The Ever-Shifting Balance Between Resources & Dreams

(from Carl Richard's New York Times' Bucks blog, 9/20/2011 - click here for the original post.  Carl  is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)

Most of us have limited resources, like time, money, energy and skills. At the same time, we have needs, goals and dreams. All too often they exceed the limited resources we have, so balancing these two areas of our personal economy can be tricky. We also need to understand that over time both of these circles change.

Sometimes the resources we have will be greater and allow us to do more of the things we want. Other times our needs and wants will seem to dwarf the limited resources we have to throw at them.
But it’s not something that we decide once and then check off the list. It’s a challenge we have to revisit regularly. So here’s how to think about both of the circles.

First, we need to stop focusing on things outside our control. When we do that, we miss opportunities during both good times and bad (like now) to find our financial balance. Don’t put off making important and necessary adjustments, because no one else will do it for you.

Second, we need to be honest about whether our goals are realistic given our resources. You may want to retire at 50, but if you haven’t been saving money regularly, that’s not likely to happen. Aim for things that really matter to you, but don’t set yourself up to fail before you ever start. Remember: your goal is maintaining balance, not achieving perfection.

Finally, look for new ways to make the balancing act work for you. Only you know your goals and only you understand what resources you can dedicate to achieving your dreams. Get the help you need to figure out the details, but it’s up to you to keep these two areas in balance.

It’s amazing the changes that I see in people once they figure out how to match their dreams with their resources. They worry a lot less day to day about things they have no control over. They spend more time with the people they love and doing things that make them happy. Even if their balance between resources and goals doesn’t look like anyone else’s, it’s still getting them where they want to go.

And that is all that matters.

How the Mighty Have Fallen

This year has not been kind to mutual fund managers - at least the ones who try to predict the future. First, Bill Gross of Pimco warned everyone that they should cash out of Treasuries or “get cooked like frogs in an increasingly hot pot of water.” Gross manages the largest bond mutual fund and sold completely out of Treasuries earlier in 2011, only to have the performance of his Pimco Total Return Fund fall to the bottom 20% of bond funds for the past year. As Treasury yields continued to fall, prices went up and his investors suffered. In the past two months he’s increased his Treasury holdings to 16%, higher than it’s been since late last year. Looks like he’s the one feeling the heat!

This spring, Bruce Berkowitz, manager of the Fairholme Fund, dropped from leading 99% of his peers in performance for the last decade, to trailing 99% of the large company value fund managers in the last twelve months. In the past, holding only a handful of stocks and bonds in the fund paid off, but big bets in American International Group, Bank of America, Morgan Stanley, Goldman Sachs and Citigroup have backfired. The best performer in that group (Citigroup) is down 29.67% over the past twelve months vs. the S&P 500’s return of 5.64%.

On September 14th, one of the most well-known funds around, Fidelity Magellan, fired its manager, Harry Lange, after six years of subpar performance. He may have been a little premature when he told the Wall Street Journal in April of this year that “six months from now, I’ll look like I’m a star.” It’s hard to believe that a fund that once touted $110 billion in assets is down to $17 billion due to redemptions coupled with dismal returns. Hopefully the new fund manager, Jeffrey Feingold, who currently runs the Fidelity Trend Fund, can repeat his one year performance of that fund and will beat Magellan’s benchmark by 1.8%. I just wouldn’t want to bet any money I will actually need.

These are a few of the many stories of once heroic mutual fund managers falling from grace. We choose to invest our clients in the Dimensional Fund Advisors (DFA) funds because they are not depending on a “superstar” fund manager to continually outperform his/her peers. Their funds are not based on speculation, which often proves to be not only futile, but costly as well. DFA’s fund managers remain invested, capturing the returns of the markets, while keeping costs to a minimum. And because cost is the biggest predictor of the future performance of a fund, more often than not, they end up outperforming their peers.

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Living with Uncertainty

It’s been a year since my husband’s cancer diagnosis and surgeries to remove his tumor and lymph nodes. He has six weeks to go until he’ll be finished with his interferon treatments – a much smaller number than the 52 weeks he had to look forward to when his treatments began. He’ll be glad to have the drug and all of its side affects out of his system, but he’s hesitant to celebrate. Melanoma is a very aggressive cancer; and he knows he will have to live with it for the rest of his life.

