. Beyond that, most prospectuses are so lengthy that even an above average investor would struggle to follow along. Second, simply disclosing investment objectives does not mean that the securities within the fund are actually lined up to meet those objectives. This, again, is a subjective statement. As was with the Oppenheimer Core Bond Fund that was held within many college savings plans, the information and holdings were disclosed, but most did not understand the holdings. Thus, most believed that the bond fund was a much safer investment than it turned out to be. (Refer to this article for more information: http://mke.me/K3R8GT.) But it was disclosed, and that’s what the Investment Company Act of 1940 requires; so you, the investor should have known!
Going even further into the paragraph… “It is important to remember that the act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.” OK, there it is! That makes the entire act….well, pointless (my opinion). And so, here I sit, happy that we, as financial advocates, are provided with the information so that we can pour through the prospectuses for you, but disheartened that I have to learn one more pointless act and remember the name of something that has little to no logic or meaning and really does very little to protect the investor, myself included. However, this does strengthen my understanding and belief that the profession I chose is necessary in order to protect individuals from the loose guidelines provided to the big companies.
Anyway, ramblings over, I will return to my book and keep the flaying to a minimum, but please ignore the outbursts if you happen to see me at your coffee shop, I’m simply frustrated with the rules as they are established. It’s too bad that we can’t scrap the whole system and start all over.
Market Volatility on 5/6/2010
Yesterday’s market intraday market volatility set records for extremes. Proctor and Gamble common stock (PG) opened the trading day at $61.91, dropped to a low of $39.37, and closed at $60.75. The S&P 500 exchange-traded index fund (SPY) closed off 3.3196%, and the EAFE index exchange-traded fund (EAFE) ended the day with a 4.45% decline in value.
On the other hand, bond index exchange-traded funds were generally flat to modestly up. For example, the aggregate bond index exchange traded fund (AGG) closed with a slight gain (0.14%) over the previous day, and the 3 – 7 year intermediate term bond index (IEI) closed 0.56% higher.
Our approach is to match each client with an investment policy that is appropriate to their objectives, their financial position, and their emotional ability to withstand risk. That is why each portfolio contains a mix of stocks, bonds, cash, and in some cases, commodities. Yesterday’s extremes will receive wide comment in the press, and stand as testimony to the folly of trying to predict market performance. Our advice to our clients is constant – stick to the strategy.
We stumbled across this article today and feel it’s worth the quick read. When choosing your financial adviser it’s important to know what you’re getting into and what you’re really paying for!
Paladin Q1 2010 Investment Philosophy
PALADIN PARTNERS, LLC/LAKE COUNTRY WEALTH MANAGEMENT Q1 2010 Investment Philosophy
The monetary base expanded since our Q4 ’09 report, but for the first time since these reports have been written the change versus a year ago is a smaller number (1,685,564 from below compared with 1,740,586 in the Q4 report). Unfortunately, the reason for the smaller number is a higher comparable, as the monetary expansion was beginning in earnest in April of 2009. The pace of growth between Q4 ’09 and Q1 ’10 is less (1.943 TN Q4 Δ 2.058 TN Q1= 5.91% ; 1.795 TN Q3 Δ 1.943 TN Q4= 8.24%). Hopefully, this deceleration will continue. An expansion is an expansion, however, and inflationary pressures continue to rise.
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The 2.1% annual rate of inflation is lower than the level reported in our Q4 ’09 publication (it was reported at 2.7%), but still substantially higher than the 0.2% level of a year ago.
PULSE OF THE ECONOMY
- Indicates new report
Inflation |
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| JOC-ECRI Industrial Price Index f | Apr 1 | 120.16 | 117.54 | 68.98 | 74.20 | ||||||||||
| Consumer price index b (unadjusted) | Feb | 216.7 | 216.7 | 212.2 | 2.12 | ||||||||||
| Gross domestic product deflator | 4th Qtr | 0.5 | 0.4 | 0.1 | 400.00 | ||||||||||
| Producer price index (finished goods) c | Feb | 178.8 | 179.8 | 171.3 | 4.38 | ||||||||||
| Rate of inflation, % (annual, unadjusted) | Feb | 2.1 | 2.6 | 0.2 | 950.00 | ||||||||||
a-1997 equals 100. b-1982-84 equals 100. c-1982 equals 100. e-Estimate. f-1996 equals 100. p-Preliminary. r-Revised.
