My Awakening

Many have asked me why I do what I do.  This post is my response.......

I grew up in a modest, but neat home the youngest of nine children.  (All of them were girls except seven of us.)  Dad worked incredibly hard to provide the necessities of life.  He had his own business, was a county commissioner and held several demanding and high profile jobs at our church.  Mom worked probably harder at home cooking, cleaning, washing clothes, being a PTA mom as well as serving in various capacities at our church.  Both of them were truly amazing people who knew how to make a dollar stretch as far as possible.

You see, both Mom and Dad were teenagers during the great depression.  On Halloween day 1933, when my Dad was 15, he climbed into the back of the truck with the family cow to move from the small city of Arimo, Idaho to Pocatello so that Grandpa could look for work.  Grandpa and Grandma had homesteaded two 160 acre plots.  Their house was on skids so they could pull the house from one homestead to the other allowing them to live the required 6 month minimum to maintain both pieces of land.  Grandpa had also started the small town store and had a grain elevator which he used to engage in buying grain from local farmers and then loading a train car to sell it to buyers in the East.

Sometime during the summer of 1933, Grandpa and Grandma went into Logan, Utah and withdrew a substantial amount money in cash. They quietly returned to Arimo, promptly went down to the dirt basement and buried the money. For the next few days Grandma lived in fear.  She had nightmares of someone breaking into the house, harming the children and stealing the money.  Finally at her insistence, the two of them retrieved the money and took the long ride to Pocatello, Idaho.  There they interviewed a number of different bank presidents/managers.  One particular president prevailed in convincing them his bank was sound and in no danger of going out of business as so many did that year. They deposited the money and returned home feeling confident, especially Grandma.

I am sure you know what happens next in my story.  Yup, not long, supposedly two weeks later, the bank went bust and Grandma and Grandpa lost all that money which led to them losing essentially everything; their store, their land, their grain elevator - all lost.

I grew up with this story of Grandma and Grandpa being told and retold.  I guess the main point I take from the lesson is: being self-reliant and in control of your money is best.  My Dad, on the other hand seems to have taken from his experience the idea that paying cash was the best way to go.  If you have no debt on something, no one or no bank can foreclose and take it away from you. Dad did not distrust banks, but then again he did not trust them all that much either.  I was taught to do without material things and save up until you could pay for something with cash.  Oh, the many fun luxuries I saw friends have that I did not.  Often though, but the time I had saved enough to get whatever it was, my tastes had changes and I no longer wanted it.

Another key lesson I gleaned growing up was: the banks make the most money.  My Dad is a veteran of World War II.  When he came home to his three year old son and wife, Grandpa wanted the 5 brothers who had all served in the military to stay together and work together.  (A story for another day.)  As time passed however, the brothers all started doing their own thing, except my Dad and his identical twin who started a lumber company.  They were inseparable.   At one point several years later, my Dad was on the roof of one of his three 6-plexes they were building when my Mom came to visit.  She was 9 months pregnant.  She called up to Dad and asked; "Are you coming to the hospital? This baby (yours truly) is coming and I cannot wait any longer."  When I was about 4 those three apartment buildings were sold.  Dad and his brother carried the paper; in other words they financed the purchase, acting as the banker. For the next 30+ years, Dad received a check each month.  The total payments were a lot more than the purchase price of the apartments; he made quite a bit of money on interest as well. For decades we siblings always wanted to know how to make money like Dad.

The third lesson is best describe by Mark Twain: "Don't let your schooling get in the way of your education." In other words, you can never stop learning. I got a little lost from this for a while.  You see, my Dad regretted that he did not take full advantage of the GI Bill upon returning from war.  He had a 3 year old after all and needed to get to work. He wished he would have gone to college, so Dad really encouraged us kids to do well in school and to get a university eduction. Why?  So we could get a good job and be successful.  Most of us graduated from college.  I took it to the extreme and got a Ph.D. in Chemistry.  My major professor often asked me a question that has stuck with me ever since: "If we are so smart, why aren't we rich."  I decided to do post-doctoral work at the California Institute of Technology - Caltech to the those "in the know."  When I finished there I was ready to conquer the world and be on my way to fame and fortune.

