Category Archives: Financial Planning

The HFH Way and two newspaper articles

There were two articles in the papers this past weekend (Jan 18) that have a lot, in my opinion, in common. They also address the investment philosophy of HFH Planning Inc.

Jason Zweig starts his article with “Nowhere to run, nowhere to hide – – and no one to get unbiased advice from.”

One was Zweig’s column talking with a man, Dean LeBaron, who made millions founding Batterymarch Financial, an investment firm, before selling it to Legg Mason in 1995 for over $90 million in today’s value. First he suggests that one must look to those areas that did not ride the tide that raised all stock areas in 2013 and second to invest for safety. The “invest for safety” is a favorite of people who have been in the markets and have enough money that even a very small income from those investments is enough to live a life style they choose. Ross Perot was a famous advocate of investing only in Treasury Bills. But the other he mentions is developing markets plus China, Gold, Real Estate and Inflation Protected Bonds (TIPs). We don’t like the Chinese market because of government control of the companies and the lack of transparency. We are not investing in TIPs because inflation adjustment only adds to the principal after six months and the interest is very low

The second article, in the New York Times by Nobel winner in economics, Robert J. Schiller, talks about how he believes that investing is controlled by the irrational behavior of human beings and that the markets cannot be predicted. That view is in opposition to a fellow Nobel winner, Eugene F. Fama, who believes that research is the answer.

At HFH Planning, we walk a line between these different views. First, we believe that asset allocation designed for the individual takes into account the amount of risk to which that individual should be exposed. The more time to retirement the more risk one may take.

Next we choose mutual fund managers who have, over an extended period of time, shown the ability to choose investments that do well.

Third we analyze returns on a quarterly time frame to examine the results of the allocation we’ve chosen and do an asset rebalancing. That rebalancing adds money to areas that have underperformed by taking money from the areas that performed extremely well. The procedure means we miss out on some of the upside. We are willing to accept that loss of potential in order to protect the gains from the exuberant “bubble” and the damaging fall that follows. Safety first.

Putting Emergency Funds Aside

On Thursday, 12/5/13, Andrew Blackman, writing in the Wall Street Journal, took on the conventional wisdom of having an emergency fund equal to 6 months of expenses and that those funds be in a bank account. He suggested as possible alternatives: a 5 year CD (with a low withdrawal penalty) and a diversified equity portfolio. While the first one would be fine, the latter just puts more money into the broker’s pockets in place of it going into banker’s pockets.

Why not start at the root?

The six month figure sounds fine, but as a starting point not an ending.

Why should we not go back to the source to find the funds needed?

True, if you are an “At Will” employee and the employer may come to you at any time and say that you are not needed you need six months of reserves. However, what if you know you will receive at least some number of weeks or months in the form of a severance package? How about unemployment insurance? Shouldn’t those sums be subtracted from the six months figure to reduce the need for the six months cash reserve and let people feel better about investing in alternative ways.

Science??? When is it Science and when Not?

An article in the Wall Street Journal the other day about mistakes doctors make reminded me that I was supposed to write this blog about what is science.

My definition of science is that it is a discipline that always produces the same results when carried out in the same way.

Two hydrogen atoms and one oxygen atom always equals water. If you substitute nitrogen for hydrogen you always get “laughing gas.”

Drop a weighted object from the roof and it will hit the ground in exactly the same amount of time each and every time.

Take a number of jelly beans and add a like number and you always have twice as many jelly beans.

Medicine isn’t that way. We are all slightly different and what works to stop the coughing in one person may not stop it in another. Yes, there are areas of medicine that are replicable, surgery for example, but, on the whole that’s not true.

Economy is not a science. If it were, three different economists with conflicting theories would not have all received Noble prizes for their work.

