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One Marshmallow or Two?

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A decades-long study has been conducted with children using marshmallows to determine their ability to make long-term decisions. The experiment is simple. Children are presented with a marshmallow; the person conducting the experiment tells the children they can eat the marshmallow now, or if the child waits 15 minutes before eating the marshmallow, the child will be presented with a second marshmallow. The child has to decide if it is worth waiting the grueling 15 minutes before eating the marshmallow in order to have two marshmallows. The study tracks the percentage of children who have self-control and long-term thinking capabilities to forgo immediate gratification for a larger reward in the future.

What if you were offered $10,000 today that you could spend as soon as you want, but if you waited 30 years to spend the money, you would be given $1,000,000? This is a choice you make when you save for your retirement. Thirty years is a lot longer to wait than the 15 minutes for the marshmallow, but the requirement for long-term thinking is still needed to end up with the better outcome.

As a financial planner, one of the best parts of my job is watching the families I take care of enjoying their life after work. The stories about the trips they take, or seeing them spend their winters in Florida, or the joy they have when they talk about not having to wake up early on Monday mornings to drive to work – this drives me to help more families reach this mountain top. But the reality is, this dream was not accomplished overnight. It took years of sacrifice, discipline, and patience to get to the point where they could officially leave the workforce.

Saving for retirement is not rocket science. What I mean to say is that you do not need a degree in finance or a deep understanding of the stock market to have success in the stock market. So why don’t more people retire with more money in their investments?

Because saving for retirement requires the discipline to live on less than you make. It requires saying no to newer vehicles or saying no to expensive vacations. It requires paying attention to the dollars that come in and the dollars that go out. This is not difficult in an academic sense, but it is very difficult in a behavioral sense.

Popular culture pushes all of us towards instant gratification. We live in a consumer-driven economy. Keeping up with the Jones’s is not a new phenomenon, but it is nevertheless more prevalent with the addition of social media that floods our feeds with images of families taking big trips or buying new homes. We are constantly being told to eat the marshmallow.

Your life after work starts with a vision. This vision provides a focus point, and it reminds you when you add money to your investments, rather than adding money to your standard of living, that waiting for two marshmallows will be worth it.

Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

Beware of Little Orphaned Assets

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King Solomon famously wrote, “It is the little foxes that spoil the vine.” In a secular moment, he might have written: “it is the little assets that spoil the estate plan.”

More often than not, with careful examination, we uncover forgotten assets in a family’s financial situation.  They may be overlooked or held in accounts that you no longer check, however, these neglected assets require your attention.

 It may be a small 401k from a first job, an old IRA contribution or a stock lingering in a long-forgotten lockbox.  While it is easy to focus our attention on larger assets and the current context, investments are not meant to function on autopilot.  Tax requirements and investment opportunities dictate at least occasional attention.

 When reviewing your assets, some basic rules apply.  Generally, a family will have a joint account and a couple IRA’s or retirement accounts.  Remember that retirement and IRA accounts must stay in individual names and account holders cannot mix their money with their spouse’s accounts.

 If you have three or four small IRA accounts in your name, you can place them in a single account to simplify and generally reduce administrative expense. If you have old retirement accounts, you may be able to move them to your current retirement plan or directly to your IRA.

 Orphan accounts and long lost dollars can impact decisions we should be making in any one of five distinct financial areas. These areas are not obvious and it is difficult to understand how they interrelate.

 Where do you begin? Always start with the end in mind. For most people, the starting point is their retirement plan. We call it your life after work because most people don’t vacation the rest of their lives after leaving the workforce.  Instead, they transition into a new phase.

 Tax planning must be done proactively before the end of every year in order to properly determine contributions and financial decisions. Creating and following your investment policy is paramount to getting through the storms and challenges of market movements.

 There are also one-off situations that simply accompany life.  Some are good and others painful but they are part of the process. Last but not least is the legacy plan that ensures your assets are distributed where and how you want them after you are gone. Allowing orphan assets to exist without recognition can create challenges in each of the five critical financial elements.

