Category Archives: Investment Planning

Money Confession: I have $30,000 sitting in my checking account, but I’m too scared to touch it

Tony’s Friday Blog = Random Thoughts: This advice from Kaitlin Menza applies not only to millenials but to baby boomers and earlier (of which I am one). But especially to those of you with many years to live.

Inertia is an insidious problem for many of us. We have money in a ‘safe’ place and with all the uncertainty we face, it comforts us to know it. But we are perhaps trading a present benefit for future drama.

So what should you do? I have some thoughts but I’d like to hear from some of you before I answer.

By Kaitlin Menza | Sept. 19, 2018

In this ongoing series, Mic readers submit their money confessions — and we’ll ask experts how to help solve these difficult financial issues. Send your own anonymous confession to to get advice on your situation here.

The confession

“I have a stupid amount of money in my checking account. I inherited a bunch of family money that I truly wasn’t expecting, and now there’s around $30,000 in there, in the same spot where my paychecks come in and out. I haven’t touched it because I’m frozen by all of the options and by my fear of losing it. Help!”

Why this is an issue

It sounds like a great problem, right? So great that many people might not feel so bad for this week’s Money Confessor. But it’s not necessarily the dream scenario it might sound like, Ashley Johnson, chief operating officer and chief financial officer at Wealthfront, an investment app and website, said.

“Sometimes we have these windfall events,” Johnson said in a phone interview. “The company we’re working at goes public, or because your company does well one year, you get a bonus. The bottom line is good financial habits apply to everyone. Whether it’s a onetime windfall or if someone is squirreling away 15% of their paycheck, the same rules apply.”

The advice that follows, then, isn’t just for those who are suddenly gifted five figures. It applies to anyone who is paralyzed by extra funds sitting in a savings or checking account doing nothing for them — an occurrence that is incredibly common for millennials, especially millennial women. A SoFi and Levo League study published in April found that while over half of millennial women have the means to invest, 56% don’t due to fear.

“For the Millennial generation in general or anyone who’s lived through [the financial crisis], it’s natural to be inherently skeptical of putting money into the market,” Johnson said. “I also understand that women tend to have this confidence gap to investing their money. Either they feel they don’t have enough knowledge or they don’t have enough expertise to do it.”

You may think just sitting on tens of thousands of dollars isn’t hurting anything — at least you’re not losing it, right? — but that’s technically wrong, Paco de Leon, founder of the Hell Yeah Group, a financial firm geared at creatives, said.

“The reason why people believe that you should not just let a ‘certain amount of money sit in your account and do nothing’ is because of the reality of inflation,” de Leon said in an email interview. “Inflation is when things cost more over time. So let’s just say this young woman leaves the $30,000 in her checking account for 20 years. Twenty years later, the $30,000 won’t be as valuable. Her purchasing power has decreased.”

One way to combat this erosion of purchasing power is by getting a return on the cash through investing, de Leon said. “When you invest in the market, your money grows exponentially through the magic of compounding,” he added.

“One of the hardest concepts for people to wrap their minds around is the power of compounding,” Johnson said.

Here’s a great way to visualize compounding with regard to investments: It means your money multiples while you do literally nothing. Sounds awesome, right?

The advice

You might think a random windfall should be used to pay off a major debt, like student loans, credit cards or a mortgage. But both Johnson and de Leon recommend establishing an emergency fund instead.

“General financial wisdom says that the first thing you should have saved for is an emergency fund,” de Leon said.

Johnson said you should do the math on your monthly expenses. “Take rent, utilities, car payments, whatever that might be, and multiply that by three to six depending on your comfort level,” she said. “First and foremost, I’d make sure that money’s set aside in a high-yield savings account.”

From there, she suggests paying down high-interest debts like credit cards — “debt is a guaranteed negative rate of return,” Johnson said — before setting up a payment plan for debts like student loans or mortgages. “Then the third thing is investing in a 401(k) or IRA. These are tax-efficient and set you up for the future.”

At that point, the Money Confessor is a financially solid individual — and then the fun starts. Well, a type of fun.

