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The Wrong Place and Time to Have a Money Conversation

The Wrong Place and Time to Have a Money Conversation

By Carl Richards

A few weeks ago, I got home late after a long trip. I’d been traveling a lot recently and didn’t sleep well that night. The next morning, I woke up and felt like I’d been hit by a truck.

Emotionally, I was at a really low point.

When I came downstairs that morning, I asked my wife, “How are you?” She said she hadn’t slept well. Her tone was matter-of-fact, but given my thoughts and emotions, I made a huge mental leap. I took her answer way more personally than I should have.

What did I do wrong? Did I keep her up late? Did I snore too loudly? Why was she blaming me? As I went down this mental rabbit hole, I started to get mad. It wasn’t my fault she hadn’t slept well.

To be clear, my wife didn’t mention my name or even hint that I’d done anything. All she said was, “I didn’t sleep well.” But because I was tired, I reacted to what I thought she meant. I mentally curled into a fetal position and then went on the offensive. You can imagine how the rest of the conversation went.

I’ve made this mistake many times before, and you might have, too. When we’re in a bad place mentally or emotionally, we engage in what some people call basement thinking. Every little comment feels like a personal attack. We can only see the obstacles in front of us, and not the potential solutions in between. We also default to shaming and blaming the people around us for how we’re acting.

Of course, even the most routine conversations can be filled with emotional land mines when we’re in the mental basement. But just imagine the outcome if we try to talk about something as emotionally charged as money. In those low moments, before we even realize what’s happening, the simple act of opening something like the credit card bill can lead to World War III.

Our money conversations don’t have to trigger these emotional fights. We can have meaningful and thoughtful discussions about our financial goals and what we want to do with our money. But those conversations won’t happen by accident. We need to make sure that all parties are in a good place emotionally. Talking about money when we’re in the basement all but guarantees a fight.

In these low moments, we feel constricted, like we can’t breathe. We take things personally. We use words that feel like daggers to the other person. Nothing good comes from conversations when we’re in a bad place.

So if we sense that a money conversation is headed south, we need to stop it — immediately. Respect the signs. If either person appears to be reacting personally, trust your instincts and call a halt to the conversation. Instead of throwing a verbal dagger and blowing up the conversation, tell them, “I can’t do this today. But I know it’s important. Let’s talk about it tomorrow.” A small break or a good night’s sleep can make all the difference and restore our energy. The higher our energy, the higher our thinking and the better the potential outcome.

When we start or return to these conversations with the right energy, we tend to end up focusing on the possibilities, not the obstacles. Instead of negative emotion overwhelming the discussion, we find ourselves moving away from “my way” or “your way” to the idea of a third, better way. But that can’t happen if we let basement thinking sabotage the conversation.

It might help to set up a routine for these conversations. Maybe pick a specific day and time. Maybe even pick a designated place outside the home, like a park or a coffee shop. Whatever the routine, our goal is to have regular, thoughtful conversations at moments of high energy. A routine can help us prepare for these conversations and avoid emotional minefields when we’re in the basement.

Talking about money can be hard. But these conversations will only be more difficult if we let basement thinking get in the way. Learn the signs and appreciate that sometimes stopping a conversation before it turns into a fight could be the best money decision you ever make.

This commentary originally appeared June 8 on NYTimes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2015, The BAM ALLIANCE

4 of the Best Financial Investments You Will Ever Make

4 of the Best Financial Investments You Will Ever Make

By Joe Delaney

Are you getting good returns on all your investments? There may be some you’re not even looking at.

Usually the topic of investing is constrained to financial instruments. Advisors assess risk and calculate gains. It’s all about the numbers.

Maybe your financial assets are appreciating in value, but it’s time to wake up to deficits you have in the value of other assets. Life assets. Here are four ways to “reallocate” some financial resources to improve overall life gains.

  1. Invest in time with (guy/girl) friends.

I recently went on a trip to Southern Utah with guy friends who have been in my life for nearly 40 years. We camped out under the stars, sat around a fire and talked like only old friends do.

