Are Your Investments Really Diversified, or Do You Just Think They Are?


We all know that we’re supposed to diversify our investments. It’s the “Don’t put all of your eggs in one basket” rule. If you spread your investments around, you’ll reduce the risk of losing money because when one of your holdings moves lower, another is likely moving higher. For example, bonds usually move higher when stocks move lower, and vice versa.

We know we are supposed to diversify, but a lot of investors don’t do it very well. As a financial planner and investment advisor, I’ve reviewed thousands of portfolios over the years. I often find that the account owner thinks that their portfolio is diversified, when in fact it is not. Of course, this doesn’t apply to the owner of the portfolio I recently reviewed who was 100% invested in the stock of the company he works for. He knew he wasn’t diversified but was comfortable with his (high-risk) allocation decision. This post will highlight some of the most common diversification mistakes investors make without realizing the error of their ways. Then I will give some ideas on how we think a portfolio should be constructed.


One of the most common diversification mistakes I see is when someone owns several mutual funds and thinks that, because of the number of funds they hold, they are diversified. They might hold a S&P 500 fund, a large-cap growth fund, a large-cap value fund, and a dividend growth fund. Four different funds should provide good diversification, shouldn’t it? Not really. If you looked at the stocks that are held in each of those funds, you would find that they are all invested in the same asset class—large U.S. companies.

Another common mistake I see is when someone owns an S&P 500 fund and a bond index fund and thinks that they have a good mix of stocks and bonds. This example is better than the first one, but the mix is still not providing good diversification benefits. The S&P 500 fund provides exposure to the 500 largest companies in the U.S. but none of the 2,500 or so other publicly traded U.S. companies. There’s also no exposure to international stocks or bonds.

When building a portfolio, it’s important to look beyond the borders. “Home country bias” refers to the tendency of investors to focus on the investments within their own country. For example, U.S. companies make up about 50% of the total market capitalization in the world, yet the average U.S. investor holds about 70% of their portfolio in U.S. holdings. A recent study in Sweden showed that investors in that country put their money almost exclusively into investments from Sweden, even though their country makes up about 1% of the world’s capitalization.

When building an investment portfolio, we focus on diversifying across the various asset classes. The first step is to determine the percentage that should go into the largest, broad-based asset classes—stocks and bonds. A conservative investor might have 30–40% of their money in stocks; a more aggressive investor might have 60–80%. The balance would be allocated to the bond side of the portfolio.


The next step would be to allocate geographically. We like to see about 50–60% of the stock allocation go into U.S. stocks, representing the U.S. capitalization mentioned earlier. Next, we would allocate between 25 and 30% of the stock allocation into international developed countries in Europe, Australia, Asia, and the Far East. We invest the remaining stock allocation into the emerging-markets asset class, which gives us exposure to companies in China, India, and other developing countries. We would follow a similar approach with the bond side of the portfolio, with more exposure to the U.S., which makes up about 60% of the world bond market.

Finally, we want to diversify within the geographical asset class. We want to spread our investment dollars across companies of different sizes. We want to make sure we have exposure to large, medium, and small companies in domestic, international, and emerging markets.

Diversification reduces risk in a portfolio by allocating investment dollars across asset classes, countries, and industries. The goal is to maximize returns by lessening the chance that a major market event would have a devastating effect on an entire portfolio. That’s why it’s so important to get it right.

Fake News? No, Just Headlines After Your Eyeballs


Despite the first thing you probably thought of when you saw the title of this post, this is not a political article. While I am a self-admitted news junkie and very interested in politics, this post is about the damage that headlines can cause to your investment portfolio—if you allow them to.Over the last week, I’ve captured some of the headlines that have appeared in major financial publications and websites. While I am sure that the writers of these articles do not intend to bring financial harm to their readers, the possibility of doing so exists.