My first job was in the San Francisco Bay area with a venture capital funded start-up company.  Remember "bio-tech bay?"  I was in the middle of it.  We (my wife and two sons by then) purchased a modest house and entered what I call indentured servitude. My mortgage payment seemed huge.  As time went on, another son was born, and I started to realize that even though I was making a good salary, things were not as good financially as I wanted.  Nor were they close to what I had envisioned for myself.  It wasn't for lack of effort either, I was the most aggressive of anyone at my work in the percentage of my salary that I was putting aside into the 401(k).  I had a co-worker, who had also been at Caltech, with whom I used to talk about things.  He knew of my impatience in wealth building and suggested I read the book "Rich Dad Poor Dad."

What an eye opener that book was for me!  Here I was, Dr. Henderson in professional circles, all highly educated and such, but I had let my schooling get in the way of my education.  According to the book, I was Poor Dad.  To make things seem worse for me, my Dad was Rich Dad and I had failed to learn his lessons about life and wealth.  He had done it right, by design or default, it doesn't matter.  Here I had spent all this time in school getting degrees and publishing papers, presenting my work on multiple continents and even having patents issued on my work.  Was it all a waste of time? I don't think so, as the experience was valuable, but as far a building wealth goes, the fact remained I was Poor Dad. I was guilty of doing what Mark Twain warned against.

That book was only the beginning.  I became a voracious reader of financial books.  I consider a Ph.D. degree nothing more than a certification that I know how to learn, and  I was confident that I could learn the best way to build wealth.  I was determined to prove my professor wrong - I was smart and I was going to be rich.

In the middle of all this reading I learned another lesson: it is better to have your capital returned than a return on your capital.  Living near the epicenter of the dot com craze in 2000 I watched the beginning of the bubble burst.  Don't misunderstand, I knew my share of several 20 something employees of dot com companies that sold their stock options when their company went public, took the cash and promptly walked into the nearest Porsche dealership and wrote out a personal check for a new car.  For me, the recession and stock market crash in late 1999 and early 2000 was an eye opener. I saw some hard earned and harder saved money just disappear into thin air. Luckily, I found a different job, and moved out the area, allowing us to be able to sell our house for a handsome profit before real estate took a hit in the Bay area. 

My new job was a good job and I excelled at what I did.  I helped build the company and brought in millions of dollars in sales as a result of creativity, management skills and work ethic. For a while though, I allowed myself to be strong armed by the company owners. Conditions at the company were unsafe and unhealthy.  If OSHA had shown up at our facility, we would have been shut down for safety violations, but pleas from employees were ignored.  Two good people were even physically hurt rather seriously and still not much changed. Several others left so emotionally drained and robbed of life it was tragic. Despite the great work happening in the department I oversaw, there were decisions made by the owner management that were unethical and dishonest.  This conflict haunted me, did the fact that I was still Poor Dad, just at another high paying job making someone else wealthy.  

Looking back, part of the pain came from my ignoring the lesson of Grandpa and Grandma - I was not self reliant, I was not in control.  The pain of the conflict grew to a point that I actually had a doctor tell me I was going to die unless I changed things in my life to relieve some of the stress.

I need to back up here and tell you what was going on while I was at this company. Because I had forgotten the lesson of Grandpa and Grandma I went through a period of time where I was discouraged.  I began to believe the American Dream was dead.  Yes, I thought there was no way I could provide for my children at the level my Dad had provided for me.  And then, my world all changed when I saw an advertisement about how to become your own banker.  Memories of what my Dad had done as a banker with his apartments flooded in.

As I learned about several financial concepts, I was challenged to rethink my ideas about how money works.  Because I am a good learner and was motivated to find a better way, I was able to unlearn some downright crazy financial myths and relearn sound and lasting truths.

