Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Friday, November 20, 2015

Financial Lessons from 2015!

Susan and I had a lot of fun coming up with financial lessons we learned from events in 2015. I was super excited to see Ashley Redmond of include them all in her article! While the news about rising wages may have the most important impact on your pocket, there were lessons to be drawn from One Direction splitting up, Lamar Odom falling into a coma and even the excitement of getting new, high resolution photos of Pluto!

Here were a few of the lessons I found in recent news:

  • There has been some pretty cool news coming from outer space this year. New Horizons has sent us our best images of the surface of Pluto and we have our best evidence yet that there is water on Mars! These are amazing accomplishments that were a very very long time in the making. These are a good reminder that it is important to stay focused on long term goals, even when there is trouble in the short term.
  • The shocking and tragic story of Lamar Odom is a harsh reminder that estate planning is not just for the elderly! Estate plans need to be made early, and updated at any major life event. While I do not know the details of his planning, things like a Will and a Medical Directive are super important for people at any level of assets or relationship status. These need to be updated whenever anything changes, such as a marriage, divorce, birth of a child or retirement.
  • We were all very shocked, of course, when Zayn Malik left One Direction. When the entire band announced they will go on hiatus in 2016, our inner tween fell into deeper despair. Like a working relationship, it is important to always evaluate our financial relationships. Sometimes it is a budget item that just has to go to make room for another, or maybe an adviser that just isn’t providing appropriate advice anymore. One of the hardest relationships to break off is one with a sentimental stock, maybe an old family gift or a company a retiree has pledged undying loyalty to. These are important to evaluate in the context of the investor’s entire portfolio and sometimes, the stock just does not fit with the investor’s goals anymore. Always evaluate your financial relationships and make sure they are still fully aligned with your own financial goals.
  • Exciting for workers everywhere, Target, Wal-Mart and several other very large employers announced that they would be raising wages. While this is a direct boost to those workers paychecks, it will also spread to, and lift the fortunes of all other low-wage workers. These wages aren’t being raised because the employers are kind and loving people, but because they are having a hard time filling positions. Raising the wages effectively puts an above minimum wage floor on what an American worker will be earning going forward. This will likely lead to inflation of basic goods in the coming year, however.
  • Tesla made big headlines when their Model S was awarded 103 of 100 in the consumer reports rating system - the highest they ever awarded. This was gold in the hands of their confident promotor and CEO, Elon Musk. On the surface, it is an amazing car, incredibly safe, incredibly fun to drive and quite good looking to boot! Digging deeper into the Consumer Reports article, I noticed one glaring flaw. The car was very new, with little operating history. The section on brand reliability was essentially ignored. Reliability is a major factor when buying a car! Fast forward to a few days ago, some reliability numbers came out and they were “worse than average”. If you had bought a Tesla already, you might not be so happy about your future with it. If you had done a bit of deeper digging at the time, you might have suspected the reliability adjustment was coming (even an article sent to me by a Tesla salesman mentioned having to get a motor replaced). This lesson of doing your research can be applied to a lot of things, but particularly to investing. Far too often I see a mutual fund with a short operating life and a great track record being pitched to me or my clients. Without digging deeper into the sources of return and the risks being taken, you can’t build a realistic outlook for the future of the fund. A long operating history is no guarantee of future success (look at Volkswagen!) but it provides a lot more data for you to understand what you are getting into.

how to prioritize

This photo of a tree growing from the walls of the Tin Hau Temple in China was taken while on a recent CFA trip to Hong Kong.  Goes to show that with enough persistence, you can reach great heights.  Now, let's tie this in to personal finance.

Everyone has the same financial goals, just in different amounts. This article shows how people rank some key financial priorities. While posed as a generational divide article, it should actually pit generations against a more objective ranking of priorities. It says that Millennials are getting their priorities wrong, but it appears that Generation X does too.

Here is my ranking of how most people should prioritize these seven goals and some reasoning behind it. While everyone's situation is unique (if you don't plan to have kids, why save for their college?) this should be a useful reference for any financial plan.