Which takes us to the investing area. There are those who, to convince clients that the plan they have devised for the client is going to work 95% of the time use some formula or other – very often the “Monte Carlo Simulation.” The problem is that the input is based on extrapolated historical results. Now, since we have no crystal ball to look ahead it behooves us to study historical information to give us information to use in moving forward. We do that when we drive somewhere. Route one has taken us 30 minutes, route two 35 and route three 50 minutes. So we take route one. Sometimes an accident creates a situation where route one takes an hour. That’s life. Well, in investing the same is true. We use historical data and recognize it will work sometimes. However, we don’t want to gamble on that information as if it were a holy grail. We want to use historical input and do not want to drive “looking through the rear view mirror”.

As advisors we want to do the best for you and we also want to make you feel comfortable. Just don’t get too comfortable.

More reason to be careful in choosing to use a LTC (Long Term Care) Insurance Policy

Add together prolonged low interest rates to advances in both health care and life expectancy, sprinkle in spiraling costs of healthcare and you have a recipe for major change in the long-term care (LTC) insurance industry. These industry dynamics, as well as a few others, have many LTC insurance carriers rethinking how to balance consumer needs with achieving long-term profitability. Many carriers are beginning to make significant adjustments to their product offerings, increasing premiums, changing pricing strategies and reducing product benefits. Even more dramatic, some are exiting the long-term insurance business entirely.

While long-term care insurance (LTCi) isn’t for every client, preparing for long-term senior care is prudent and oftentimes pays off. As we progress through life and age into retirement, it is common to expect new health concerns to greet us. As such, clients may want to consider long-term care planning early because once certain health issues set in, LTC planning gets much trickier and much more costly. LTC insurance can pay for extended care needs that often result from normal aging, and help pay for quality long-term care services that are not covered by health insurance or Medicare.

LTCi is a relatively young industry with a shorter history when compared to other coverage such as life insurance. Although the first traditional LTCi policy was issued close to 40 years ago, actuarially speaking the application of mathematical and statistical evidence to assess risk in this industry is in its infancy. Actuaries across the board have admitted to missing the mark when initially pricing this new form of insurance. Short medical histories as related to activities of daily living, low interest rates and increasing payouts for claims means today’s LTC insurance products are not priced appropriately (i.e., not generating acceptable profit margins for insurance carriers).

Major insurance carriers have begun announcing significant changes to their LTC products and requirements. Just recently, Genworth instituted a new pricing strategy and underwriting practice to reduce risk and improve the sustainability of their LTC insurance portfolio.

While there have been several changes announced recently across the industry (reduced advisor commissions, suspension of new sales), two significant developments on the horizon and already with one major carrier are:

  • Gender-based pricing with premiums for females increasing across the spectrum, substantially in some cases
  • Expanded underwriting requirements for applicants such as paramed exams, and blood/urine samples

Though long-term care is a concern for both men and women, there is greater risk for women. Industry studies show up to two-thirds of new claims are for female policyholders. New policies in gender-based pricing translates into increased cost for future female policyholders anywhere from 15 to 50 percent, while for men it may decrease 15 to 20 percent.

In the U.S., women live longer than men (81 years on average versus 76 for men), according to data released in 2013 by the Institute for Health Metrics and Evaluation.¹ This longevity translates to potentially more unhealthy years on average for women — 11 years compared to 9.7 for men, according to² Women are also more likely to live alone in older age or to be a caregiver for their spouse. Women who need care themselves in old age are less likely to have a family caregiver, which may further increase their potential expense to an insurance company.

I’ve just received a brochure from my Credit Union talking about Cashier’s Checks

