Can We Pass the Marshmallow Test?

In the late 1960’s, psychologist Walther Mischel conducted an ingenious experiment testing the ability of children to delay gratification.  A child was left alone in a room with a marshmallow on the table, and was told if he or she could wait 15 minutes to eat it, they would get a second one as a reward. 

About two-thirds of the kids failed the experiment – but the fascinating part of the study was the follow-up research on the children years later.  The kids who didn’t eat the marshmallow had stayed in college, made more money, and had fewer drug and alcohol problems.  The kids who had been able to delay gratification were more successful in life overall.  

As I read a Wall Street Journal article this morning about yet another government spending program that makes it impossible to balance the budget, I wondered why we’re surprised we have this problem.  It’s easy to be critical of Congress and its inability to make difficult decisions necessary to keep our county within its spending limits, but many people can’t balance their own family budget – so how do we expect states with competing interests to agree?  Congress is only a representation of the people it serves. 

Why has it been so tough for my baby-boomer generation to budget?  I have a theory.  We didn’t learn to delay gratification.  We grew up in a time of prosperity, and it felt like the party would never end.  Sure, we experienced the lousy stock market of the early 70’s, but most of us were just getting started, so we were unaffected.  We also experienced raises that were tied to inflation, and our salary increases in the 80’s bought us even better lifestyles when companies like Walmart and Costco drove down prices of the everyday things we purchased.  The easy credit of the 90’s caused our home values to race up and our cost of borrowing to drop - we were on a roll.  We didn’t have to budget like our parents and grandparents; until the Great Recession began in 2007. 

Although markets have recovered from their lows, it’s evident we may be in for an extended period of time when we won’t have the wind at our back.  And we need to adjust.  Like the kids in the lab, we must exercise some self-restraint; and like Congress, we have to make some tough decisions.  At the risk of sounding overly-dramatic, it’s much easier to make a change in our lifestyles today than it is to choose between buying food or paying the mortgage tomorrow.

I’ve had this discussion with clients and prospective clients over the past several years, and I’ve been told by some that they intend to enjoy life now, because it won’t matter when they’re old.  I think this is a battle we’re waging between our present and future selves.  It’s easy to delude ourselves today that it will be easier to get by with less in the future.  One of my favorite quotes on this subject was made in a presentation by Shlomo Benartzi, an economist who studies financial behavior:  “Self-control is not a problem in the future.  It’s only a problem now, when the chocolate is next to us.”

Marshmallow, anyone?

Jeannette A. Jones, CPA, CFP®

jjones@taaginc.com

www.taaginc.com

Abundance is our Future

This week we turn to TED's 2012 Conference where Peter Diamandis gave a talk called "Abundance is Our Future".  Peter looks at the world of information overload, how we're predisposed to focus on negative news first and how that shapes our view of the substantial problems we face as a society now and in the future.
From that somewhat dismal view, he then explains why that is extremely shortsighted and prevents us from seeing the truly extraordinary times we live in and, perhaps more importantly, the even more extraordinary times and unavoidable abundance that are to come. 

Check out Peter's video through the link below.  We felt it was well worth the time.

Peter Diamandis: Abundance is Our Future

For those that might not be familiar, TED, according to their website, is a nonprofit devoted to Ideas Worth Spreading. It started out (in 1984) as a conference bringing together people from three worlds: Technology, Entertainment, Design. Since then its scope has become ever broader. Along with two annual conferences -- the TED Conference in Long Beach and Palm Springs each spring, and the TEDGlobal conference in Edinburgh UK each summer -- TED includes the award-winning TEDTalks video site, the Open Translation Project and TED Conversations, the inspiring TED Fellows and TEDx programs (including one coming to Cincinnati in May), and the annual TED Prize.

Have a great week!

The Asset Advisory Group
info@taaginc.com
www.taaginc.com

A Different Angle

My husband, Tom, and I recently updated our estate planning.  I recommend my clients review their documents at least every 5 years or as their circumstances change (marriage, divorce, inheritance, birth or adoption of a child).  This seems to be an item that can easily stay on one’s “to do” list for a year or more.  Many times estate planning is put off because of the decisions which must be made regarding the disposition of your assets after death, choosing who will be your children’s guardians’ or your power of attorney.

As Tom and I struggled with beneficiaries and contingent powers of attorney, there were two very helpful points that our attorney, Jeff, brought up which made the whole process a lot easier. 