Capacity utilization continues to inch ahead versus our last report (72%). Not a huge pickup in capacity, but the trend continues to be positive rather than negative. GDP 4th Quarter numbers are out, and are up huge. Fixed investment is also up (both residential and non-residential), but personal income receded slightly from the numbers reported in Q4 (12,180 versus 12,200). A small change, but a change in the wrong direction nevertheless. The personal savings rate is trending downward – and based on other data (GDP, fixed investment) it seems reasonable to assume that consumers are starting to loosen the purse strings.
| Economic Growth and Investment | |||||||
| Durable manufacturing (NAICS) a | Feb | 100.7 | r101.0 | 99.0 | 1.72 | ||
| Capacity utilization % | Feb | 72.7 | r72.5 | 70.3 | 3.41 | ||
| Gross domestic product | 4th Qtr | 5.6 | 2.2 | -5.4 | …. | ||
| Industrial output a | Feb | 101.0 | r100.9 | 98.8 | 2.23 | ||
| Manufacturing (NAICS) a | Feb | 100.7 | 100.9 | 98.5 | 2.23 | ||
| Nondurable manufacturing (NAICS) a | Feb | 99.5 | r99.6 | 97.0 | 2.58 | ||
| Personal income, (bil. $) | Feb | 12,180 | r12,179 | 12,034 | 1.21 | ||
| Personal Savings Rate, St.Louis Fed | Feb | 3 | r3.4 | 4 | -26.19 | ||
| All fixed investment, (bil. $) | 4th Qtr | 1,646.6 | 1,626.7 | 1,909.3 | -13.76 | ||
| Non-residential investment, (bil. $) | 4th Qtr | 1,285.5 | 1,269.0 | 1,496.1 | -14.08 | ||
| Residential investment, (bil. $) | 4th Qtr | 362.9 | 359.6 | 415.0 | -12.55 | ||
Consumption and distribution numbers, all compare favorably with our Q4 report with the exception of Autos (166,656 sold per Q4 report vs. 165,656 below), Light Trucks, domestic units (304,600 reported Q4 vs. 293,166 below), and New Home Sales (355,000 from Q4 compared with 308,000 below). The book to bill ratio is still a touch below 1 (New Factory Orders of 383.53 billion ÷ Factory Shipments of $384.86 billion = 0.9973; since manufacturers recognize income when orders are shipped, this number is a leading indicator of manufacturing revenue. A number above 1 indicates future growth while a number below 1 indicates the reverse). Also, the inventory to sales ratio continues to move lower. The increase in consumption appears to be broad based with the exception of these areas.