“How she distributes the rest of the cash is entirely up to her and should be dictated by her goals,” de Leon said. “The question of whether or not to invest and what to invest in is easily answered once you determine what your goals are. Some people have a goal of retiring by 40, some people have a goal of buying a Tesla and some have a goal of aggressively trying to get out of debt. Different goals will determine what you do with your cash.”

If buying a home or paying off loans is a medium-term goal, for example, one might want to keep the cash liquid for easier access. Otherwise, Johnson recommends hiring a low-cost money manager — here’s more information on finding one — to help figure out how to diversify your investment portfolio based on “age, income and risk appetite.”

In short, a random inheritance, gift, bonus or even lottery win is hardly an excuse to go on a spending spree. It’s an opportunity to finally establish a solid plan so you don’t have to fear medical emergencies, getting laid off or the million other anxieties life might hold. The worst thing is to stay afraid and to do nothing.

“Empower yourself to use money as a tool to formulate your future,” de Leon said. “The financial industry, just like any other industry, leverages your anxiety so they can continue to hold the power and so that you have to pay for advice or knowledge or access.”

If the alternative is your money actually decreasing in value, well, perhaps that’s enough motivation to finally get moving.


What’s Happening This Week In The Markets?

My Comments: Somewhere in the news cycle there is always a story about what’s happening in the stock and bond market and whether or not there’s a reason to get freaked out.

Media companies these days are overwhelmed with crisis after crisis and spending much time on this issue is a waste of energy and limited resources. Only a retirement planning junkie like me is willing to pay attention. It’s a miracle you’ve read this far…

Anyway, from time to time I find in my inbox a report from J. P. Morgan, a global asset management firm with solid information. At the bottom is a link to their two page report that appeared this morning.

Here are two excerpts if a quick summary is all you have time for:

January’s inflation
report confirms that deflationary fears are
easing, and that an aggressive rise in
inflation is not materializing.

…risks stemming from rising (interest) rates and higher
wages will build as the economy moves
later into the business cycle…

What I infer from the report is that the recent volatility was healthy in the short term but that long term, all bets are off. Here’s the link to their report:

What should I do with the $300,000 I am about to inherit?

My Comments: What would you do if you just found out you were getting an extra $300,000? And to whom is this question posed?

The article appeared in a news feed on my phone this morning as I was drinking coffee and getting ready for the day. You can find it HERE.

I’m sharing it with you for other reasons, none of which should imply I’m about to have an extra $300k, because I’m not. Unfortunately.

Since it appeared in a public forum, there are financial advisors across the country, who when asked this question by someone, will immediately think of answers like these:

1. Buy stocks and bonds (I make a commission.)
2. Buy an annuity (I make a commission)
3. Invest in a managed portfolio (I earn a fee or % of the assets invested)
4. Buy a portfolio of mutual funds and let me manage them (I make a commission and a fee)
5. I’m a realtor also, so buy a property and hope it appreciates (I make a commission)
6. Buy a life insurance policy and gain tax advantages (I make a commission)
7. Etc., etc., etc….

To be fair, some of those thoughts crossed my mind since for the past 41 years, I’ve called myself a financial advisor and earned a living from commissions and advisory fees.

On the other hand, offering someone a litany of options, all of which might be valid choices, begs the question that should immediately follow the above question, which is “What are your strategic goals?”.

This implies that someone has developed and articulated their strategic goals, all of which surface when you ask yourself certain questions. For example:

1. I’m a long way from retirement, so do I want to spend it now or do I want to grow it and spend it in the future?
2. I’m close to retirement and this money will help a lot but I have an immediate need to pay down debt. Should I use it for that or perhaps pay off my home mortgage?
3. How much money do I make now and how significant is this $300k in the grand scheme of things when it comes to living my life the way I want to?
4. I know that receiving this money has no current income tax implications for me but if I successfully turn it into $400k, what are the future tax implications?
5. Does having this money present opportunities to limit other existential threats to my financial future like bankruptcy, my future health needs, living too long and being broke, paying more taxes than I need to pay?
6. How much risk am I willing to accept without getting really nervous?
7. Etc., etc., etc….

The lesson learned by me from the article is that there are people who are only in the ‘answer’ business and there are people in the ‘question and answer’ business and if this happens to you, you should first find someone in the ‘question and answer’ business that you can trust and enjoy working with, who will help you first define your strategic goals.

Forecasting the Next Recession

My Comments: I may have retired from providing investment advice but I’ve not yet left the building. What happens in the world of money still interests me both professionally and personally.

Attached to this post, by way of a link to a 12 page, downloadable report, is a projection from Guggenheim that says we’ll experience a recession roughly 24 months from now.

Whether they are right or wrong, the next one is somewhere on the horizon. Knowing in advance when it might happen will help manage the financial resources you have that pay for your retirement.

Just don’t confuse the timing of a recession with the timing of market corrections of 10% or more. While there is some correlation, it is far from 100%. Also keep in mind the stock markets price things based on what people THINK will happen, not what actually does happen.

Here’s the link to download a copy of the report: Forecasting the Next Recession.

Retirement: Get Help or Not?

My Comments: Some people have an innate ability to look after money. Others, not so much.

This is especially critical as you transition from working FOR money to when money is working FOR YOU. We call this retirement.

It’s further complicated because the financial advice industry is now undergoing a massive shift in how you receive that “advice” and how much you pay for it. How do you you choose that person or company and are they worth the effort? Are the fees they charge justified?

The article that follows is an attempt to help you work through this question. Know that the conclusions reached by the author may no longer be valid.

By Nick Thornton October 26, 2015

New analysis of investment returns from managed accounts shows participants who are using the option (to get help) often have a substantial advantage over those who don’t, according to a study published by Empower Retirement.

In “The Haves and the Have-Nots: What is the Potential Value of Managed Accounts,” the industry’s second largest record keeper examined the account performance of more than 315,000 participants in almost 1,800 plans, from 2010 to 2015.

The average annualized return from managed accounts was 9.77 percent, net of fees, compared to 7.85 percent for participants who don’t use a managed account option.

Moreover, participant accounts without managed options experienced a wide discrepancy in rates of returns.

The data shows a spread of nearly 11.5% between the best- and worst-performing non-managed accounts.

But managed accounts experienced substantially less volatility in their performance — only about a 4 percent spread between the best and worst performing accounts.

Empower’s study, which was conducted with its subsidiary RIA, Advised Assets Group, suggests the difference in both the extra returns seen in managed accounts, and the wide variance in returns with non-managed accounts, is largely explained by behavioral finance.

Ed Murphy, president of Empower, says managed accounts can neutralize participants’ natural instinct for loss aversion, which can influence the stasis so often experienced in non-managed accounts.

That fear can keep savers in a poorly balanced strategy.

“Managed accounts can take the emotion out of investing,” said Murphy in an interview. “More and more, participants are showing they want help designing and managing a strategy. A managed approach can give participants the confidence they need that investments in their plan are properly allocated.”

Murphy said Empower is seeing growth in terms of the number of plans adopting a managed option and the number of participants actually enrolling in them. Because of their relative novelty in the market, previous comparisons have been hampered by limited data.

But this year’s study incorporated data from 64 percent more plans and 159 percent more participants than last year’s study, as more savers have been enrolled in managed accounts long enough to be eligible for review.

That suggests a more accurate accounting of how well managed accounts are faring, said Murphy.

“The results are convincing,” he added. “Look at the compounding effect of an annual difference in 200 basis points. Over a participant’s lifetime, it can mean an astronomical increase in retirement savings.”

Fees are important, underscored Murphy, because he thinks an excessive preoccupation with cost can have the adverse affect of participants overlooking the need to understand their risk profile. That can result in volatile, and often lack-luster, returns.

Earlier this year, Cogent Reports, the financial services research arm of Market Strategies International, released research showing one-fifth of plans with at least $500 million in assets are defaulting participants into managed accounts.

That’s a notable increase from just last year, when only 5 percent of such plans were doing so.

As adoption has grown, and as more record keepers and advisors create managed products for the market, some have suggested they are poised to replace target-date funds as the next evolution in plan design.

Murphy is skeptical of that theory, and says both options will have their place for the foreseeable future, as different investors will be attracted to different strategies.

But he does say the conventional target-date strategy is “outmoded.”