One of those myths was that paying cash is the best way to acquire things I wanted and needed.  Given what I grew up with, this was a n extremely difficult concept to unlearn. But my upbringing also planted the seed of learning a better way. Remember the apartment complexes Dad built and sold?  He owned the debt on the properties - he acted like the banker.  I have since learned the best way to acquire the things of life is to finance them with your own resources, using debt as a tool to create wealth, not as a shackle of servitude.  The difference between the two is who owns the debt.  As I (painfully) relearned a better way, my optimism grew and my faith in the American Dream returned.

Because of this new knowledge I started to be happier and more excited about life. My whole outlook changed from a perspective of scarcity to a perspective of abundance. I wanted everyone I knew and cared about to know what I had learned.  I started right away to help people part time.  

Ok, back to the doctor telling me to change things. Despite all the positive things happening for me on the financial side of life, my work situation was still so poor it was literally killing me.  Well, I took the doctor's advice and made a change.  I decided the best way to help the world was to share with them the message of hope I had found. When people look at the world through a lens of abundance, they are able to be better people - better citizens, neighbours, church members, family members, and friends.

And so it goes;  my story continues from that point.  I love helping people help themselves.  I love teaching people how they can be financially self sufficient.  I help them to make money like banks do. In addition, they are confident that they will have all they want and need it life. 

A huge bonus to all this is the ever-growing circle of friends I have.  When someone goes through "an awakening" from things I share with them I become a trusted family friend.  They want to introduce me to their family and their close friends.  I really like being a benefit to others.  I like being someone who others come to for advice.  I am making the world a better place by what I do - one person at a time.  What a blessed life.

 

You Can't Handle The Truth!

That was the response of Jack Nicholson's character (Colonel Jessep) to Tom Cruise's character in the most memorable scene in the movie A Few Good Men.  In writing this post, I feel a bit like Colonel Jessep.  Most Americans simply cannot handle the truth.  That is my conclusion.  Although, trying to allow the benefit of doubt, another possibility is that they simply do not want to know the truth.  And why wouldn't they want to know?  Because they can't handle it.

What does this scene from a popular movie have to do with financial matters?  Pretty simple really.  One of the biggest secrets within the investment industry is that mutual funds, variable annuities and countless other products tied to the whims of the stock market, advertise their average return numbers in a very misleading way.  And do you know what really gets to me?  They are not breaking any written laws by their practices.

I know…there’s a collective gasp sweeping its way across everyone reading this blog post.  Or is there?  It seems like everywhere we turn some politician or other talking head is not giving us the truth.  So maybe many reading this post are just yawning and saying "so what?"

SO WHAT?  This slight of hand is costing you thousands of dollars.  Costing you time.  Re-routing your future.  To where? Someplace you do not even know or expect.  Not only re-routing your future - possibly making your hoped for retirement non-existent or impossible.

I have been following the investment world for a few decades.  I have done countless calculations to determine how much I am going to have in retirement or how much I need to save to have the kind of retirement I want.  But the reality is far different.  You see, by my own experience I’ve noticed that almost all investment product companies (mutual funds, ETFs, stock market indices, variable annuities, closed end funds, REITs) love to cite their “average annual rate of return” figures which always inflate what the particular investment actually returned to its investors. And it really bothers me.

2+2=4 right?  Always?  Not necessarily on Wall Street.

This problem isn’t complicated nor is it really nuanced in any particular way,(as the investment industry would have you believe) it really comes down to basic math.

Average annual return, as is always stated in investment literature, (marketing pieces, prospectuses, etc.) is simply a deliberate shell game meant to confuse your perception of the returns by stating simple arithmetic mean calculations. I feel the only meaningful number that matters is the compound annual growth rate (CAGR).  What is CAGR? It is a calculated number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.  Some people like to say that this is the cumulative rate of return. Most simply put - MY ACTUAL RETURN.

I can hear you now...."Dr. Henderson you are getting worked up over nothing, you are splitting hairs here." Please hang with me through an example and you’ll understand my beef.
Example:

Let’s say that Bill invests $100,000  into his investment account at J.T. Baker and for the 1st year  his account grew by 25%.  This is great.  But the account returned a negative 25% the second year.

Stock market muppets would say your average return is 0%…and they’d be telling the truth.  How much money to you think Bill has in his account? (Answer - $100,000.00.  Really?  What is the real answer?)