First and foremost, we need to remember that a financial newspaper, magazine, or website has one main goal: to capture your eyeballs. The more people who view their publications or site, the more they make from their advertisers. When they publish an article with an attention-getting headline, they are trying to draw you in. They do so with scary headlines about why the financial markets are about to crash, or warnings that you better go “all in” soon or you’ll miss the next big bull run.

Before we go any further, it’s important to understand the perspective that I bring to the discussion. Our firm has long believed that any attempt to predict, or time, the markets is a waste of time and money. And the academic evidence supports our position. So, it is frustrating when I read articles that could lead investors to make decisions that hurt them.

I’m going to list several of the headlines that I’ve seen over the last week and try to provide a little perspective. I think it’s important to do so, especially when I see a headline like this: “Half of Americans See Market Swings as an Opportunity to Cash In.” This article says that 48% of Americans see volatility in the markets as a chance to get rich quick. That approach is gambling—not investing. However, the article does include a quote from Greg Anton, a CPA and chairman of the AICPA's National CPA Financial Literacy Commission, that puts things in perspective: "Investing is not a get-rich-quick scheme and trying to time a volatile market with hopes for huge gains is a serious financial risk." Truer words have hardly ever been spoken.


We’ll begin our look at some of the headlines with the ones that are calling for Armageddon in the markets. “Behold the ‘Scariest Chart’ for the Stock Market” is a pretty technical article that highlights similarities between 2018 and 2000, the year of the tech-wreck in the markets. It’s difficult to look at the chart presented and not see the similarities, but that doesn’t mean it’s going to play out the same way moving forward. A lot has changed since 2000. The writer of the article “A Duo of Factors Signal That a Stock-Market Downturn May Be at Hand” is at least coy enough to use the word “may” in the headline. This article is another technical one about some market indicators that could be looked at as data mining, or selecting the data that helps “prove” a point. With enough data, you can make the indicators say almost anything you want them to. Another article on the same subject uses a much scarier headline, “A Bearish Market Warning from the Tech Bubble Is Back.”

This article, “Market Bull Braces for 5-10 Percent Pullback, Sees Compelling Reasons to Buy the Dip,” says that a slight pullback in the market is “conceivable.” Really? Of course, it is conceivable! Five to ten percent is not even considered a market correction.

This Chart Says Stocks Are About to Run Out of Gas in a Big Way” compares the chart of the S&P 500 with the index for silver. I don’t understand the connection, but at least the author hedges his bets by saying, “We are in the slower summer months, and price moves are more likely to reverse than continue.” (My emphasis.)

How to Predict the Next Market Downturnacknowledges that predicting the market is a fool’s errand, but goes on to let readers know about the tool the publication has developed to help do so.


Of course, it’s not always gloom-and-doom predictions. “Stocks to Pop Another 10% or More from Here, Despite Trade War, Rising Rates” predicts that stocks will rise and that any pullback should be used as a buying opportunity. No wonder investing can be confusing.

Here’s another: “Obscure Market Statistic Could Point to Record Highs for S&P 500 by Year-End.” This article points out that the S&P 500 was higher in April, May, June, and July. That has happened only 10 times since 1950, and the market moved higher by year end all 10 times. That is pretty obscure. Not something I would recommend betting on.

This article, “Traders Are Expecting a Big Stock Market Soon,” doesn’t say that stocks will move higher or lower, just that they are set for a big move. Well, that’s not very helpful.

I’ve attempted to use a little humor to illustrate the mixed signals we are all subject to and how difficult it is to predict how the financial markets will move. The above articles represent only a fraction of those written by the so-called “expert” market prognosticators. If you pay attention, you might notice that there seems to be a lot more articles written about the coming fall in the markets than the possibility of a rally. Remember why they write the headlines. They want your eyeballs. And fear sells.

Roth IRAs and 401(k)s—Why All the Fuss Lately?


Have you noticed the increased attention to Roth IRAs and 401(k)s recently? It seems that, every day, I see a new article promoting the advantages of using a Roth for your retirement planning. Sure, a Roth is a great way to fill up the tax-free bucket of funds available for you at retirement. But as of this year, the Roth option of retirement savings has been around for 20 years. Why the fuss lately?