 When we uncover investment decisions that create tax penalties, more often than not the situation occurred because another account had been totally disregarded. When estate plans fail, it is because accounts weren’t titled correctly so that the documents were unable to function as intended. When insurance policies don’t deliver as expected it is because beneficiary designations were overlooked.  Each seemingly minor scenario can create huge holes in your financial future.

 Understanding the reciprocal relationship between investments and taxes is key. Just as important is keeping track of what you own.

 Tax advice provided by CPA’s affiliated with Financial Enhancement Group, LLC.

 Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

International Investing Risks

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International investing has the potential reward of diversification, but it is coupled with additional risks. Over the last decade, the foreign market underperformed, while the U.S. market was strong. The tide may be turning. Proceed with caution, however.

There are risks in every investment, including cash. Most investors focus on one risk, which is the loss of principal in the moment. There are many risks we must consider as fiduciaries. Inflation, market, sector, credit, interest rate, business, regulatory are some but not all of the risks associated with investing. We will be doing a video series on these risks on our Facebook group page Financial Enhancement Group Financial Tidbits.

Foreign investment brings additional risks.  Notably are currency risk and political risk.  Bear in mind the above risks are also included. There is comfort in knowing your investments, which is often difficult in a foreign environment. Currency risk is the most misunderstood concept for most retail investors.

Similar to a stock, the value of a currency is what another buyer is willing to pay for it. In the case of foreign currency, the price is driven by substantial institutions. For instance, there may be a manufacturer in the U.S. with plants in China, Germany, or Japan. They need to reduce their exposure to currency risk and use institutions to buy and sell various currencies to mitigate that risk.

Foreign governments also enter the currency markets to stabilize their economy when possible. Two issues that commonly confuse onlookers: “Joe, how can a currency have risk?” “Joe, why wouldn’t a government always want a strong currency?”

Currency has no immediate risk for an individual unless you travel outside of your country. There are long-term risks for all citizens. You can live your entire life in the United States and never cross a foreign border – even to our largest trading partner, Canada. A dollar bill in Indiana is worth the same in New York, but a coffee and hotel stay is likely to be more expensive. You still understand the cost.

People in Germany maybe in three countries regularly – Germany, Switzerland, and France.  The reason the Euro currency was created was, in large part, to reduce the complexity of price change in multiple currencies. Currency fluctuation could make something cheaper in one country and more expensive in another. By the way, Switzerland doesn’t play that game and retains its own currency.

If you are an exporter of goods to other countries, a weak currency is beneficial. Notice our President is always talking about our dollar being too strong. If you are primarily an importer of goods from foreign countries, you want a strong currency so you can buy cheaper. Sobering nations try to find the right balance, but market forces continue to drive the valuation.

The fluctuation of currency values has been of great magnitude recently. Foreign investing needs to be understood, but start with learning about how currency changes impact your nest egg.

Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.

Financial Enhancement Group is an SEC Registered Investment Advisor.  Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor.  Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group.  FEG is not owned or controlled by World Equity Group.

Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney

Consider This Program…Radio Show

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Welcome to the February 1, 2020 episode of Consider This Program with Big Joe Clark, Managing Partner of Financial Enhancement Group and CFP, Angi Kinser, and Ken Dilger.

 

In this podcast, we cover The Investment Toolbox, Lessons in Trusts, IRAs Impacting your Last Years Tax Return, Are you in a Relationship with Your Stocks?, plus more. Click here to read the show notes from the episode.

 

To listen to Consider This Program on podcast, please click here. 

The 5 Mega Companies and What That Could Mean for Markets

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Transparency should be an objective for every investment account. Knowing what you own and what fees and expenses you are paying is a critical part of portfolio management. Developing a diversified portfolio is difficult when you don't know or understand what you own.

 

Many people have mutual funds. Mutual funds are holding tanks for individual stocks, bonds, and cash type instruments. The performance is based on those underlying investments.  A mutual fund is not an investment in and of itself. You could own multiple mutual funds, yet still, hold the same underlying stock.  Not giving you the diversification you intended.