However, the muppets are clouding the truth with a statement that has no relationship to what you actually experienced.

Here is what Bill actually experienced:
Year 1- 100,000 +  (25% x 100,000.00) =    125,000
Year 2 - 125,000 - (25% x 120,000) =    93,750

Bill started with 100k and now at the end of year two his account is worth $93,750 his actual compound annual growth rate (CAGR) was -6.25%.  Negative 6.25 percent growth per year for two years gives me an actual result that a lot different than if I said you had a 0% average rate of return for two year.

With a 0% average rate of return, how can Bill have less money than what he started with?

Welcome to the wonderful world of investments and the imagineers of Wall Street.

Remember how I defined CAGR?  Guess what I found on-line at investopedia.com (http://www.investopedia.com/terms/c/cagr.asp):

CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.(The emphasis is mine.)

Are you kidding me?  I think the accountants that were at Enron have found a new job writing for Investopedia.

In most professions and in every place except Wall Street this kind of definition would get you thrown in Jail or out of town.

Would you care what you “averaged” over the last two years if your stack of money is shorter than when you started? That’s NOT a zero sum game.  Who cares about an average?

Here is a question for you; Why would the investment world always quote the average return numbers?

Go ahead and take a moment to think that one through.  Have an answer yet?  The answer is: Because average annual returns always look better than actual, real returns.  The fact is most stock market investments are volatile and showing you the average return (arithmetic mean) makes them more attractive.
 
Over at moneychimp.com there is a fun calculator.  I wanted to see what the average rate of return on the S&P 500 was for the last 14 years.  The calculator showed me the following:

From Jan 1,2000 to Dec 31, 2013
Average rate of Return: 3.06%
CAGR: 1.17
$1.00 grew to $1.18 

There is a big difference between the average rate of return and the CAGR.  If the actual return had been 3.06 percent over those 13 years $1.00 would be $1.48.  I can hear you complaining again, Dr. Henderson you are talking a difference of 30 whole pennies.  In reality what we are talking here is a difference of about 26%

What adds insult to injury is that there has actually been periods of time (and they are not all the infrequent) when the average rate of return is a positive number when the actual rate of return is a negative number.

Here is an interesting excerpt from Warren Buffet's book The Essays of Warren Buffett: Lessons for Corporate America.  He could easily be talking about this very issue.

Over the years, Charlie and I have observed many accounting-based frauds of staggering size. Few of the perpetrators have been punished; many have not even been censured. It has been far safer to steal large sums with pen than small sums with a gun.

Take to heart what Buffet is saying in this quote, it applies here!
What is really unfortunate about this whole situation, is that I think the majority of people who perpetuate this lie, have no idea they’re doing anything wrong!  The calculations using average rates of return are so embedded that even advisors, CFPs, investment advisers and other financial professionals spout off the numbers without questioning their validity. I am not going to go so far to accuse anyone of being deliberately dishonest.

But the question has to be asked - which is worse, being dishonest or ignorant?

If you have stuck with me this far you are asking what do I advise you to do?  I advise you to get educated - first visit my website (www.financialtailwinds.com) and sign in to get a series of free 5 minute videos that will raise your financial IQ considerably. Last but not least; do the math yourself and ask lots of questions.  Only then can you be confident that you’ve made a wise decision

Warning! Ignore at your own peril.

 

 My friend and colleague traveled through a canyon near his home. Part way through the passage, traffic came to a halt and he found himself, along with many other drivers, waiting for the cars to proceed. Eventually, as the traffic began to creep slowly along the road again, he passed the cause of the delay. An 18 wheeler tanker truck had rolled while rounding a curve too fast. The folded vehicle still lay in an awkward pile on the road while emergency responders directed traffic around the accident.

 

Now, this is not an uncommon occurrence, you might say. We see car accidents every day; they are almost inevitable in this age of modern transportation where the average American drives almost 300 miles per week.