Before I get into the reasons for the attention that the Roth is getting, it’s important to make sure we understand how the Roth is different from a traditional IRA or 401(k). Contributions that you make into your traditional IRA or 401(k) are made with “pre-tax” dollars. That means that you get to reduce your current taxable income by the amount of your contributions. Lower income means a lower tax bill. When you retire and take money out of the IRA or 401(k), the distributions are taxable.

On the other hand, contributions you make into a Roth IRA or 401(k) are made with “after-tax” dollars, so you do not get the benefit of a reduction on your current tax bill. However, when you take money out of your account at retirement, the funds are tax-free.


Two things have occurred within the last several months that helped boost savers’ awareness of the Roth. The new tax law that was passed at the end of last year and went into effect this year was the first trigger. Suddenly, most of us found ourselves in a lower tax bracket. That meant that the deductibility of a contribution into a traditional IRA or 401(k) wasn’t worth as much.

Shortly after the new tax law went into effect, Congress passed a $1.3 trillion spending bill, averting a government shutdown. The new spending will mean an increase in our national debt, which is already an outrageously big number. It is widely assumed that in order to pay down that massive debt in the future, taxes will have to eventually go higher. This spending bill is the second trigger for the new popularity of a Roth account.


The reason you use a Roth as part of your overall retirement and tax strategy is to take advantage of tax arbitrage, which means that you pay tax at a lower rate at the time of the contribution than you would when you take the funds out of the account. With relatively low income tax rates and the expectation that they will be higher in the future, the Roth becomes a more attractive option.

Another way of getting funds into your tax-free retirement bucket is to do a Roth conversion. This means that you convert the pre-tax deductions in a traditional IRA or 401(k) to a Roth account. To accomplish this, you must pay current tax on the amount you are converting. Once again, with low current tax rates and higher rates anticipated in the future, the Roth becomes more popular than ever. A Roth conversion can also be a good way to get funds into a Roth account if your income is too high to make a Roth contribution.

It’s important to keep in mind that this article is very general and that the ideas may not be applicable to your personal situation. However, it is also important to have a tax and cash flow strategy in place that does match your situation. Are you contributing to a 401(k) through your employer? You should at least investigate whether it would make sense for you to redirect some or all of those contributions to the Roth option in the plan, if one is offered. Do you have an IRA that you might be able to convert some or all of it to your tax-free bucket? It doesn’t cost anything to run the numbers, and it may save you some tax dollars in the future.

Should You Make Traditional or Roth Contributions to Your 401(k)?


More and more 401(k) plans are offering a choice on how you make your contributions. You can make deposits into the plan in the traditional way, which means that your money goes into the account before taxes are paid on that money. In recent years, many plans have begun offering another choice. If your plan allows, you can now make a Roth contribution, which means that the money goes into your account after-tax. Which option is best for you? As with most financial questions, the answer is “It depends on your personal situation.” I’ll try to help you decide which option is best for you in the paragraphs ahead, but first we need a little more detail about the choices.

Most people are familiar with the way that traditional contributions work. First, you decide how much you would like to have withheld from your paycheck, usually a percentage of your pay. That amount is deducted from your paycheck before income taxes are withheld. For example, if you make $75,000 per year and decide to contribute 10% of your pay, $7,500 goes into your account. Pre-tax means that, in this example, you would reduce your taxable income (before deductions) to $67,500 ($75,000 less the $7,500). So your traditional contributions result in a lower current tax bill. However, when you withdraw the funds, they are taxed as ordinary income.


Roth contributions work just the opposite way. Using the above example but making your contributions to the Roth option instead, your taxable income would be the full $75,000 you earn (less regular deductions). But when you withdraw the funds at retirement, they are tax-free. Contributing to the Roth option means that your current tax bill will be higher because you are paying tax on the entire amount of your income now, and you will receive tax-free income later.