  1. Emergency Fund. Every plan starts with this. Period. Your emergency fund should be able to cover several months of expenses, a few months of minimum payments on any debt and insurance deductibles (health, home, vehicle, etc). Always have cash set aside before you start investing for other goals. I do not get paid for cash my clients hold at their banks, but I would never recommend they go without it. For those who really do not want cash, there are a few ways to reimagine the emergency fund: low cost lines of credit (credit cards or HELOCs) or this investment based emergency fund outlined by Betterment.
  2. Retirement. This is probably the most expensive decision anyone will make. Even if you are one of the lucky 18% (and dwindling!) of workers covered by a pension, you may still need additional funds to maintain the lifestyle you want. For most workers, Social Security and their own savings is all they will have. Retirement savings should start as early as possible and always be taking place in the background. This is easy if your employer offers a retirement plan, but if not, it is on your shoulders.
  3. High Interest Debt. People often wonder why this is less important than having an emergency savings. After all, paying 10-20% for old credit card debt is more expensive than the almost 0% interest you hope to earn on a cash savings account. However, if you have an emergency, more cash is more useful than less debt. I am not opposed to considering high interest debt your worst emergency if your financial situation is otherwise great.
  4. House. Everyone needs to live somewhere. This is not a super high priority, however, because of all the options available for financing the purchase. While a 20% down prime mortgage may be the best option, first time buyer programs and 3% down FHA loans ease the burden a lot. Especially right now, money is cheap and buying a house shouldn't be all that difficult. However, if you never plan on owning a home, it is perfectly acceptable to leave this one out. If you plan on renting forever, you should have plenty of money set aside for future rent payments. If you already own your house outright, your emergency saving should take emergency maintenance into account.
  5. Own Student Loans, Lower priced debt. If you have debt, keep paying on it!
  6. Future Education Expenses. College is a big expense, no doubt. It is also a hugely stressful decision with a lot of complicating factors and media attention. However, it should not be a high priority for several reasons. College costs are actually very controllable, you simply have to pick a school in your price range. If you want to go to a more expensive school, there are ways to reduce that cost through public and private scholarships and work-study programs. Taking a year off to work, or getting started at a community college can not only reduce the cost but improve chances of getting merit based scholarships. Lastly, there are always student loans. Student loans are not ideal, but with income based repayment plans, forgiveness for some public service careers and reasonable interest rates make them a tool that deserves a good look. For those who have taken care of everything else, their state's 529 plan may be a good way to get a few tax advantages while getting an early start saving for future education expenses.
  7. Future Health Care Expenses. By now, we're all supposed to have health insurance. While your plan may not be perfect, it should limit your out of pocket costs, keeping it to an amount that your emergency fund would cover in, well, an emergency. After taking care of ongoing healthcare costs, future expenses should be a pretty small consideration.

Like I said, this should be a useful reference for your financial plan. It is not tailored to your situation. How to meet these priorities and what accounts and tools to use is a whole different discussion.

What priorities do you keep the highest?

Monday, November 09, 2015

street meat

So I didn't actually eat anything that unusual in Hong Kong. So, this may be less exciting than you were hoping for. There will be pictures of open air butchering and lots of unidentified street meat, however. Actually, lets get the open air butcher and fish monger out of the way.

I just had Mr Chens for lunch, so I am in the mood to write about Chinese food. In a lot of ways, the food I ate in Hong Kong was basically the same as I might find here. Purely by pointing at a menu and pictures on the wall, I managed to order this delightful noodle dish one morning. It is basically just noodles with some pork and bok choy - nothing you can't get here. It was, however, dirt cheap, and very tasty.

Nothing unusual here.

The slightly more adventurous eating just meant pointing at whatever smelled the best as I walked down the street or through 'cooked food markets'. The smells were amazing, and I kept wishing I could bottle them up to bring home. One night, I strolled around spending a dollar here and there for a variety of wonderful treats that made my dinner.

Possibly pork. Everything was pork.

I think one of these is duck. I hope it was.

Coconut and evaporated milk. Delicious and refreshing!

Turned out to be rice balls and maybe pork?

It was not all random street foods. I also ate at Michelin starred restaurants! Tim Ho Wan was recommended by a friend who noted that it was "probably the cheapest Michelin starred establishment in the world." She recommended that I get the pork buns, among other things, and they did not disappoint. My entire bill there, which I split into two full meals, came to about $11 USD. After I got a suit made, I donned it to go to Din Tai Fung, another reasonably priced establishment with a Michelin star. A very full dinner there set me back about $20.

Because everyone wants to know something weird, I'll leave you on this tasty tidbit. My hostel in causeway bay was nestled amongst a bunch of decaying concrete buildings. In an alley behind it, there were a bunch of hole in the wall restaurants. Under a small time crunch, me and a girl from the hostel decided to grab something from one. We walked in the one that smelled the best, but had no english anywhere. The entrance was next to the kitchen, fairly open the the restaurant and the outside. We leaned in and gawked at the bubbling pots and poles of food, figuring we would just point and choose. An older lady started shouting at us and digging deep in a drawer for something. She pulled out an ingredient list which provided the english translation to the menu. This was clearly something that they did not often use. I picked two ingredients and a noodle type: Octopus, Pig Intestine and Thick Noodles. I was not disappointed: