Monthly Archives: December 2016

Bank of America 2016 Christmas Party

Kathy made dinner for us and then we had White Elephant.

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Assessing Asset Allocation

At some point, anybody with an investment portfolio such as an IRA or 401K has seen a pie chart showing how much equity, fixed income, cash, and maybe alternative investments they have in their portfolio. Depending on how much of each of these investments a person has in their portfolio they are considered aggressive, moderate, or conservative. What does that mean though? Lets break each part down.

Equity represents ownership of something. A person has equity in their house if the house is thought to be worth more than what they owe on it. If a person owns part or all of a business they are said to have an equity share. A share of stock is a small sliver of ownership in a large company. Generally speaking, equity investments have been the greatest creator of wealth for investors. Of course, greater upside means greater downside. If the rental market is sluggish, or GDP growth is not what is expected, the value of equity is going to drop. Because of the risks that investors take by investing in equity, the more equity in a portfolio the more aggressive it is.

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Credit: gold_globalintergold

The other large portion of the pie chart is usually fixed income. Fixed income is a little deceiving I believe. Debt is a more appropriate name for this portion of the portfolio, because fixed income portfolios primarily invest in bonds, which are a form of debt. Essentially what that means is that the investor is lending somebody money. When someone lends money to someone they have recourse if things go belly up. Having recourse and being guaranteed a stream of income makes bonds and other “Fixed Income” generally thought to be safer than equities. By safer, I mean that the returns are often less than equities in the long run, but they tend not to change in value as much in short-term.

Alternative investments. I have seen The Big Short where they talk about synthetic this and derivatives of that… It didn’t end to well… While those are considered alternative investments, alternative investments are anything that doesn’t fall into the bucket of equity or debt. The point of an alternative investment usually is to have exposure to something the will move in contrast to equities and debt, so when the rest of the portfolio drops (and it will at some point) at least something else moves up. The most popular alternative investment I have seen is gold. Gold, unlike equity or debt does not produce any cash flow. All gold does is sit there and look pretty, but that is kind of the point. If the housing market crashes, if the US is delinquent on its debt, gold will still be pretty.

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Game of Thrones Referencing a Movie?

 

Was Games of Thrones making a reference to Airplane!?

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How to Think About Annuities

A quick Google search of “Annuity Strategy” will yield almost 1 million results. It is not difficult to find someone to dole out annuity advice. The first thing anyone shopping for annuities should know is that an annuity is an insurance product. People don’t think that they will become extremely wealthy off of their home insurance or auto insurance. The same is true for annuities. Regardless of what type of annuity a person chooses and the riders on it, the concept is the same. An annuity is designed to PROTECT money.

 

Why would a company sell an annuity? A company sells an annuity, because they believe that they can earn more money on the money than they will pay out to the customer. Show me an annuity that doesn’t accomplish this and I will show you a company that won’t be around for long. This is not to say that annuities are all bad, in fact I believe annuities make a lot of sense in the right situation.

 

One thing I always tell my clients is that, “Annuities are great if you play by the rules.” Annuities can accomplish anything from guaranteed growth, guaranteed income, or a combination of the two. The problem is that many of the benefits that come with annuities also come with costs such as long lock-up periods or high internal expenses. If a person purchases an annuity for one reason such as guaranteed income and ends up cashing it out, it can cost the owner a great deal.

I believe an annuity should not be purchased without a strong financial plan, because they can be so complicated. Often times I use an annuity to cover fixed expenses in retirement much like a pension replacement. As I alluded to in 5 reasons for financial planning in your 50s, many annuity riders have a growth stage before the income stage that can be as long as 10 years. Planning ahead of time and executing on that plan will help the owner get the most out of their annuity.

I can’t count the number of times I have talked to a client that has been sitting on an annuity for years and has forgotten what kind of annuity they purchased or why they purchased it. I guarantee the person that sold them the annuity made it sound like the best thing since sliced bread, and it may have well been a great product. The problem is that if someone purchases a product without a plan often times they cannot take full advantage of it.

An annuity is an insurance product. Insurance can be a good thing to have, but it needs to be used with a purpose. Create a plan and follow through with it to get the most out of an annuity.

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Marin Headlands

Kristen, Brien, Lear, and I took a hike through the Marin Headlands on the Friday after Thanksgiving.