The availability of scanners and high quality printers as made it much easier for scam artists to create genuine-looking counterfeit documents.
Those people who are bright enough to use HFH Planning Inc. (an HOURLY ONLY financial advisor) are smart enough to know if it sounds too good to be true it likely is too good, except for the scammer.
You, however, might have family or acquaintances who need to be cautioned.
The brochure lists a number of ways these fake checks might be used. I’m not going to list them because the solution is easy. Look up the bank (make certain it’s not a phony number) and call to assure the check is not bogus. Even better, deposit the check on a “collection” basis. Only turn over the “extra” proceeds or the goods when the bank informs you the funds are good. That may take up to two weeks.
Yes, I know the person isn’t willing to wait that long. The price he is willing to pay for the goods is 15% above what you could get from someone else. Sales are sluggish, at best. And, put away your sales hat and put on your credit hat and figure how much you can lose if the check is bogus.
Even worse, if the check is for more than the bill and she wants the difference in cash.
If the incidents are enough for a financial institution to send out a brochure it is not happening only a few times a year.
PS I just learned that a number of car dealers were scammed in this way. Person came in, negotiated on a car, came in the next day, as he had stated, with a cashier’s check. One week later, check bounced – car and individual not to be found.
So it aint just dummies that are gullible.

Thoughts on another advisor's advice

Suze Orman has been in the news recently and made me think of a number of things that Ms Orman suggests that don’t sound as if they should be put into practice.  Rather, they sound as if they were lobbied for by the banks.

Having an emergency fund is great.  The question is how many months of expenses should be in that bank account.  Six months expenses mighty be the right amount.  Further, if one is an “employee at will” for a company six months might be appropriate.  Who is an “employee at will”?  Someone who may be discharges for any reason or no reason without any recourse.  Of course that is not most people.  If one will receive a sum of money when they are fired (laid off, downsized, etc.) the amount of money that they will receive should reduce the six month figure.  So, if you will get two weeks notice you need five and one half months savings.  If you’ve been with the company for 10 years and will get one months salary for every year you’ve been there you need no money in the emergency fund.

Another bad idea is the savings account when you have debt.  When I was teaching a continuing ed course at NYU one of the first things I asked was how many of you have credit card debt.  A number of people raised their hands.  I then asked those who had hands up to keep them up if they had money in the bank.  A good percentage did.  When I asked why, they told me they were told to do that in case of an emergency.  So my next question was, “if you reduced the debt by the amount in the bank and you had an emergency couldn’t you the charge the money to the card?”  In the meantime they would not be paying 15 or 20 % on the debt and getting 1% minus taxes on that income.  WOW.

As long as we’re discussing her recommendations there is one I totally agree with.  If you need life insurance buy Term.  Insurance is risk transference.  If you do not have enough in wealth to permit those who depend on you to continue living in the lifestyle you have been providing they need extra money to invest to continue the lifestyle.  Term life insurance is the vehicle. Other types of life insurance are there to make the insurance company richer.

What/Whom to Listen to for Financial Advice

The November 19/20 weekend had three articles. Peggy Noonan quoting Steve Jobs on why decline in companies happens, Jason Zweig re 401k investments, and The New York Times opinion by Edward Glaeser about the dentist who is not able to retire because of her investment program may not seem to be connected, but I think they are—all three illustrate the pitfalls of making financial decisions based on gut feelings.

Trusting your gut may be appropriate when selecting a mate, but choosing how to invest your money requires a detached analysis of information about investment opportunities, something which historical fact tells us most individuals are not willing to do. It is, therefore, necessary to choose a financial advisor.

While a good financial advisor can’t help you choose a mate, he or she can give sound advice on investing money to accomplish your goals. Choosing a financial advisor is also a decision that requires information and analysis and should not be left to your gut.

First, and probably most important, the individual should be a fiduciary. That means that the decisions that he or she makes put your interest first. A way to insure that is to make sure your advisor is a Certified Financial Planner™.

Next, you should choose a financial planner who works on an hourly basis, one who does not charge fees as a percentage of assets under management. Make sure the advisor will recommend both the asset allocation and the investment. For example, your advisor should be able recommend the extent to which your long-term needs require rapid growth and the amount of risk your financial situation can tolerate. Your advisor should also be able to recommend individual funds to satisfy the allocation. Finally, you should choose an advisor who will monitor your account at least quarterly.

As you have select an advisor, discuss the allocation the advisor recommends. Ask the reasons for the advisor’s recommendations and what the alternatives are. A good advisor will answer your questions and will not leave you feeling “talked into” his or her recommendations. When you agree to the allocation, your advisor should explain why it is in your financial interest to remain committed to that allocation unless you have a life change–for example, a new child, a divorce, a change in employment, or a major illness.