We all realize life is full of uncertainty, but it feels like we’ve been living with more than a healthy dose of it over the last four years. This summer’s debt ceiling debate and the current concerns over Europe’s sovereign debt have done nothing to improve most people’s peace of mind. If you have the personality of an engineer or CPA like my husband and me, you may have an even more difficult time not knowing what comes next. So how do you cope?

1. Know what you are dealing with. I believe one of the biggest hurdles for many people is refusing to face their fears. For example, if you are worried about your ability to retire, but you have no idea what you are actually spending on a monthly basis, it only adds to your anxiety. It’s an issue you may not want to deal with, but not addressing it means you might be spending yourself further into a hole that you can’t dig yourself out. Not facing the issues you are worried about only compounds the situation. 
2. Have a plan. I understand I’ve said this before, but having a plan is critical and helps keep panic at bay. If you know what you need to live on, and you have five years of living expenses stashed away in cash and short term bonds, the next time the market takes a dive it won’t take your stomach with it. You’ll be confident that you don’t need to rely on a market upturn for your future survival. If you are saving for a goal, know what you need to accomplish each year, so you can make adjustments if you need to, instead of abandoning hope.
3. Recognize the uncertainty for what it is. There are basic truths in investing that cannot be avoided. If you refuse to take any risk, you will not receive as much reward. Look at CD rates these days. Your principal is guaranteed, but you earn virtually nothing. Stocks, on the other hand, pay us a much greater return over time in exchange for the erratic path they take toward those returns. If there was no day-to-day uncertainty in holding stocks there would be no long-term reward.

So how are we dealing with Gregg’s uncertainty? We have read almost everything there is to read about melanoma, the current treatments and research in progress. We know his odds, and we are doing everything we can to improve them. We also know that uncertainty can be a gift. When you don’t take your life for granted, you appreciate each day even more.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Estate Planning & Personal Property

My wife’s family is currently dealing with her grandfather making a permanent move to a nursing home that has highlighted an area of estate planning I believe is often overlooked.    

What do you do with all of the “stuff”?

The formal estate plan has long been in order and has been reviewed and updated on a regular basis.  We’re grateful knowing that everything will be handled to his precise wishes when the time comes.  What to do with the personal property outside larger items, however, was never really addressed.

I’ve blogged on more than one occasion about my feelings surrounding “stuff”, but in this case, believe it deserves substantial consideration.  There are items of sentimental value, items that he would like to go to specific individuals and other items that need to be donated or discarded. 

Fortunately, he is still with us and able to help sort out which items belong in what pile.  The process has been challenging, but no major blow ups or surprises have occurred.  I can easily see where this would not be the case, though, especially where the loved one is deceased.  At best, it could lead to some very uncomfortable conversations and debates amongst heirs.  At worst, it could generate costly legal battles and tear families apart.

Often times when you walk through the estate plan review process, the attorney or your financial advisor will reference a checklist about how to handle personal property.  This is often missed or forgotten about in favor of focusing on ensuring that assets get titled correctly, making sure all the I’s are dotted and T’s are crossed and that trustees, executors and beneficiaries are properly named.  It’s understandable to take a “let the kids figure it out” attitude about the rest of the stuff, but we all have different ties to different things.

The solution?  Make a video walking through your home and discuss items of significance, share stories that might be relevant to specific family members and why you’d like certain people to have certain things.  For those items you don’t believe are significant, sit down with your heirs and make a list of those things that might hold some unforeseen value to them.  As with most things, the more communication, the better. 

No one enjoys talking about a family member’s future demise, but these conversations alleviate stress both for the ill in their final days and the families after the fact.  Once these intentions are clearly thought through, sit down together as a family and make sure everyone is on the same page.  You don’t want the burden to fall to the executor as to how to interpret lists and videos that few or no one has ever seen.

If there are contested items or things you want an unbiased opinion about how to divide, consult your estate planning attorney or financial advisor.

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/