 

But, what made this accident so tragic, so unnecessary, was the myriad of warnings this driver passed just prior to his crash. And when I say a myriad, it is no exaggeration. My friend retraced the path of this truck a couple of days later as he drove the same road again. Within a mere 2.5 miles of the accident site, an alert driver would have seen the following signs:

 

 #1: At approximately 2.5 miles before the accident, the first sign advises drivers to test their brakes, indicating a need to use them ahead.

 

 

#2: Caution sign indicating the steep grade which lies ahead over the course of the next 2 miles.

 

 

 

#3: Third sign cautions about the extreme curves 2.5 miles ahead which require drivers to slow to 20 mph.

 

#4: 2 miles before the accident, a sign alerting drivers to the runaway truck ramp available - just in case.

 

 

 

#5: Another warning about the dangerous curves now 1.5 miles ahead and caution to slow down.

 

#6: A second indication of the steep grade approaching.

 

 

 

#7: A third sign referencing how fast to take the impending curves which are now 1 mile ahead.

 

 

 

#8: A second notice that a runaway ramp is available just ahead.

 

 

 

#9: Another warning to use the ramp if brakes haven’t slowed a vehicle sufficiently to take the turn at a safe speed.

 

 

 

#10: The fourth warning about the safest speed at which to take the turns which are only a half a mile ahead.

 

 

 

#11: A last speed warning with the dangerous curve visible ahead.  The sign says 500 feet.

 

 

 

#12: One final indication of the runaway truck ramp providing safety to drivers.

 

 

 

 

Did you get that? There were a total of 12 warning signs posted in an effort to protect drivers. A mere 25 feet just past the runaway truck ramp, see the red circle below, the driver, taking the turn too fast, lost control and the truck crashed.

 

 

 

 

This was not a tragedy caused by lack of information or insufficient time to prepare for the turn, or inadequate routes of “escape” from the danger. This accident was unnecessary and unquestion­ably preventable. Had the driver exercised a bit of caution and judgment during the approach of the dangerous curves, he could have easily made it to the other side of the canyon safely.

 

The economic parallels are easily discernible. How many warnings are really necessary before we (you) take heed? Did you notice this one? http://www.foxnews.com/politics/2014/01/16/senate-passes-11-trillion-spending-bill/  

 

I am not going to take the time to discuss all the warning signs that point to an upcoming tragedy.  We are living into a future unlike anything anyone has ever experienced. Those that are observant and paying attention to those signs, there are ways to protect yourself and your family.

 

Let me ask you a question;  What would you rather 1) Miss out on another 10% increase in your current assets or 2) Have a 50% reduction in your current assets?

 

There are economic “ramps” available that will help you build your wealth safely and predictably, despite the perilous circumstances which may lie ahead.   (www.financialtailwinds.com)

 

jasonchem@gmail.com

 

 

 

What a Joke! 3% Inflation? Are you kidding?

This morning during my self-required 30 minutes of reading about the financial world, I came across an interesting story.  The authors of the story had an overt agenda of trying to portray the current administration's first five years in the best possible light.  Why publish such a story today?  It is not being published today because the statistics or charts just became available but because tonight is the Constitutional mandated State of the Union address.  Yes, the President is explicitly required by law to address Congress about how the country is doing.

 

One of the charts in this story showed what the rate of inflation has been since the President took office.  Guess what the last recorded number was?  No, try again - this time lower.  The "official" inflation number was 1.5%.  Are you kidding me?

 

I recently had to take a short business trip.  Being parsimonious, as I happen to be, I booked a flight that required me to be at the airport at 4:30 in the morning.  I made the long drive to the airport, parked my car in the long term parking lot and caught the first shuttle to the airport.  As you can imagine, I was the only one on the bus.  As I boarded the bus, I greeted the driver and sat in the first seat.  I commented to the driver, “You're up early.”

 

“Early?”  he asked rhetorically.  “I got up at 2:00 so I could be here and start driving by 3:00.”

 

I was amazed this seemingly well-dressed and well-spoken man was working such a job.  He was what some might call middle-aged.  As I continued to speak with him I learned he was once a VP at a well known company and made good money.  He had done pretty well saving for his retirement which had commenced 13 years ago, but was now having to work a job to make ends meet.