“Take two 40-year-old participants. One has saved, the other hasn’t. One has a history of cancer, the other is healthy. Both are put in the same TDF with the same glide path. There’s not enough personalization,” said Murphy.

“And there is a substantial difference in the risk different funds with the same glide path take on. I think people purchase them without a full appreciation of the risk involved,” he said.

That said, he doesn’t see target-date funds going away. He does, however, see them evolving.

Anecdotally, Murphy says interest in managed accounts is growing with all types of sponsors, but that their popularity is particularly notable among sponsors of public plans, such as state and local governments.

Still, challenges remain. Education on managed accounts, and their value proposition, remains essential.

“We believe this new paper presents a strong empirical case for considering managed accounts as part of a plan sponsor’s offering to its plan participants. We will be sharing it with both advisors and clients as a way to drive the discussion further,” he said.

Bull Market Complacency Calls for Caution—and Action

My Comments: Today is Monday, when I post something about investments. Scott Minerd is not only a global figure in this environment, he has the ability to reduce complex ideas to where even I can understand them. His message, as I understand it, is continue to ride the bull, but be prepared to panic at any time.

  June 09, 2017 | By Scott Minerd, Global CIO

By many measures, the stock and bond markets have rarely been more expensive and more stable, and that has me worried. High-yield bonds and mortgage-backed securities are both trading near their narrowest-ever spreads relative to Treasurys, and they have been hovering around these levels for months. At the same time, U.S. stock market indexes are continuing to make new highs while the Chicago Board Options Exchange Volatility Index (VIX), which measures option-implied S&P 500 volatility, is near its lowest level since 1993. The amount of complacency built into the markets argues for caution.

Plenty of events clustered around this summer and fall could potentially spell disappointment for the markets. In Europe, Emmanuel Macron may have handily won the presidential election in France, but there remains the French parliamentary elections next week. These elections may result in what the French call “cohabitation,” a term that describes when the president and the majority of the members of the French parliament represent two different parties, which has not happened in France since the 1997 election. Meanwhile, the U.K. election results have hobbled Theresa May’s mandate and created a cloud of uncertainty over the timing and direction of Brexit negotiations. German federal elections, due to take place in September, will test Angela Merkel’s conservative bloc.

In Washington, the focus is on the Senate version of the healthcare bill, which is unlikely to be finalized before the August recess. This delay could push back the timeline for enacting tax reform to 2018. This says nothing of the political uncertainty in Russia, North Korea, or in the Middle East.

As this realization settles in, I think some of the hope underpinning the markets will slowly erode this summer. History suggests that there is a high likelihood we will get some sort of shock in the second half of the year, which would lead to tightening financial conditions and widening credit spreads. I have seen it happen a number of times in my career: The stock market crash of 1987 and the Asian crisis in 1998 were both unexpected events late in a lengthy economic expansion that led to a brief but violent repricing of risk assets. Both events, however, were followed by at least two more years of an expanding economy.

Today we are on pace to set a record for the longest expansion in U.S. history, thanks in large part to the slow post-crisis recovery and accommodative monetary policy. The current upward slope of the yield curve offers no indication that it will end soon, but eventually it will, given the Federal Reserve’s indications that further tightening is needed. I believe we will see two more rate hikes in 2017, the next one occurring later this month, and at least three increases in 2018. I also expect that the Fed will announce in September a change to its balance sheet strategy that will involve a gradual tapering of reinvestments in 2018. This should put upward pressure on yields at the short end and the belly of the curve, where most of the new Treasury issuance is likely to come.
Even as conditions call for a healthy dose of caution, there is no need to panic longer term. There is still significant ongoing stimulus coming from the European Central Bank and the Bank of Japan.

The combination of these conditions argues for taking certain near-term portfolio actions. Investors should consider upgrading credit quality whenever possible while reducing exposure to high-yield bonds and stocks. Holding some dry powder* for opportunities that should arise amid a pickup in volatility later this year would be a wise move. With spreads near record tights, fixed-income investors simply are not being compensated for the risk they incur in the hunt for yield. Investors should remain disciplined and not chase returns now. It may not be the most exciting message, but no one ever took a loss by booking a gain.