Roth IRAs and Roth contributions in 401(k) accounts have been growing in popularity recently because of two reasons. First, the new tax law passed last year means that most of us will be in a lower tax bracket. That means that traditional, or pre-tax, contributions will be slightly less attractive. Shortly after the new tax law went into effect, Congress passed a $1.3 trillion spending bill, which results in a large increase in the national debt. That debt will eventually have to be paid, and most “experts” agree that it will mean higher taxes in the future. If that’s the case, your tax-free dollars will be worth even more.

It becomes a bit of a balancing act to determine whether you should make traditional or Roth contributions to your retirement plan. Do you take advantage of lowering your current taxable income by making contributions to the traditional option? Or do you pay a little more in tax now to have tax-free income at retirement? If you are just getting started in your employer’s plan, I say it’s a no-brainer—go with the Roth. If you’ve been in the plan for a while, you should consider redirecting at least a portion of your contributions to the Roth option.


Many people have been contributing to the traditional option for years and find it hard to give up that current tax break. After all, a dollar in your pocket now feels better than one in the future. There’s a good way to help you make the decision. Take the information from your 2017 tax return and run it through a 2018 calculator like this one, 2018 Tax Reform Calculator offered by the Tax Foundation, an independent tax policy nonprofit.

We’ve run the analysis for several of our clients and find that most will have a lower tax bill for 2018. We are recommending that they reduce their traditional contributions to the level that would keep their tax bill about the same, and start making Roth contributions with the tax savings. Over time, we recommend increasing the amounts going into the Roth. After all, tax-free is almost always better than tax-deferred.

If You Only Knew This, Planning Would Be Easy


How long are you going to live? That’s an impossible question to answer. But when you are planning for your financial future, it’s a very important question that needs an answer. Well, maybe not an answer, but as least a good guess. One of the main reasons for putting together a financial plan is to make sure you don’t run out of money before you run out of breath. But trying to figure out when that’s going to happen is at best a guess.

When putting a financial plan together, we need to make a lot of assumptions. We make assumptions about our lifestyle, the financial markets, inflation, tax laws, and many other things. This is why financial planning is not an exact science. Markets will change, tax laws will change, inflation rates will change, and our life and goals will change.

Our life expectancy is another assumption we have to make in a plan. I’ve often said that planning would be easy if we knew when our life was going to end. We could plan our finances perfectly. We would know that we have enough money to comfortably live out our days, and feel free to spend money on things we enjoy without worrying about leaving behind a big pile of money once we are gone. We could achieve what I consider to be the “perfect” retirement plan, the one where the check to pay the funeral expenses bounces.


So, when working on our financial plan, how do we address our life expectancy? First, we can start with statistics. According to the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. That’s a good starting point.

Then we need to consider our current health. Do we exercise regularly? How about smoking? How’s our weight and eating habits? We should also consider the depth of our gene pool. I always ask clients about their parents. How old are they, or if they have passed away, how long did they live? If mom and dad lived into their late 80s or 90s, we want to make sure to use a higher-than-average expectancy in our plan.

There are tools available that can help. One of my favorites is the website It is a site developed by Dr. Thomas Perls, founder and director of the New England Centenarian Study, the largest study of centenarians in the world. There is a calculator on the site that can help you estimate your life expectancy. There are 40 questions related to your health and family history. It only takes about 10 minutes to complete, and it will give you a guesstimate of your life expectancy. Having done it myself, I admit that it’s a little disconcerting as you wait to see your “number.” But it’s good information.


Once you have a number, it’s important to add a few more years to the estimate just in case. You don’t want to plan as if your life expectancy is 90 and then run out of money when you live until age 95. Also, with advances in medicine and medical technology, our life expectancies are likely to increase. I recently attended a conference on retirement income planning, and one speaker said that we should be planning as if our clients will live to 110 or 120 years of age!