We celebrated the things we were thankful for. We shared our life challenges, too: health struggles, loss of loved ones, broken relationships.

Studies show that friendships among others of the same gender help us not only cope with stress, but become more resilient to it. In other words, we invested in each other on that trip. The memories we made are paying great dividends no calculator can measure.

  1. Invest in unplugging.

If you’re a strictly analytical person, you might think that this was nice, but ultimately unproductive time. A loss to make up when you get back to the office. Thus, you’d better have your iPhone handy to keep in touch.

I didn’t. For the first time in years, I completely unplugged over this eight-day trip. (I had to. This was Southern Utah!)

The result? I did not come back feeling overwhelmed by the need to catch up. I think the reason is because one of the benefits of letting go of your mental load for awhile is increased mental power. Another excellent return.

  1. Invest in stress reduction.

This was a trip that we go on once a year. Most of us are former lifeguards, so it usually has a physical component to it. This time it was mountain biking, hiking and river rafting.

It is well documented that exercise helps reduce stress. We all know it, but we don’t always believe it, and we certainly don’t always act on the knowledge.

All I can offer you is my personal experience. I feel happier and I am able to serve my clients better when I exercise. It was a better investment of my physical energy over those eight days than a week of appointments.

For you, it may be yoga, meditation, prayer. Whatever you engage in to reduce stress, stop thinking of it as unproductive time. It is producing a greater return on the investment than you know.

  1. Invest in getting away.

You can spend time with friends, unplug and exercise without going to Utah; but you should also go to Utah. Or the destination of your choice.

The reason is incredibly simple. Research shows you get a huge boost in happiness just from planning a vacation. Think about that for a moment. Just by putting it on your calendar and making the necessary arrangements, you can start feeling improved mental health long before you even leave town.

There is something about telling your brain that you will be fully immersed in another place, in another state of mind, working your muscles and sharing your heart with people you enjoy, that unlocks the mental and physical benefits long before it even happens.

That was certainly true for me. I was looking forward to this trip, and I was not disappointed.

EXPENSE OR INVESTMENT?

It’s true that there was some expense involved with this trip. If you make plans to get away, you are going to spend money and time away from work. That may sound stressful to you at first.

My professional advice is to look beyond your bank accounts, beyond your portfolio, and consider the losses that may not show up on the balance sheet.

Making dinner reservations with an old friend; missing a few business calls because your phone is off; buying a new pair of running shoes; purchasing airline tickets to your summer vacation destination; these all involve what you might think of as an “expense”.

As your financial lifeguard, I’m telling you from experience that they are not. These are some of the most important investments you will ever make. The return on your investment may not show up on any balance sheet, but by the end of your days, they are some of the ones you will value the most.

 

By clicking on any of the links mentioned above, you acknowledge that they are solely for your convenience, not required to click. They do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by myself and other featured authors are their own and may not accurately reflect those of Lifeguard Wealth. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2018, Lifeguard Wealth

 

Investing Lessons from a Poker Player

Investing Lessons from a Poker Player

Larry Swedroe, Director of Research, 5/25/2018

As expert poker player Annie Duke explains in her book, “Thinking in Bets,” one of the more common mistakes amateurs make is the tendency to equate the quality of a decision with the quality of its outcome. Poker players call this trait “resulting.”

In my own book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” I describe this mistake as confusing before-the-fact strategy with after-the-fact outcome. In either case, it is often caused by hindsight bias: the tendency, after an outcome is known, to see it as virtually inevitable.

Duke explains: “When we say ‘I should have known that would happen,’ or, ‘I should have seen it coming,’ we are succumbing to hindsight bias.” She adds that we tend to link results with decisions even though it is easy to point out indisputable examples where the relationship between decisions and results isn’t so perfectly correlated.

For example, she writes, “No sober person thinks getting home safely after driving drunk reflects a good decision or good driving ability.” The lesson, as Duke explains, is that we aren’t wrong just because things didn’t work out, and we aren’t right just because they turned out well.