As I see more life left in this economic expansion, I believe there will be opportunities later in the year to make up for any near-term underperformance. The coming correction might not happen tomorrow, but current conditions bring to mind the legendary response of Baron Rothschild, who, when asked the secret of his great wealth, said he made his fortune by selling early. It might be wise to follow Baron Rothschild’s example and take some chips off the table.

How Not To Screw Up Your Investments

My Comments:
Basic stuff for some of us; gibberish for others. So if you have difficulty with this, ask your financial advisor for help.

Dana Anspach on April 6, 2017

Smart investors follow an asset allocation plan.

An asset allocation plan tells you how much of your total investments should be in stocks versus bonds and then gets into additional detail, such as how much should be in large company U.S. stocks (or index funds) vs. international vs. small cap.

You maintain investment ratios by rebalancing on a predetermined basis, such as once a year. In a 401(k) plan, rebalancing is often accomplished automatically by checking a box that says something like “rebalance every x months to this allocation.”

In general, while you are saving, rebalancing can be easy. If you should have 10% of your investments in small cap, and you only have 5%, when you fund your IRA, you put it in a small cap fund.

This process gets more complex as you accumulate different types of accounts. You may have a 401(k), an IRA, a Roth IRA, or a 403(b). If a married, your spouse may also have multiple types of accounts. Maybe you also have a deferred comp plan or stock options. Now rebalancing must encompass which types of investments should be in which accounts. While working, as you add money to accounts you can make progress on maintaining the right balance by putting new deposits into the investment type that is most needed.

When you retire, if you have multiple types of accounts, it gets more complex. Should you withdraw from the S&P 500 Index SPX, +0.11% fund in your brokerage account first, or sell a portion of the stable value fund in the 401(k)? Some 401(k) funds won’t allow you to choose which fund to sell. You may have to take withdrawals proportionately from each investment type, which isn’t necessarily a bad thing, but it limits flexibility in how you manage your investments.

If you have enough wealth, rebalancing won’t matter. I have one client who has about $2 million with my firm and manages the bulk of his investments, another $6 million, at Vanguard. I recently asked him how he manages cash flow in retirement. He said when his checking account gets too low he sells something at Vanguard. Pretty easy for him. The amount he is selling is small compared with his portfolio size, so his decision will have an insignificant impact on his portfolio allocation.

Most retirees don’t have $8 million in financial assets. If you are a consistent saver, you may have $500,000 to $1.5 million; if you have a great job or inherited wealth, perhaps a bit more. You have enough to be comfortable, but the decisions on how you withdraw it will have a significant impact on your total wealth and available cash flow in retirement.

There are two primary approaches to rebalancing in the withdrawal phase: systematic withdrawals and time segmentation.

With systematic withdrawals, you withdraw proportionately from each investment type. For example, if you were withdrawing $30,000 from a $500,000 account which was allocated 60% to stocks and 40% to bonds, you would sell $18,000 of your stock holdings and $12,000 of your bond holdings, thus maintaining your 60/40 allocation. Systematic withdrawals are easy to manage if the bulk of your investments are in one account.

If you have multiple account types, systematic withdrawals are more difficult. For tax reasons, it often makes sense to withdraw from one type of account first, and that account may be allocated differently than other accounts. And, if you’re married, your spouse may invest conservatively, while you invest more aggressively, or vice versa. Investing this way may not be optimal, but if you haven’t coordinated your plan as a household, this is often the reality. Multiple accounts with varying tax consequences and an uncoordinated allocation make maintaining an appropriately balanced portfolio while withdrawing more challenging.

With time segmentation, first, you develop a plan that tells you which accounts to withdraw from in which years. Next, you match up the investments in those accounts with the point in time where you plan to take the withdrawals. If you know you are going to withdraw $30,000 a year for the first five years from the IRA, you will have $150,000 of the IRA in safe, stable investments, like CDs or bonds with maturities matched to the year of the withdrawal, or low duration bond funds.

As with all investment strategies, there are pros and cons to any approach. The biggest problem is many people don’t have a plan at all. Having a well-tested retirement income plan brings peace of mind. A plan allows you to relax and enjoy your retirement years. If you are nearing retirement age and don’t have a defined rebalancing strategy in place that shows you when and how you will take money out, it’s time to get one.