You should also discuss the funds the advisor recommends. Ask the advisor to explain how the performance of individual funds may be affected by market forces and may in turn affect the balance of the asset allocation. The advisor should also explain that changes in investments may be necessary to correct any imbalances and get back to the original allocation. How often reallocations are necessary will depend on the market forces and the size of your portfolio.

Your advisor should assist you in understanding the statements you will receive. When you receive them it is your responsibility to examine them to make sure there are no unauthorized transactions or other inaccuracies.

Finally, if your advisor performs these tasks, you should be confident that he or she is pro-actively looking out for your financial interests throughout the inevitable fluctuations in the economy and the “market”. You will not need to turn to television, computer, or newspapers for news about investments. In fact, to do so is counterproductive—it will only tempt you to buy or sell investments based on your gut. This,in spite of the fact that such reactive moves are financially unwise. One should always be pro-active, not reactive. Your financial advisor, and not your gut, has the proven ability to provide the best long-term protection of your financial assets in a way that will make your goals attainable.

Fallacy in Generic Thinking

There’s an adage that says you can never be too rich or too skinny. The fact is that it depends on how you try to get there. We’re pretty much all in agreement that bulimia and anorexia (an eating disorder characterized by refusal to maintain a healthy body weight and an obsessive fear of gaining weight) are notable exceptions to the latter.
Those in the Hedge fund business, on the other hand work hard at making themselves more wealthy. These people use their expertise to bring in returns that are in excess of what the general individual can find. I’m not about to suggest that being bad. Of course, even they have losses. But not losses that forces the individual into bankruptcy.
However, along comes the story of the professional football player who chooses to use his wealth by investing in areas that he knows little or nothing about to create wealth that he REALLY doesn’t need. Maybe like the anorexic. If the quarterback had invested in a diversified portfolio, similar to what we encourage people to do, he would be able to live out his entire life ( to whatever age that turns out to be) spending at the same level he did during his career, without concern about running out of funds and be able to leave money to heirs.
So where was the financial advisor? Thinking about assets under management or getting great commissions?

Not to Worry, or better yet, Worry Not

I was reminded again this weekend why asset allocation is such an important aspect of financial planning.
I don’t necessarily mean the allocation between the categories HFH Planning uses to diversify, I mean the allocation between equities, fixed income and cash.
If one is 35 or 40 years old with YEARS to go before you need to withdraw from you accounts, time is on your side. Take advantage of it. No need for money market or fixed income. Your chances of having more loaves of bread in your accounts when you start withdrawing is huge. Yes. I said loaves of bread. Dollars, Pounds, Euros, Yen don’t count. What you want when you start to take money out of the account is buying power. More loaves of bread than when you put the dollar equivalent of a loaf of bread into the account.
What about if you want to buy a “big ticket” item in the not too distant future? Well that money should be in a liquid instrument – Money market, CD, short term mutual fund, etc. You don’t want to come across the “right” apartment or house just when the market dumps and you need X dollars and the investment is now X minus.
As you come closer to retirement the investment in fixed income should grow while the equity portion is lowered. Further, we suggest that if you are retired you take out the percentage you and the planner have agreed upon at the beginning of the year. If you divide the sum into 12 pieces it will be just as if you were receiving your monthly pay check. You’ll budget accordingly. Money that you don’t spend in month one goes to a savings account (just like you used to do) and is available for the vacation, extra purchase, etc.

Bank Fees

Most people who read this blog do not use a bank debit card. For those who do, I implore you to switch your bank to a bank that does not plan to charge a fee for the use of the card. I also encourage you to examine the use of a credit union. There are a number of reasons to do so.
The interest rate on your deposit is generally higher than at banks.
Loans are generally easier to obtain and the charges are, again, generally lower.
Most care about the people they serve.
If you need the name of a credit union to use – email us.