 

“You see” he continued, “my financial planner told me that historically inflation had been 3% so I should plan on an average of 3% when calculating how much I would need in retirement.”  “I found out too late that my financial planner was dead wrong.”

 

I really felt bad for the man.  He had done everything right, he had worked hard and gone to school and obtained a good degree.  He had worked hard during his career and appeared to have been a good employee, made his boss look good and helped the company to be profitable.  He had diligently put money aside in his 401(k).  So where had he fallen short? What resulted in his golden years not being so golden? 

 

His number one mistake was not being better informed.  He was not aware of how money works, what his money was doing, or what is really going on in the world of finance.

 

Getting back to my early morning bus ride: the driver went on to explain how he was being pinched two ways by inflation.  Using the chart below, this is what he explained: “Every year since I retired, as the cost of living has gone up as a result of inflation, the buying power of my dollars has become less.  The only way to maintain my standard of living is to make up the difference is by taking more and more from my savings.  We realized we were being forced to make a decision - either lower the cost of living or get a job.”  He went on to lament how accessing more of his dollars and/or having more income by having a job has affected his Social Security taxation.

 

 

I bid my new friend a kind farewell and ran into the airport terminal.  Since then I have thought about his plight. You see, it goes almost without exception that when you sit down with a financial planner he will tell you to assume a 3 percent inflation rate. “That is the average over a long period of time” is what you are told. 

 

How accurate is that statement? Read on and decide for yourself.

 

Very few people know that inflation is NOT what Uncle Sam is telling us.  Even fewer know Bureau of Labor Statistics is the government entity that calculates the inflation rate. The BLS actually has two numbers, the core Consumer Price Index, more commonly called the CPI, and the non-core index. The CPI is what is used to determine Social Security benefits and the like. Well, guess what?  The CPI, does not include food or energy. Yes, you read that correctly; the price of food is not included in the calculation.  I guess eating is not all that important. And, apparently neither are utilities, gas and postage. Just a few minor exclusions.

 

Let us look at the cost of mailing a letter via the US Postal service.  The USPS is a "not for profit" organization, so any cost increase in postage should be exactly that, increases in the cost of doing business.  These costs would include salaries, equipment, and energy costs to run the trucks, heat their building etc. The price to mail a letter rose 3 cents (from $0.46 to $0.49) on January 26th 2014.  The previous increase was 364 days earlier.  How much did the cost of a postage stamp inflate during that year?  Believe it or not, that is a annualized inflation rate of 6.52%.  "Well," you might argue, "that is such a short time frame. Looking over a longer term, it is surely much less than that."  Ok, giving away too much information; when I was born, the cost of a stamp was $0.04.  Using that as a starting point, the inflation rate for postage stamps over that 47 year period is still 5.5%. Pray tell, where is the 3% your financial advisor has been telling you to use?

 

If something you thought to be true about money turned out not to be true, when would you want to know about it?  How will you ever know what is true unless you take some personal responsibility and do some reading.  A good place to start is here: www.financialtailwinds.com or www.financialfreedomrestored.blogspot.com.  There are some seminal works from the Mises Institute here www.Mises.org  as well which should be required reading in schools.

The New American Nightmare

 

Americans' confidence in being able to retire comfortably is at a record low, despite official government statistics that the economy is showing signs of improvement and the stock market hitting record highs.  Call it the new American nightmare: Running out of money in retirement is scaring the hell out of record numbers of older workers, forcing them to stay in the workforce.

The Employee Benefit Research Institute recently released its annual survey.  Here are a few highlights (lowlights?) from the survey.

• 57% of those surveyed report having less than $25,000 in total household savings and investments. Only 24% reported savings of $100,000 or more

• Only 24% are very confident they'll be able to live comfortably in retirement

• Only half said they could definitely come up with $2,000 to cover unexpected expenses within the next month.

Another study revealed “The percentage of older middle-class Americans who said their day-to-day financial concern is “paying the monthly bills” has climbed from 52 percent last year to 59 percent today, according to Wells Fargo. Saving for retirement comes in second. Four in 10 say saving and paying the bills is “not possible.””