Don’t Judge Performance By Results

“Fooled by Randomness” author Nassim Nicholas Taleb put it this way: “One cannot judge a performance in any given field by the results, but by the costs of the alternative (i.e., if history played out in a different way). Such substitute courses of events are called alternative histories. Clearly the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).”

Here’s an example from poker. With one card remaining to be drawn, there are just two players left in the hand. Player X calculates that he has an 86% chance of winning. Based on those odds, he makes a large bet. Unfortunately, he loses the hand, just as he would expect to occur 14% of the times he faced the same situation. If he engaged in resulting, he would change his betting strategy because he would conclude that it was wrong to make such a bet. However, we know that if he made the same decision each time he faced those odds, over the long term, he would be expected to come out way ahead.

Let’s look at another example of resulting. John Smith, a hypothetical investor, works for Google and has nearly his entire portfolio invested in Google stock. He became a multimillionaire based on that strategy. John believes concentrating all your eggs in one basket—a basket that, as a senior executive, he could watch closely—is the right strategy. He thought diversification was only for investors who don’t have his sophistication. Of course, many other, similar situations turned out entirely differently, despite using the same strategy of concentrating risk in what you know. That’s why the saying “the surest way to create a small fortune is to start out with a large one and concentrate your risk” offers such good counsel.

Flawed Strategy

Among the once-great companies whose stock prices collapsed are Polaroid, Eastman Kodak, Digital Equipment, Burroughs and Xerox. However, despite the fact that there are far more Polaroids than Googles—showing John’s strategy is flawed—his outcome convinced him the strategy was right.

As Duke points out, once a belief becomes lodged, it becomes very difficult to dislodge. It takes on a life of its own, leading us to notice only evidence that is confirming, and causing us to experience cognitive dissonance. We then work hard to actively discredit contradicting information, a process called motivated reasoning.

Making matters worse is that research shows being “smart” actually makes certain behavioral biases worse: The smarter you are, the better you are at constructing a narrative that supports your held belief.

Duke cites the research of Richard West, Russell Meserve and Keith Stanovich, who tested the blind-spot bias. They found we are much better at recognizing biased reasoning in others but are blind to recognizing it in ourselves.

Surprisingly, at least to me, West, Meserve and Stanovich also found that the better you were with numbers, the worse the bias—the better you are with numbers, the better you are at spinning those numbers to suit your narrative. Quoting Duke: “Our capacity for self-deception knows no boundaries.” So, what does this have to do with investing?

Invest By Playing The Odds

When it comes to investing, there are no clear crystal balls. Just as in poker, the best we can do is put the odds in our favor and invest (bet) accordingly.

As I recently discussed, using factor data from Dimensional Fund Advisors from 2007 through 2017, the value premium (the annual average difference in returns between value stocks and growth stocks) was -2.3%. Unfortunately, resulting, hindsight bias and recency bias led many to conclude it was a mistake to invest in, or overweight, value stocks.

Another way to look at the situation is that, over 10-year periods since 1927, value stocks outperformed growth stocks 86% of the time—the same percentage as in the aforementioned poker hand. The value premium’s now-decade-long underperformance was not unexpected, in the sense that in 14% of the alternative universes that might have shown up, we expected value stocks to underperform.

Similarly, again using Dimensional Fund Advisors data, the market-beta premium has been negative (U.S. stocks underperformed riskless one-month Treasury bills) in 9% of the 10-year periods since 1927.

In other words, investing is risky. To be successful, you must accept that fact there will be periods, even very long ones, when the right strategy leads to poor outcomes. Even at 20-year horizons, the market beta premium has been negative 3% of the time. That is why Warren Buffett has said investing is simple, but not easy. It takes discipline to earn risk premiums.

Summary

One of the hardest things for investors to do is to stay disciplined when their strategy delivers poor results. It certainly is possible that the strategy was wrong. To determine if that is the case, look to see if the assumptions behind the strategy were correct. Seek the truth, whether it aligns with your beliefs or not. For investors, the truth lies in the data. When your theory isn’t supported by the data, throw out your theory.

While it’s certainly not an investment book, investors can learn many lessons from Duke’s “Thinking in Bets.”