Just like the other assumptions we build into a plan, our life expectancy estimate isn’t a set-it-and-forget-it number. As we age, we will want to adjust most of the assumptions built into the plan as we have new information. If we suffer a decline in health, we might want to adjust our life expectancy assumption downward. If we hit 80-plus and are still going strong, we might want to increase it.

Financial planning is not a static process. It’s not something we do once and then leave alone. It should be revisited at least annually and updated as life changes. Because it certainly will.

Find A Penny, Pick It Up?—How Little Things Add Up for Financial Success


You probably remember the children’s rhyme “Find a penny, pick it up, all day long you’ll have good luck.” Ever wonder where that originated? There’s a surprising amount of information on that rhyme available with a simple Google search. It turns out that it may have originated from the belief in ancient ­­times that metals would protect from evil spirits. Once we started using coins as currency, those who had more coins were considered wealthy, which translated into good fortune, or luck.

I’m not a very superstitious person, but when I was walking across a field the other day and saw a penny lying on the ground, I bent over and picked it up. Then I started thinking about why I did. It should be noted that the penny was heads-up. There are those who believe that a tails-up penny shouldn’t be picked up but instead should be turned over so that the next person who finds it will have good luck. But I digress …


When I picked up the penny, I didn’t do so because I believed that it would somehow bring me good luck for the rest of the day (although I did win two items at the silent auction I attended later that day). I picked it up because doing so fit into my financial philosophy. It wasn’t the value of the penny that was important; it was the idea that if you pick up the figurative pennies in your financial life, you’ll increase the odds of being a financial success.

What are these “figurative” pennies that I refer to? I will illustrate with several examples, but the principle basically comes down to doing a lot of little things correctly. Our firm is not going to be able to identify the next Amazon or Apple stock that could make a huge difference in your financial future. Instead, what we try to do is to help you do a lot of little things right. If you do a lot of (seemingly) little things right, you’ll be on the right track financially. So, what are these little things?

I have always used the example of a convenience store. If I stop in to get a drink that costs me 95 cents, I’ll give the clerk a dollar and wait for my change. The nickel that I get back certainly isn’t much, but in my mind, it’s a return of 5%. Once again, 5% isn’t a huge return, but it’s a guaranteed 5%—and there are no investments that will offer us a guarantee of that amount.

What about the interest rate you are earning on your savings? If you have an account with the traditional brick-and-mortar bank, you’re probably earning less than 0.30%. A quick search of the interest rate being paid by an online bank shows that it’s pretty easy to get 1.5–2%, and the account is still FDIC insured. That’s a difference of a little more than 1% to move the account to an online bank. Again, that’s not a lot, but over time, those 1% differences add up.


How about the expenses you are paying for your investment accounts? Unfortunately, a majority of people don’t know what they are paying in fees. I have reviewed many portfolios that are being charged fees that range from 1.5% to over 3%. Investment fees are like a headwind for your portfolio, and the larger your portfolio, the more high fees are slowing you down. Costs are one of the main factors that we consider when making investment decisions because they are relatively easy to control. And they save our clients a lot of money. If you can reduce your investment expenses by 1% or more, you’ll save a lot of money over the years.

There are several other “little” things that can add up to make a big difference in your financial situation. Make sure that you have the proper insurance coverages in place to protect you, your family, and your assets. You should have the proper estate documents in place to for the same reason. Make sure your portfolio is well diversified. Don’t leave free money on the table by not participating in your company’s retirement plan.

Like the penny I picked up in the field, it doesn’t seem like any of these changes would make a big difference in the grand scheme of things. But when you put them all together, they can make a very positive impact on your financial situation. So maybe we can change the rhyme to “Find a (figurative) penny, pick it up, and all life long you’ll have good luck!

Improve Your After-Tax Return with an Asset Location Strategy


You know how important it is to diversify your investment portfolio. You spread your investment dollars across several types of investments because you don’t want to have all of your proverbial eggs in the same basket. We suggest diversifying across several categories, or asset classes, because the different asset classes perform differently. But it’s also important to diversify your portfolio by diversifying across account types.