PULSE OF THE ECONOMY
- Indicates new report
| Pulse Item | Latest Date |
Latest Data |
Preceding Period | Year Ago |
Year over Year %Chg |
| Consumption and Distribution | |||||||
| Autos, domestic units sold | Mar | 165,656 | 138,433 | 138,139 | 19.92 | ||
| Autos, import units sold | Mar | 379,885 | 263,799 | 306,753 | 23.84 | ||
| Business sales, (mil. $) | Jan | 1,046.87 | r1,041.08 | 979.79 | 6.85 | ||
| Consumer spending, (bil. $) | Feb | 10,713 | r10,677 | 9,932 | 7.86 | ||
| Durable goods (bil. $) | Feb | 179.8 | r180.8 | 179.1 | 0.39 | ||
| Factory shipments, (bil. $) | Feb | 384.86 | r385.33 | 364.48 | 5.59 | ||
| Instinet Research Redbook Avg. (monthly %) | Mar 27 | 1.16 | 1.55 | 0.09 | 1188.89 | ||
| Light trucks, domestic units | Mar | 293,166 | 224,819 | 241,675 | 21.31 | ||
| Light trucks, import units | Mar | 227,498 | 153,214 | 171,212 | 32.88 | ||
| New home sales, (thous. units) | Feb | 308 | r315 | 354 | -12.99 | ||
| Personal consumption | 4th Qtr | 9,289.5 | 9,252.6 | 9,195.3 | 1.02 | ||
| Retail store sales, (bil. $) | Feb | 355.55 | r354.34 | 342.36 | 3.85 | ||
| Wholesale sales, (mil. $) | Jan | 346,705 | r342,422 | 313,772 | 10.50 | ||
| Inventories | |||||||
| Business inventories, (bil. $) | Jan | 1,310.17 | r1,310.28 | 1,433.06 | -8.58 | ||
| Domestic crude oil, (thous. bbls) | Mar 26 | 351,928 | 351,507 | 357,794 | -1.64 | ||
| Factory inventories, (bil. $) | Feb | 498.29 | r495.78 | 528.92 | -5.79 | ||
| Gasoline, (thous. bbls) | Mar 26 | 223,161 | 226,008 | 215,596 | 3.51 | ||
| Inventory-to-sales ratio (Business) | Jan | 1.25 | 1.26 | 1.46 | -14.38 | ||
| Wholesale inventories, (mil. $) | Jan | 382,168 | r382,809 | 423,288 | -9.71 | ||
| Orders | |||||||
| Durable goods, (bil. $) | Feb | 178.1 | r177.2 | 165.6 | 7.55 | ||
| Factory orders, backlog (mil. $) | Feb | 722.23 | r718.96 | 770.94 | -6.32 | ||
| New factory orders, (bil. $) | Feb | 383.53 | r381.43 | 348.46 | 10.06 | ||
| Nondurable goods orders, (bil. $) | Feb | 205.06 | r204.51 | 186.65 | 9.86 | ||
| Purchasing management index | Mar | 59.6 | 56.5 | 36.4 | 63.74 | ||
a-1997 equals 100. b-1982-84 equals 100. c-1982 equals 100. e-Estimate. f-1996 equals 100. p-Preliminary. r-Revised.
The Q4 data included an unemployment rate of 10.0%, and the data below reports 9.7%. This is good news, but often these numbers are revised after their release. Hopefully, these numbers will hold up, and we can begin to see improvements, albeit small ones, in the employment numbers. The indicators are a “mixed bag,” with areas of improvement and retracement. Leading indicators continue to trend upward.
PULSE OF THE ECONOMY
- Indicates new report
| Pulse Item | Latest Date |
Latest Data |
Preceding Period | Year Ago |
Year over Year %Chg |
| Employment | |||||||
| Civil labor force, (thous.) | Mar | 153,910 | 153,512 | 154,164 | -0.16 | ||
| Employed, (thous.) | Mar | 138,905 | 138,641 | 140,854 | -1.38 | ||
| Employment cost index | 4th Qtr | 114.3 | 114.0 | 111.6 | 2.42 | ||
| All non-farm payrolls, (thous.) | Mar | 129,750 | r129,588 | 132,070 | -1.76 | ||
| Government payrolls, (thous.) | Mar | 22,496 | r22,457 | 22,880 | -1.68 | ||
| Goods prod payrolls, (thous.) | Mar | 17,870 | r17,829 | 19,233 | -7.09 | ||
| Initial jobless claims | Mar 27 | 439,000 | r445,000 | 651,000 | -32.57 | ||
| Continuing claims (mil.) | Mar 20 | 5 | r4.668 | 6 | -19.28 | ||
| Service payrolls, (thous.) | Mar | 111,880 | r111,759 | 112,837 | -0.85 | ||
| Unemployment rate, % | Mar | 9.7 | 9.7 | 8.6 | 12.79 | ||
| Unemployed, (thous.) | Mar | 15,005 | 14,871 | 13,310 | 12.73 | ||
| Avg. wks duration unemploy | Mar | 31.2 | 29.7 | 20.8 | 50.00 | ||
| U-6 employment – Seasonally Adjsuted | Mar | 16.9 | 16.8 | 15.6 | 8.33 | ||
| Other Indicators | |||||||
| Consumer confidence (Conference Board) | Mar | 52.5 | r46.4 | 26.9 | 95.17 | ||
| Index of coincident indicators | Feb | 100.1 | r100.0 | 101.9 | -1.77 | ||
| Index of lagging indicators | Feb | 108.0 | r107.7 | 113.7 | -5.01 | ||
| Index of leading indicators | Feb | 107.6 | r107.5 | 98.4 | 9.35 | ||
| Coincident to lagging ratio | Feb | 0.93 | 0.93 | 0.90 | 3.33 | ||
a-1997 equals 100. b-1982-84 equals 100. c-1982 equals 100. e-Estimate. f-1996 equals 100. p-Preliminary. r-Revised.
