The Solution to Maintaining a Budget Is Awareness

The Solution to Maintaining a Budget Is Awareness

By: Carl Richards I talk to many people who have problems with spending. Sometimes it’s friends. Sometimes it’s co-workers. Sometimes it’s neighbors. And yes, sometimes I talk to myself about my own struggles. What I’ve discovered over the years is that most of our problems do not come down to income. Instead, we don’t notice enough. Spending mindlessly, without even thinking about it, has become a national bad habit. And we all know how hard it is to break habits. So we make the same mistakes over and over again. Oops! I did it again! Another month, another blown budget. We keep having this problem because we keep using the same tips and tricks while expecting a different result. We tear up our credit cards and use only cash. We may even wear a shock bracelet (there’s actually somebody who advocates that), which you can use to zap yourself when you buy something. Crazy, right? Well, it’s time for a new approach. Solutions that focus on negative reinforcement are like hacking at the branches when what we really need is to focus on the roots. What I’m proposing is really simple, and it’s based on one central hypothesis: The solution is not making spending more painful; the solution is awareness. So I want you to try a little experiment I’ve created. It’s called “30 Days and Three Seconds.” Here’s how it works. For 30 days, when you spend money, I want you to take three seconds and simply notice what you’re doing. That’s the program. Simple, easy and doable. It can be before, during or after the purchase. Be...
No Big Edge For More-Active Funds

No Big Edge For More-Active Funds

By: Larry Swedroe The prevailing wisdom is that the market for equities in emerging markets is less efficient than in developed markets. Unfortunately, the evidence doesn’t support this hypothesis. For instance, the S&P Indices Versus Active (SPIVA) scorecard showed that over the 10-year period ending June 2015, 92% of actively managed emerging market funds underperformed their benchmark, the S&P/IFCI Composite Index. On an equal-weighted basis, the full universe of actively managed funds returned 7.2% over that period and underperformed the benchmark by 1.9 percentage points. On an asset-weighted basis, the underperformance was 1.2 percentage points. More Proof Of Active Underperformance As another example demonstrating that emerging markets are not inefficient, we can look at Morningstar data. Even with the significant survivorship bias in Morningstar’s data (a bias not found in the SPIVA data), for the 15-year period ended April 18, each of the three passively managed funds from Dimensional Fund Advisors (DFA)—which my firm uses to gain exposure to emerging market equities—outperformed the vast majority of actively managed funds. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.) The DFA Emerging Markets Portfolio II (DFETX) had a 25th percentile ranking (which means it outperformed 75% of the surviving actively managed funds), and both DFA’s Emerging Markets Value Portfolio (DFEVX) and DFA’s Emerging Markets Small Cap Portfolio (DEMSX) had 1st percentile rankings. That’s an average ranking in the 9th percentile. And that’s even before considering the survivorship bias in the data, let alone the impact of taxes (the higher turnover of actively managed funds will typically create more negative tax consequences). It is hard to make the...
Four Cures For Investment Anxiety

Four Cures For Investment Anxiety

By: Jean Chatzky “Index funds or ETFs? Target date funds or managed accounts? Rebalance once a year or twice?” Is your heart beating a little quicker now than it was a minute ago? You’re not alone. The problem with many money questions is that they have answers – often good answers – but they don’t necessarily have right ones. You want to pick the best credit card in terms of interest rate and perks, or the best small SUV in terms of price, efficiency and safety ratings? You can, because those are absolutes. There are correct answers. But when it comes to investing, you’re looking into the future and there’s no way to be absolute about that. The result? As CNBC’s Karen Finerman explained to me on a recent episode of my new podcast, HerMoney with Jean Chatzky: Investment anxiety. Particularly among women. “The idea of ‘What if I’m wrong?’ is paralyzing,” she said. “But you’re better off being somewhat wrong [than doing nothing].” This year has been a particularly anxious one. Financial education site, Investopedia, recently published its Investopedia Anxiety Index (IAI), which tracks and plots user search traffic for 12 “negative” definitions (think words like inflation, bankruptcy, volatility and short selling). Peaks in the index correspond with events like the Greek bailout and the U.S. credit downgrade, and it was even elevated for a year before the recession in 2008. The IAI also peaked the first three weeks of January 2016 — the period known as the worst-ever start to a year in market history. If you’re anxious, it’s not that you’re doing something wrong, says Tim Maurer,...
Annuities and Problems of Longevity

Annuities and Problems of Longevity

By: Larry Swedroe As the director of research for The BAM ALLIANCE, I frequently receive questions related to the advisability of purchasing payout annuities (as opposed to variable annuities, which I generally categorize as products meant to be sold, not bought). Combine the relatively poor performance of equities since 2000 (the S&P 500 returned just a little more than 4% and the MSCI EAFE index returned less than 3%) and the fact that current bond yields are at exceptionally low levels with concerns about Social Security’s solvency and the demise of defined benefit plans (then add in longer life expectancy), and it’s no wonder investors are seeking alternative strategies to ensure they’ll have sufficient assets to support their desired lifestyle in retirement. Given the importance of this issue, and how often I’m asked about it, I thought I would share my thoughts. To begin, we buy insurance to protect our homes, cars and lives, transferring some or all of risks we prefer not to bear ourselves. Thus, buying insurance is really about diversifying risks we find unacceptable, because the costs of not being insured and having the risks “show up” are too great. The same logic applies to the purchase of payout annuities, payments from which can be in either nominal or inflation-adjusted (at least to some degree) dollars. At its most basic level, deciding to purchase a payout annuity is a decision to insure against longevity risk (the economic consequences of outliving a portfolio of financial assets meant to provide lifetime income). As the pain of outliving one’s financial assets is extremely high, purchasing a payout annuity makes...
The Elephant in the Room: Addressing Aging Issues with Family Elders, Part 2

The Elephant in the Room: Addressing Aging Issues with Family Elders, Part 2

By: Joe Delaney Last month I shared Part 1 of my interview with Carolyn Rosenblatt, registered nurse, elder law attorney and mediator with experience navigating the turbulent waters of family issues. We discussed yellow flags, early warning signs that it’s time to discuss issues relating to an elder’s loss of independence. She also provided some insights into addressing the red flags that tell us either the elder or those around them are already in danger. I asked Carolyn about a complex issue I have seen come up time and again in my clients’ families. Mom or Dad is still driving when you know it’s no longer safe. What do you do? CAROLYN ROSENBLATT ON THE 5-STEP PROCESS FOR ENGAGING ELDERS IN CRISIS The driving issue is important. I was a personal injury litigator for 27 years. So many of those accidents were caused by people who should not be driving. When the elder loses the ability to drive, it can be caused by physical issues or cognitive issues. Physical issues include diminishing vision, the ability to turn quickly to the right or to the left and decreased reaction time from stimulus to action. For example, seeing a kid running out in the street chasing a ball, noticing that’s a danger, being able to put your foot on the brake in response to the stimulus. Cognitive issues have to do with confusion, memory loss. Driving is really complicated. It involves multiple sources of stimuli coming at you that you have to process quickly while remembering to obey the rules of the road. When you look at all that it’s easy so say...
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