There are several types of accounts you can invest in. For example, there are individual and joint accounts, trust accounts, IRAs, 401(k)s, and Roth IRAs. In a previous post, “The 3-Bucket Approach to Retirement Savings,” I discussed the importance of having different “baskets” of money to draw upon in retirement. It’s good to have a pool of after-tax, tax-deferred, and tax-free funds to draw on. It’s a strategy that allows you to exert some control over the taxes that you pay.

Another way to control the taxes that you pay is to use a strategy called “asset location.” It involves diversifying your investments according to the type of account. To implement this strategy, we must understand a couple of things. First, it’s important to know the different ways we make money on our investments. Fixed-income, or bond, investments typically pay interest and/or dividends. Stock-based investments may pay some dividends, but the main way we make money on them is through capital gains. We buy them at one price and hopefully sell them at some point at a higher price.


Next, it’s important to understand that different types of income are taxed in different ways. Interest and dividends are taxed at ordinary income rates. This means that the total amount you earn in interest or dividends is added to your other sources of income (employment, pension, IRA distributions, Social Security benefits, etc.) to determine your tax bracket. Capital gains are taxed differently. If you hold an investment for over a year and sell it for a profit, it is considered a long-term gain. Depending upon your tax bracket, capital gains are taxed at 20%, 15%, or possibly 0%.

The strategy works by placing the investments that are going to be taxed at higher, ordinary income rates inside a tax-deferred account, like an IRA or 401(k). The investments that will generate capital gains should be in your post-tax accounts, like your joint or trust account. This means that your bond-type investments will be in your tax-deferred accounts, and the regular interest and dividends you earn will not be currently taxed. Your stock-type investments will be in your taxable accounts, where any gains are taxed at the lower capital gains rates.


It’s important to note that this is an oversimplified example to illustrate the concept of asset location. In reality, it’s not that simple. It’s rare that your accounts are the exact size that you need so that your IRA doesn’t hold stock-type investments. And your taxable accounts will need to have some cash and bond-type investments to meet your liquidity needs. You also need to understand that the performance of the accounts will be dramatically different. If you put growth-oriented investments in your taxable account, and fixed-income investments in your IRA, your IRA will likely lag from a performance standpoint. But this turns into a benefit later, when you start taking your required minimum distributions at age 70. A smaller account balance results in lower distributions—another way to control your tax consequences.

The goal of the strategy is to place your investments in the type of account that will maximize your after-tax return. After all, it’s what you end up with after taxes that you get to spend. Asset location is not an easy strategy to implement or maintain, but if it can increase your spendable income in retirement, it’s worth it. For help in seeing how it would work in your case, don’t hesitate to reach out.

Retiring with a Pension? You Have Some Decisions to Make


It used to be that a retirement pension was common. It was typical for someone to work for a company for 20 or 30 years and retire with the proverbial gold watch and a pension. The so-called “three-legged stool” of retirement income was made up of personal savings, Social Security benefits, and a pension. The pension and Social Security benefits provided a guaranteed monthly income for the rest of the retiree’s life.

Times have changed quite a bit over the last couple of decades. Driven mostly by employers’ desire to reduce their long-term liability exposure, pension plans have become increasingly rare. They have been mostly replaced by 401(k)s or other employer-sponsored savings plans. But some people are lucky enough to still have a pension, and it will be a big part of their retirement plan.

If you are one of the fortunate ones, you will have some decisions to make when you are ready to retire. First, you have to decide when to start receiving your pension benefits. Some plans offer payout options that work similarly to Social Security benefits. You can start receiving benefits early—say, at age 62—but you will receive a smaller amount. Or you can wait until a later date, like age 65, and receive a larger payout.

Perhaps the biggest decision you will need to make is how you will receive your benefit payment. You might have a lump sum option that allows you to cash out of the plan. You will also have a couple of options that offer you monthly payments.