The monthly Money Supply data suggest that since December (from the Q4 report) M1 increased and M2 decreased, which is consistent with the declining savings rate reported earlier. Money is coming out of longer term deposits and moving into spending accounts.
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The gross public debt continues to climb, along with the statutory debt limit. The previously reported convergence of the value of the US Dollar and the Euro shows a recent reversal, with the Euro once again gaining in value versus the dollar.
| American Debt and Deficits | ||||
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Latest Report |
Preceding Report |
Year Ago Report |
Year over Year % Chg |
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| Federal Budget Deficit (bil. $)-a | 1,171FY’10 | 1,752FY’09 | 459FY’08 | 155.12 |
| Budget Surplus/Deficit (bil. $)-b, February | -220.91 | -42.60 | -193.86 | 13.95 |
| Trade Deficit (bil. $, sa)-c, January | -37.29 | r-39.90 | -36.90 | 1.06 |
| Treasury Gross Public Debt. (bil. $)-d | 12,684.6 | 12,662.5 | 11,110.7 | 14.17 |
| Treasury Statutory Debt Limit (bil. $)-d | 14,294.0 | 14,294.0 | 12,104.0 | 18.09 |
| Consumer Installment Debt (bil. $)-e, January | 2,456.3 | r2,451.3 | 2,571.4 | -4.48 |
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| Sources: a-Office of Management and Budget, b-Monthly Treasury Statement, c-Monthly Commerce Dept. Report, d-Daily Treasury Statement, e-Monthly Federal Reserve Release. | ||||
The US continues to be ranked near the top of developed countries in terms of forecasted gross domestic product growth. The only developed country with a higher forecast in 2010 is Israel.
Output, prices and jobs Mar 31st 2010 | From The Economist print edition
Commodity prices are uniformly up year on year. Food and gold are the only two items that have shown decreases in the last month.
The Economist commodity-price index
Mar 31st 2010 | From The Economist print edition
Conclusions:
The PALADIN PARTNERS, LLC/LAKE COUNTRY WEALTH MANAGEMENT investment policy model architecture includes six models. Three of these are more conservative, i.e., favoring asset preservation over growth. Three of these are more aggressive, i.e., favoring growth over asset preservation. Our recommendations, therefore, are more defensive for the conservative models.
- Inflationary pressures continue, and our view that the risk is to the upside with interest rates remains unchanged. We addressed the tactical side of this view during Q4 by lowering the duration of recommended bond holdings for our conservative portfolios. No further changes are contemplated at present.
- We will continue to hold inflation protected bond indexes as a part of the fixed income allocation in all but our most aggressive portfolio.
- There continues to be positive momentum in the economy, but it continues to be a “mixed bag” with regard to the indicators. We will make no changes to the level or classes of equities in our models at this time. Small company stocks will continue to be represented only in the more aggressive portfolios.
- Economists’ GDP forecasts continue to award the US economy with high growth through 2010 among developed countries, and at present we will continue to favor US markets over foreign markets. See the last bullet point for our view of the future.