First, it can be difficult to decide who will serve as your executor, trustee, power of attorney, etc… because we are often wondering what happens when/if that person predeceases us.  Our attorney told us not to worry about 10 or 20 years in the future, but to think about today.  If something happens to Tom and/or me now, what do we want in place?  We were able to make our choices much more quickly when we weren’t worrying about appointing a parent as a successor power of attorney because we are likely to outlive them.   As our lives change, we will update our plan, as needed.

The second advice was with regards to naming beneficiaries.  Tom and I do not have children, so our inclination was to divide our estate between our parents, my sister and niece and nephew.  Jeff asked if an inheritance would make a meaningful change to our parent’s lives, and, in most cases, the answer was no.  We were also hesitant to leave a large inheritance to our niece and nephew.  By observing the way people handle a sudden windfall, I have witnessed many instances where money causes more problems than it solves.  After further discussion, we realized our goal was to help our family members with the greatest need and also use our estate to truly make a difference in the lives of others through charitable gifts. 

By simply suggesting that we look at things differently, we were able to enjoy the process instead of looking at it as a chore.  If you are putting off your estate planning because this seems easier than the decisions that you will face, try looking at it from a different angle.  Make sure your estate documents set up so that you are comfortable with the decisions you have made if something were to happen to you tomorrow – and not just 20 years from now.

Christine Carleton, CFP®

ccarleton@taaginc.com 
www.taaginc.com  

Playing to Fear, Not the Plan

After combing through what’s become a lengthy “future blog topics” list for this week, I was sidetracked by the recent onslaught of advertising by the world’s largest asset manager, BlackRock.

I don’t have anything against the firm, per se.  They aren’t managing more than $3 trillion just by accident.  It’s just the message behind their most recent ad campaign seems to be a perfect example of what we try to warn against on a regular basis; Wall Street playing to investors’ fears.  Even in a market that has been more positive than most might have expected since the fourth quarter of 2011, the message persists; what are you afraid of and how can I create a product to sell you that answers that fear? 

What’s wrong with that process?  In traditional business, absolutely nothing.  Our society has been built on the successes of those producing products to fit a need.  However, with investing, the process tends to completely disregard the question of whether or not the product is actually an appropriate investment for the investor’s situation. 

The product answers to fear, it should answer to a plan.

The ad states “2% ISN’T A RETURN; IT’S A RETREAT.”  Ok, I’ll agree.  The return on safe instruments such as cash and short term, high quality bonds are, as can be expected in this environment, paltry at best.  However, that doesn’t mean they don’t play a vital role in your portfolio.  “Mattress money” is meant to be just that, a place to safely store the returns earned on the risk you take in the stock market or other investments. 

What does BlackRock suggest you do?  Try some of their products, of course.  One they mention specifically, the BlackRock High Yield Bond Fund, might certainly boost your expected return, but at what cost?  Well, if you look back to Morningstar as to how the fund performed in 2008, it lost 27.8% of its value.  That doesn’t make it a bad investment, but it’s not something I’d want in my mattress.

Another suggestion is the dividend-focused BlackRock Global Dividend Income Fund.  Dividends are certainly a hot topic of late, and, for all I know, this particular fund, despite its 1% expense ratio (and up depending on share class), may be a perfectly reasonable way to access a global portfolio of dividend paying stocks.  But, just like the High Yield Bond Fund, that doesn’t mean it’s a reasonable replacement for cash or high quality fixed income instruments.

We’ve said it more than a few times in this space, there’s nothing in investing that can’t be boiled down to the relationship between risk and reward, fear and greed.  There are lots of ways to seek out returns that might outperform lower yielding instruments, but not without taking the appropriate amount of corresponding risk. 

What’s more important is to understand why you hold various asset classes, what amounts you hold and how that relates to your tolerance for risk and your long term goals and dreams.  It is our goal to assist our clients with this very important process.  If you ever have questions on how this relates to your plan or know someone who might, please let us know.

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com  

That's Why We're Here

At TAAG, we work only with individuals and their families, so we can focus on getting to know each of our clients well.  While we manage your investments and provide financial planning, we can also help in other ways you may not be aware. 

   

I recently met with a client, her son, and her son’s partner to help them with their budget planning.  They had just purchased a home and were having difficulty adjusting their spending and tracking how they were doing.  We provided help with ideas, resources and ways to track their expenses that were not so burdensome.  My client contacted me later to let me know her son was happier and was more engaged in the on-going financial discussions, something that made HER happier.  