This commentary originally appeared May 11 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

The Financial Perils of Old Age

The Financial Perils of Old Age

By Larry Swedroe, Director of Research

In planning for retirement, most people—and their advisors—consider issues such as:

  • How much savings will be needed to maintain a desired lifestyle (in other words, what’s your “number”?)
  • Current assets and what rate of return will be needed to achieve the stated retirement goal
  • What allocation to risky assets, such as equities, is required to achieve the needed rate of return
  • What lifestyle adjustments can be made if risks appear?

While addressing these issues is important and necessary, the all-too-common unwillingness of the elderly to even discuss the possibility of losing their independence, and the awkwardness of the subject for other family members, unfortunately can lead to a lack of planning for the financial burdens that long-term care can impose.

That brings to mind the adage that the failure to plan is to plan to fail. And failing to plan simply ignores the fact that, according to the National Family Caregiver Alliance, the probability of an individual over 65 (there are 35 million Americans in this category and the figure will double over the next 25 years) becoming cognitively impaired or unable to complete at least two “activities of daily living” (which include dressing, bathing and eating) is almost 70%.

Alzheimer’s Increasingly Common

Raising the importance of the issue is that, today, one in nine people 65 or older has Alzheimer’s, while nearly one in three of those 85 or older (the fastest-growing part of the U.S. population, with 4 million people in this group currently and almost 20 million people expected to be there in 2050) has the disease (with women having twice the risk).

Alzheimer’s is a progressive, deteriorating disease for which currently there is no known cure.

What we do know with certainty is that anyone with dementia will require some form of long-term care, unless they succumb to something else before dementia reaches an advanced state.

Failure to address issues such as the cost of taking care of aging loved ones, cases when elder care is needed but not covered by insurance, and whether assets are sufficient to pay for the care required can result in a shock when long-term care becomes a reality and leads to a diminished quality of life. The burden can then fall on other family members, often with dramatic consequences for their finances as well because the cost of long-term care is frightening.

The average out-of-pocket medical expenses a 65-year-old couple can expect to incur during retirement is estimated to be in the mid-$200,000 range to somewhere in the mid-$400,000 range. And that’s the average. Some, obviously, will incur far greater expenses. Long-term care specifically is not considered an out-of-pocket medical expense because it is not “medical” in nature; rather, it is considered “custodial.”

Revealing Look At Pitfalls Of Aging

Carolyn Rosenblatt, a nurse and elder care attorney, and Dr. Mikol Davis, a geriatric psychologist, are aging experts and thought leaders on how aging affects all areas of personal finance. In their book, “Hidden Truths About Retirement & Long Term Care,” they bring to life through case studies their extensive practical experience from having advised hundreds of older people and their families on the many challenging and uncomfortable issues related to aging and the cost of care—which they show can run into the millions for those living decades with diseases such as Alzheimer’s.

Highlighting the potential costs families may have to incur, Rosenblatt and Davis note that the average current cost of caring for someone with Alzheimer’s is about $60,000 a year (and can be much higher in higher-cost-of-living areas). This does not include the cost of around-the-clock care, which is typically required in the late stages of the disease (and can last for more than a decade).

They also dispel the frequently held notion that Medicare will pay for many of the kinds of help a person with Alzheimer’s typically needs, such as meal preparation, bathing, dressing, toileting, and even getting from bed to a chair and back again. Far too many are unaware that Medicare will not pay for the kind of assistance in long-term care that doesn’t require the skill level of a licensed professional, as is the case with the aforementioned activities of daily living (ADLs). Help with ADLs is considered “custodial care” by Medicare, and, while it’s not covered, most people will need at least some help at some point.