- There will be no changes to our cash allocations.
- We will look for confirmation of direction for the US economy in the coming months. Indicators that will be of particular interest are the book to bill ratio, the unemployment rate, the inventory to sales ratio, the savings rate, the deficit, and the relationship in the money supply between M1 and M2, and capacity utilization.
- Depending on the resource, data suggest that the non-US equity market, on a market capitalization basis, represents only 30 to 40 percent of the currency-adjusted world enterprise value[1]. Data also suggest that US-based retail securities providers underweight their recommended non-US allocation to equities in comparison to world market capitalization. For example, the Vanguard website piece entitled “International Equity: Considerations and Recommendations” cites data from the Investment Company Institute (2007 factbook) reporting that international equity funds constitute 23% of the total equity allocation of US mutual fund investors. We have also been underweighting non-US equity representation in our portfolios compared with world market capitalization. This decision has been based on data about the 2008 capital market turmoil and where the US economy has been in the recovery cycle. In the months ahead, we will be re-evaluating this stance. We will not maintain our underweight position indefinitely; therefore a move toward increasing non-US equity and debt exposure will be inevitable in future quarters.
Wm Baxter, CFP®, CLU, ChFC® Brion Collins, CFP®, CLU, ChFC®
This information is provided for informational purposes only. The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. Any opinions expressed herein are subject to change without notice. An Index is a composite of securities that provides a performance benchmark. Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is not a guarantee of future results.
| Paladin Partners, LLC
709D Milwaukee Street Delafield, Wisconsin 53018 262-646-3551 Paladin Partners is a fee-only investment advisor and does not offer securities. |
Lake Country Wealth Management
709B Milwaukee Street Delafield, Wisconsin 53018 262-646-3549 Securities offered through NEXT Financial Group Inc. Member FINRA/SIPC. Neither Lake Country Wealth Management nor Paladin Partners, LLC is an affiliate of NEXT Financial Group INC. |
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[1] MSCI ACWI currently includes an allocation of 41.95% to United States equities as of 3/31/2010; source is iShares publication no. iS-1738-1209 iS-ACWI-F0310.
WSJ Article
Here is an overview of an article from The Wall Street Journal that hit my inbox this morning. To read more, click the link below. Are these the people one should use for objective advice?
News Alert
from The Wall Street Journal
Major banks masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the New York Fed.
A group of 18 banks—which includes Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Bank of America and Citigroup —understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
http://online.wsj.com/article/SB10001424052702304830104575172280848939898.html?mod=djemalertNEWS
“I Want It All”
We’re going to hit you twice today because we feel so strongly about this topic and my voice is slightly different than Bill’s (and not just in pitch).
Most people discuss the ‘younger’ generations (X, Y, Z) as wanting and expecting it all. A negative light is put on this thought in that ‘younger’ individuals seem to think they can have anything and everything (didn’t the baby boomers parents’ (even the Silent generation) say the same thing about their kids??). And, honestly, isn’t that what everyone wants? Don’t we all want the freedom to travel when we want, buy the cars we want, donate when we want, shop when we want, attend events when we want? Isn’t that everyone’s goal? Isn’t that why we work as hard as we do? Or at least one of the reasons…
So, assuming the generations aren’t so different after all, don’t the questions really become: how do I get there? how do I set myself up to do these things? and what do I have to give up? And that’s where most people stop. That’s where the fear that I actually have to acknowledge what I’m spending and where my money’s going becomes overwhelming, so I stop and choose to remain blissfully ignorant to the reality that I don’t know. “I like what I’m doing; I don’t go over my income and am not in debt, so I’m OK. Why would I want to ruin what I have going by writing down the facts?” That’s fantastic if you don’t spend beyond your means, but does that really mean that you have things in control or that you are doing the right things? Possibly. But probably not.