 

Prudent investors have learned the value of diversification and the challenge with mutual fund overlap – owning the same stock in varying mutual funds. A plausible answer was to buy an index fund where they “knew” all of their individual investment holdings. The S&P500 is comprised of the largest US companies and is non-managed. The index is often replicated by mutual funds and exchange-traded funds. Owners do indeed own 500 approximate companies, but there is a break in the concept versus reality.

 

The index is comprised of 500 companies, but the common way to express investment ownership is via market capitalization. The individual company's market capitalization is vastly different and is concerning. The markets experienced a similar issue in 2000 right before the tech wreck.

 

According to Goldman Sachs, in late 1999, the five largest companies in the S&P500 accounted for 18% of the entire value of the index. Currently, that percentage exceeds 20%. That is troubling; however, there are some differences.

 

The tech wreck of the late 1990s was driven by a technology and telecommunications explosion that had a collective negative net earnings profile.  The two sectors accounted for 40% of the indices valuation. That was anything but diversification.

 

The five mega companies of today – Microsoft, Apple, Amazon, Google, and Facebook – have real earnings, and they have cash. Goldman Sachs reports that the companies added over $4 trillion in market cap since 2013. They also have EPS (earnings per share) growing at 12% year over year compared to the other 495 companies that grew at a mere 2% in the first quarter of 2020.

 

What does this mean for the markets? According to SentimenTrader, when the top five companies make up less than 20% of the S&P500 market cap, a rallying market does well.  Keep in mind that this is not necessarily the case in a declining market. Their research shows the opposite when the five largest holdings are greater than 20% of the value.  Looking one year out, during time periods where a rally existed and the top five were below 20%, the market had a positive return 100% of the time a year later. However, when over 20%, only 29% of the occurrences were positive one year later.

 

Diversification is elusive at times.  We must be diligent in our research over transparency for the sake of managing portfolio risk.  Know what you own!

 

Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.

Financial Enhancement Group is an SEC Registered Investment Advisor.  Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor.  Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group.  FEG is not owned or controlled by World Equity Group.

Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.

Planning for Physical and Fiscal Fitness

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Waking up early and heading to the gym is tough. But once the workout is over, the payoff is often a tremendous energy boost. While people exercise for many reasons, they usually expect to benefit from their “sweat equity” not in the current moment, but in the future.

We will all encounter health issues at some time and the medical world assures us we will be better equipped to deal with health problems if we get – and stay – physically fit. Preparation matters.

Perhaps you’re asking what exercise has in common with financial planning and investing. Good question! The answer is very few individuals prepare to invest. Most folks look at the choices in their retirement plan and make selections. Studies have shown that more than 68% of 401k plan participants made no changes in 2008 — perhaps the most volatile market year in history!

Getting back to the fitness analogy, the greatest benefits of exercise come from the stress we intentionally place on our muscles so that when a health problem arises, our bodies are in better condition to deal with the situation. From an investment perspective, investors who choose to go it alone need a methodical regimen for taking in and processing market data. They also need to develop a strategy to accommodate unforeseen yet inevitable future events.

When it comes to market data, investors should not allow random news clips to guide their decisions and they must filter out market “noise” in determining how to act on the data. For the record, you don't have to make changes in your portfolio just because something changed; but you must be prepared to consider adjustments when the information dictates conditions have shifted.

The financial industry refers to this as an investment policy statement. I prefer to use the term investment playbook.  The playbook specifies how we intend to respond to change with a disciplined approach aimed at particular objectives. It’s a much better approach than reacting to Wall Street and the media’s noise.  Great stock or even mutual fund opportunities may arise, but if they don't match the investor’s playbook, they need to stay on the bench.

The playbook should describe what the investor is trying to achieve and how market changes will be managed. A well-designed playbook keeps investors from making emotional decisions or “freezing up” during confusing times like those the market experienced in 2008. The playbook should clearly document investment information sources, the technology involved in investing and why a particular investment was purchased.

I have been married for over 26 years and people continue to ask me how I met my bride Barb. The initial decision matters in marriage and it should matter in investing as well.  Why was an investment purchased and when will it be sold off?  Unlike marriage, stocks are rarely lifetime decisions!

When you go to the gym, you have can wander aimlessly or plan to invest your energy.  I think you know which one works best. Investing is no different.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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