In addition to ADLs, which also are not covered by Medicare supplemental insurance (sometimes called MediGap), there are other kinds of help many older people require, such as managing their personal finances, balancing checkbooks, bill paying, shopping, cooking, doing errands and transportation. These are sometimes referred to as “instrumental activities of daily living,” or IADLs, and they, too, are not considered medical care. Thus, it’s important that a comprehensive financial plan consider the possible (if not likely) need for these services. Highlighting the importance of planning for such expenses is that, according to the Institute on Aging, in 2005, 56% of people 80 and older reported a severe disability, and 29% reported needing assistance. In 2009, 25% of Medicare beneficiaries 65 and older reported difficulty with at least one ADL, with the figure at 85 rising to 40% for men and 53% for women.

Cost Of Help

Rosenblatt and Davis provide data on the costs of such help. For example, they note that the monthly median cost of a homemaker (someone who helps with shopping, cooking, cleaning and other household chores) is about $3,200. A worker with some training would be a personal care attendant or home health aide—costing about $20 an hour. The cost of assisted living, while varying widely across the country, is now close to $4,000 a month. (For some residents in California, assisted living facilities with daily help can cost up to $12,000 a month, and that is without any skilled nursing whatsoever; it’s just for maintaining a person who needs help with most ADLs.) If nursing home care is needed, the cost rises to about $7,000 a month for a semi-private room and about $8,000 a month for a private one. Even adult day health care costs about $1,500 a month. Does your retirement plan contemplate such costs?

Among the most important issues raised by the authors is the too-common failure to appoint an agent through a durable power of attorney document that creates advanced health-care directives (living wills). If you don’t have such documents for both medical and financial matters, you should make correcting that deficiency a high priority. In other words, estate planning isn’t just for the rich. It’s important for everyone to have a will and/or trusts, as well as durable powers of attorney.

Through the use of case studies, Rosenblatt and Davis examine the choices people have about where to receive long-term care. While “aging in place” is almost always the preferred choice, particularly for those who own a home, they also examine:

  • Going to a place where nonskilled care is available part time
  • Going to a place where nonskilled care or skilled care is available full time
  • Going to a day center and remaining home at night

The authors also go into great detail about the risks of elder abuse, which occurs at home as well as in care facilities. This highlights the importance of using a qualified agency for home care that screens their hires. While it is more expensive than hiring someone outside an agency, it is more prudent. They also provide a checklist to follow, which includes using a trusted advisor in the hiring of care workers (do not let the person in need of care take on that task themselves), locking up all valuables, having a trusted advisor monitor financial statements, never allowing caregivers access to cash or credit cards, being conscious of the risks of telephone scams, internet thieves and “front-door fraud,” and using only fiduciary advisors.

Rosenblatt and Davis highlight the essential need for anyone who may ultimately require Medicaid to consult an estate planning attorney. They note there are legal devices, called special needs trusts, that allow a person who is running out of assets and who plans to eventually qualify for Medicaid to potentially set aside some funds to meet his or her nonmedical needs.

‘It’s Not Going to Happen to Me’

Unfortunately, one of the most common mistakes people make is that they tend to be overconfident, believing “it’s not going to happen to me.” The statistics don’t lie, though people lie to themselves. The stubborn refusal to face the facts and odds can lead to what for many are unthinkable outcomes, such as outliving your assets. This is true even for those who ignore medical warnings about obesity (about 80 million Americans are obese), smoking, insufficient exercise (nearly 80% of adults don’t get the recommended amount) and excessive drinking.

Rosenblatt and Davis relate having heard people, usually the ones with the worst health habits, say something like, “I don’t care if I don’t live long, I just want to have a good time.” The same people naively believe that if you have a lifestyle and habits that leave you prone to heart attacks, strokes, diabetes and so on, you don’t need to worry about outliving your assets because you will die early. The reality is that advances in medical science may save them. We are much better at saving lives than at paying for the costs of living a long time.

Summary

While Rosenblatt and Davis wrote the book specifically directed at financial advisors, “Hidden Truths About Retirement & Long Term Care” should be mandatory reading for all adults, as it has important information that can help everyone be better prepared for the costs they or their family members might face in retirement. I highly recommend the book, which makes a great companion to the authors’ other book, “Succeed with Senior Clients: A Financial Advisor’s Guide to Best Practices.”

This commentary originally appeared April 25 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

To read the original article click here.

 

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