Think of it this way, if you prepare a budget (Gasp! What a horrible word!), OK, if you prepare a Cash Flow statement, you might find that your money is not going where you thought it was, and simply by redirecting five dollars a week you might actually be happier. Crazy, I know! The ability to look down at the numbers and see where each dollar is headed is surprisingly refreshing. When we help clients through this, we don’t judge, we honestly don’t care – if you want to spend all your money on a new car each month, fine, that just means you probably won’t be able to skip the country each month, as well (or maybe you will). What we do is help you look at these statements and match up the now with the future. Do you want a house on the lake when you retire? Do you want to send your kids to college? Do you want to give a certain amount to your alma mater? That’s where we come in. We act as a second set of eyes, roll up our sleeves, and throw our arms around your entire picture with the intent of aiding you.
But really, it all starts with you. Using the ship analogy, do you want to run your ship ashore or end up in the middle of the ocean just because you don’t have a lighthouse or compass to direct you? Without a written idea of where your dollars are headed that’s exactly what you’re doing. Who knows, you might get where you want to go…but isn’t that called dumb luck? I believe it is much more rewarding to get where I want to go because I chose to go there.
Lost Rudder
After the market and economic turmoil of 2008-2009 many people are uncertain about their current and future financial security. In response, large firms hire marketing-focused MBA’s and arm them with the resources to interview focus groups, collect data, and provide analysis targeted at identifying consumer angst that can be converted to cash. If the mutual fund and broker/dealer advertisements permeating the media are any indication, it serves to confirm that people are feeling ill at ease about where they are and where they are headed financially. These ads are steeped in the irony that the structured products these firms created, sold, or bought have been identified by many as the source of past problems for which they now seek to vigorously promote and sell product-based solutions. Can this really be the answer?
Clearly many are seeking their pathway forward, and in doing so they face two challenges. First, there is the challenge of getting an interpretation of critical facts about our current situation from an objective source. Second, there are the lies we tell ourselves. What, then, is the best way to overcome these challenges?
Let us turn our attention first to the objective interpretation of critical facts: the most important facts to gather relate to our own financial position—details that are found in the bank statements, investment account statements, credit card statements, checking account statements, or any document (paper or online) that reports our income and expenses. Using a nautical analogy, these facts are the equivalent of one’s financial bearings. Accurate external bearings are a key factor in any navigation exercise. Continuing on with the navigation theme, bearings are transposed onto a chart. For finances, that chart consists of a detailed balance sheet and a cash-basis income statement. The income statement will provide feedback on how well income resources are being managed and a means to forecast future cash needs. The balance sheet will show whether current income management patterns have been the exception or the rule. Objectivity is an important component of financial decision making. The preferred delivery mechanism for objectivity is a financial advice professional, i.e., a qualified professional that sells advice only, not products. This professional can guide you through the process of assembling your data, or can produce the financial reports for you. The professional will then analyze the reports and provide an objective interpretation, including the specifics of actions that are on course as well as those that are not.
The second challenge cited at the beginning of this writing is defined as “the lies we tell ourselves.” When the facts begin to conflict with expectations, it is often a part of human nature to reconstruct them, filter them, or avoid them altogether. One of the quotes I keep on my wall for inspiration was authored by the 19th century writer and satirist, Ludwig Borne:
“Getting rid of a delusion makes us wiser than getting hold of a truth.”
Professionals and business owners that execute flawlessly for their clients and companies can “lose the rudder” with their own finances due to personal /professional time demands, delusions , or a perhaps vicious cycle of both.
The reason that a command of the facts and objectivity go missing in action at decision time may be due to circumstances (i.e., not enough time for the appropriate level of due diligence and consultation), but at times it is the choice of the decision maker.
There are many directions a lost person could take to get back on course; the least likely of these to end well is a course chosen without the benefit of a compass or any means of getting a bearing. Getting one’s financial bearing requires competent counsel and getting in touch with the facts. All “lost rudder” situations can benefit from these steps. Competent Captains know, even when they are not lost, that it is wise to check the bearings from time to time. Get back in touch with your financial fundamentals, or consult a professional who puts people back in touch with them for a living—your fee only Certified Financial Planner™.