Wow, can you believe those statistics?  I have a hard time believing those are real numbers.  On average, a man turning 65 this year will live another 20 years, and a woman that age will live another 23 years. How does an individual approaching retirement think they can live on a meager $25,000 – or even $100,000 for that matter?  How long do you think $25,000 in savings will last, especially considering the effects of inflation?

Americans seem to have two responses to this dilemma. The first is to make up for the dramatic shortfall by saving more – a lot more than they are now. Almost one-quarter of those surveyed say they'll need to save at least 30% of their income to achieve a financially secure retirement.

 

Reality check: this is simply not happening. Despite acknowledging the need to do so, Americans are not saving more. We are actually spending more and saving less. The savings rate is now only a paltry 2.6%, which is one of the lowest rates since 2007.  Additionally a full 25% of Americans are dipping into their 401(k) to pay for everyday bills.

 

As the stock market – fueled by money printing by the Federal Reserve – hits record highs, and home prices rise, consumer confidence and spending are climbing. It's called the "wealth effect," and it makes people do dumb things like spend money they know they should be saving. They figure that because the numbers on their retirement account statements and the sales prices of their neighbors' homes are up right now, they no longer need to save as much. Which begs the question... did anyone learn any lasting lessons from the last crash? (No, I am not talking about 1929; I am referring to the crash in 2008.)

 

Many people may have already forgotten much of the pain of the last crash, in which the typical investor lost 49% or more of their investments and their home values fell back to the level of a decade earlier. (I have clients who jokingly tell me their 401(k) transformed into a 201(k), i.e. lost half its value.)

Yet you have to wonder if crouched toward the back of many people's minds lurks the fear that the current bubbles now building in the stock and real estate markets are setting the stage for another crash. Who wants to set aside their hard-earned dollars in something (401(k), IRA, stocks etc.) that could crash again? The thought goes like this “If we are going to lose money in a stock market crash, we are better off just spending the money now and enjoying it while we can.” 

 

And that is exactly what is going on in America today. We are spending our money on consumer goods - things and trinkets that lose value or are gone before the credit card bill arrives.  We don’t take any care for the requirements of tomorrow.  (Ask yourself, are you any different?)

 

The second response is simply planning to postpone retirement to compensate for the lack of retirement funds. Unfortunately, that strategy may not work very well either since more than 47% of current retirees were forced into retirement sooner than they had planned.

 

A recent headline in the New York Post summarizes it well, “80 is the new 60 when it comes to retirement.” In the same article, Jeff Speight, a financial planner and manager is quoted: “Most clients are about to turn 60 (or right after it), preparing for retirement, and their concern [is]: Are they going to have enough money to live through retirement? Their main problem is, they don’t understand what to do.”

 

The biggest reason people don’t understand what to do is because they are limited by the traditional financial planning. Financial planners are still preaching the same strategies that we now know are highly risky at best. But because that is all they know, and because that is the prevalent voice, most people are left feeling hopeless and uncertain about their futures.

 

We cannot solve the current problem using the same information and/or assumptions that got us here. Traditional financial planning is product centered; all you have to do to succeed is to buy the right products (stocks, bonds, etc), at the right time and hold on for the long term. Along the way the traditional financial planners have been so busy selling you the products, they have at best forgotten to give you the knowledge on how to take care of your own planning.

 

Over the past several years we have seen all the investment lessons we learned in the past fail. We all know we can’t live much longer on 5% rates of return and yet people are scared and hesitant to make crucial decisions. To make it worse, right now 90 million Americans are faced with the most critical investment challenges of their lives.

 

In this blog, and my website ( www.financialtailwinds.com ) it is my intent to shed some light on this darkness.  I am trying to break this problem down and analyze it carefully.  If you read with an open mind – be willing to unlearn and relearn some truths about money - then you will have a clear view of choices open to you. Take heart there are good, reasonable, and safe choices out there

 

If here is a topic I have not covered yet, which you want addressed, contact me and I will do my best to explain it.

 

In my next column I am going to discuss the fallacy of 3% inflation traditional planners use in projecting your needs in the future and how it affects your outcome. 

 

Stay tuned.