Brien and Lear Headlands//embedr.flickr.com/assets/client-code.js

Brien and Lear Bunker//embedr.flickr.com/assets/client-code.js

Fort Cronkhite//embedr.flickr.com/assets/client-code.js

Graffiti Face//embedr.flickr.com/assets/client-code.js

Graffiti Sunset//embedr.flickr.com/assets/client-code.js

Graffiti Johnny Bravo//embedr.flickr.com/assets/client-code.js

Headlands Bunker//embedr.flickr.com/assets/client-code.js

Kristen Bunker//embedr.flickr.com/assets/client-code.js

Brien Justin Kristen Headlands//embedr.flickr.com/assets/client-code.js

Justin Kristen Headlands//embedr.flickr.com/assets/client-code.js

Marin Headlands Pano//embedr.flickr.com/assets/client-code.js

Justin Kristen Golden Gate Bridge//embedr.flickr.com/assets/client-code.js

Kristen and lighthouse//embedr.flickr.com/assets/client-code.js

Collapsed Roof//embedr.flickr.com/assets/client-code.js

Marin Headlands Tower//embedr.flickr.com/assets/client-code.js

Kristen Lear birds eye view//embedr.flickr.com/assets/client-code.js

Kristen and Justin in tower//embedr.flickr.com/assets/client-code.js

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What is a Financial Plan Anyways?

In my previous post 5 Reasons for financial planning in your 50s, I discussed why it is important to have a financial plan. I have found that most people that I speak to are not entirely aware of what a financial plan is and why they need one. What a financial plan is is not exactly fully agreed upon between financial professionals so it is not surprising that most consumers are not entirely clear on it either. Wendell Fuller of Fuller Wealth Advisors in Richmond, Va. explains, “I see that more than anything — not having a true sense of what will be the true costs of retirement goals and dreams, or thinking of them in today’s dollars, and in 10 or 15 years, with inflation, could cost more than you think.” I am currently working for my 3rd financial company and with each company we have taken a little different approach based on the company’s policy and how I have grown to look at financial planning. I have found through my years in the financial industry that what makes a good financial plan is that it is realistic, comprehendible, and actionable.

At my first firm we were encouraged to create a detailed plan for every client regardless of their situation. What we would end up with is an extremely comprehensive spiral bound notebook projecting future returns, contributions, withdrawal rates, major purchases, etc… What I found with my first firm however was that I would put hours of data input and tweaking into these plans and when I presented them people would kinda nod in agreement and go on with their life as they normally had.

As I moved to my second firm, we followed a similar approach of creating large comprehensive financial plans for the majority of our clients. A large difference though was that a lot of the clients I was working with at my second firm had been clients for a long time with some in excess of 20 years. We reviewed and updated the plans annually with new projected expenses, assets, and goals. Although many of these clients had been through the financial planning process more times than they could count, I noticed that many of them did not fully comprehend the concepts and ideas we tried to portray through the plan.

About a year into working with my second firm we transitioned to a new approach that moved away from the 40 page bound notebook with detailed projections to an approach where we completed the process interactively in the meeting through a simple program. By the end the client left with an 8 page printout listing goals, action steps, and current projections for them to achieve their goals. This approach made the financial plans easier to comprehend and gave clients greater ownership of the plan.

A lot of the time now, especially with clients new to financially planning process, I start with pen and paper. It is odd being a millennial discussing in my blog about using pen and paper instead of some fancy app or algorithm, but it is true. At this point I have enough experience discussing finances with people and preparing financial plans that I can get a rough idea of whether someone’s current goals are feasible or whether changes need to be made. What pen and paper does is makes it interactive with the client so that they can see exactly how each number is arrived at. I will use outside tools to explain why some numbers are used and help make projections, but for the most part I am using high school algebra. Pen and paper also allows us complete flexibility. As we go through the process it is easy to make changes to assumptions throughout the process without trying to manipulate an advanced program on the fly and possible messing up other assumptions in the process.

No one process is correct and different processes are better for different people in different situations. Many people just need a couple of simple helpful tips to get their finances on track. For other people, they would prefer to see a chart detailing every projected financial transaction for the next 30 years. The important thing is that however someone creates a financial plan whether it is with a professional or on their own is that it is realistic, comprehendible, and actionable.

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Oakland Zoo

Shame on you, when you step through to The Ol’ Dirty Boucher, Oakland Zoo! Kristen, my mom, and I went to the Oakland Zoo on the Wednesday before Thanksgiving.

Kristen and Carolyn Ticket Booth Pig

Baboons Warthogs

Giraffes Camels

Lion Elephant

Oakland Zoo Selfie Meer Cat

Kristen and  Carolyn statue Zebra

Tigers Flamingos

Sun Bear

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