Another client is having health issues, and needed assistance filing for disability retirement benefits.  We helped complete the application request and coordinated the paperwork between her employer, her physicians, and the retirement plan administrator.  With our paperless filing system we have copies of all the documents in case anything is needed later.

Chip has been meeting with the second generation owners of a family-owned business, helping their estate planning attorney map out a plan to take care of their children and transition the company if something happens to them today, while planning for their continued growth into the future. 

Chris has been working with P&G employees that have been referred to us in the recent downsizing, helping them determine if they should take early retirement offers.  She’s also been working with current retirees designing option exercise plans, helping them exercise their options, and diversifying their portfolios afterward. 

During the year, we hold planning meetings with our clients and their CPAs, report investment activity, and consult with them before creating gains when given permission.  We have relationships with a variety of CPA firms, and when a client needs a CPA, we help match them to the best firm based on the complexity of the client’s situation, the specialization of the CPA and cost considerations.  We feel it is in your best interest to have an independent CPA, versus one employed by TAAG, so we can each specialize in what we do best and provide independent oversight of each other’s work.  We provide the same assistance with finding and working with attorneys.

So if you are struggling with a decision or you have a financial issue that’s causing you stress, call us.   

That’s why we’re here. 

Jeannette A. Jones, CPA, CFP®

jjones@taaginc.com

www.taaginc.com

Articles of Interest

There have been several articles of late that have grabbed our attention or garnered significant national press that we thought we would take the time to share this week.  Please see a brief intro to each and a link to access below . . .

Why I am Leaving Goldman Sachs
Now former Goldman Sachs employee Greg Smith wrote an op-ed piece for the New York Times last week on how watching clients' interests being routinely and systematically ignored for the betterment of the firm led to him feeling like the only ethical option was to resign.  The piece has been much publicized as an indictment against Goldman and the entire wirehouse business model in general.

Really Big Claims Based on Too Little Data
TAAG Blog favorite Carl Richards posted this New York Times Bucks blog recently.  Carl takes on the dangers of looking at data over the short term and building conclusions based upon not enough information.  He also does an excellent job of explaining why, ultimately, the data supports a low cost, globally diverse portfolio over finding the best fund manager du jour every time.

The Real Cost of Paper Savings Bonds
This was a post from a guest blogger to the FPA All Things Financial Planning Blog that Chip contirbutes to monthly on the potential risks of hanging onto physical, paper savings bonds and the electronic deposit program the Treasury has established to make tracking and redeeming your bonds safe and simple. 

Have a great week!

The Asset Advisory Group
Website / E-mail

Stop the Madness!

This week begins March Madness.  Friends, families and co-workers have begun selecting their picks for the 2012 NCAA Basketball Tournament.  As I contemplated my brackets, I realized that the selection process I was using to get to my winning team is similar to the process many people use when selecting investments. 

First, there’s usually a hometown bias.  This may be geographical or the team that is your alma mater.  I attended both Indiana University and the University of Cincinnati.  My attachment to these schools as well as my familiarity with their basketball programs typically leads to me advancing them farther in my tournament brackets than they often should go. 

This is not unlike buying stock from a company in which you have ties.  Oftentimes, I see clients that not only hold their company stock in their retirement plan, but they also purchase additional shares of the same company in an outside account as well.  It is also commonplace to see a new client’s portfolio that has a large weighting in local companies such as P&G, GE, Cinergy and Kroger.  These companies are familiar which can give an investor the false impression that this also means they are a safer.

Next is the equivalent of Morningstar’s star ratings.  Each team in the NCAA tournament is given a seed, ranking them in their region based on their past record and strength of opponents they’ve faced.  If you have not followed basketball all year, it’s easy to fall into the pattern of picking teams with a higher seed because they seem more likely to succeed.

Many investors chose mutual funds that have outperformed their peers in the past because they have a higher star rating.  Unfortunately, this does not guarantee the same results going forward.  This is similar to the NCAA tournament.  Not many people probably picked VCU to go to the Final Four last year or George Mason in 2006.  Both teams were 11 seeds.  In fact, I had to refresh my memory to what VCU stands for – Virginia Commonwealth University.

Whether you have the proclivity to pick stocks, mutual funds or basketball teams, keep in mind a saying from sportscaster Dick Vitale that “Anything can happen, baby.”  I wouldn’t want to invest my savings using a methodology similar to tournament betting – would you?  

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