If you take a lump sum payout, you eliminate the possibility that your employer may default on your pension. With all the reports of unfunded pension obligations, this is a real risk. There is some protection provided by the Pension Benefit Guarantee Corporation, a government agency that “insures” your benefit up to federally determined limits. But that means that there is a possibility you would not receive your full benefit.

On the other hand, if you cash out, you take on the investment risk of managing those funds. Most people who take a lump sum do so by rolling over the proceeds into an IRA. This allows you to control the tax consequences of your distribution.

If you decide not to take a lump sum, or if your plan doesn’t allow for one, you will need to decide how to receive your monthly payments. You usually have the choice of receiving payments for the rest of your life (a single life annuity) or selecting from a variety of survivor options (joint and survivor annuity) that allow for your beneficiary to continue to receive payments after your death. If you choose payments for your life only, your monthly income will be higher. The survivorship options result in a reduced payment. For example, you might qualify for a $1,500/month payment for the rest of your life, but if you choose the survivor option, your payment might be $1,000/month. That’s because the payment is now guaranteed to cover two lives. It should be noted that if you are married, the IRS requires that the benefit from a qualified retirement plan be paid out as a survivorship option unless both you and your spouse authorize another form of payment.


At first blush, the survivorship benefit is the logical choice. After all, you want to make sure that your spouse is provided for after your death. But is that really the best decision? The answer, as with most financial decisions, is that it depends on your personal situation. There are times when it makes sense to take the single life payout, and times when the survivorship option is best.

When trying to decide which is best for you, you should consider several things. How old are you and your spouse? What about your respective life expectancies? How is your health? Your health history? Your spouse’s health and health history? What other sources of retirement income might be available to you or your spouse after one of you passes? Do you have life insurance? What would be the impact of the death of one spouse on your combined income? What about the impact on your combined expenses?

As you can tell, there is not an easy answer that is right for everyone. The purpose of this post is to highlight some of the things that need to be considered as you prepare to move into the retirement phase of your life. If you are lucky enough to have a pension, you need to get this right the first time because you don’t get a second chance once you start receiving benefits.

The 3-Bucket Approach to Retirement Savings


What tax bracket will you be in when you retire? Unless you are retiring within the next year or two, this question might be a difficult one to answer. Predicting future tax rates can be as difficult as predicting the stock market, interest rates, and the weather. Taxes can have a huge effect on your retirement income, so having a strategy to minimize them is important. One strategy that can help is what I call the three-bucket strategy.

The idea is to have three different buckets of retirement money. The first bucket consists of money that you have saved outside of any IRA or employer-sponsored plan. We’ll call that the “post-tax” bucket, consisting of money that has already been taxed. The second bucket is the “tax-deferred” bucket, containing money that you have saved in a traditional IRA or 401(k)-type plan. It’s money that will be considered taxable income when you withdraw it for cash flow.


A lot of people have the first two buckets under control. The key to the strategy is that third bucket, the “tax-free” bucket. You fill up this bucket by making post-tax contributions into a Roth IRA or Roth 401(k). The money goes in after tax and comes out tax-free—including all of the growth and income that has occurred in the account over the years. This bucket has become a much bigger part of retirement planning because of the new tax laws that went into effect this year. The new laws cut the tax rates for now, but projected increases in government deficits have many believing that tax rates will be much higher in the years ahead. If that’s the case, tax-free cash flow would become even more valuable.

By putting the three-bucket strategy in place, you can effectively control the tax consequences of your retirement income. I’ll use an oversimplified example to illustrate how it can work. For a married couple, filing jointly, the 2018 tax rates increase from 12% to 22% once your taxable income goes above $77,400. For our example, let’s assume that you need $90,000 of cash flow each year in retirement.


Here’s how the three-bucket approach could work. Let’s say that between your Social Security benefits and the interest, dividends, and capital gains from your post-tax account, you have $48,000 in taxable income. Next, you withdraw $29,400 for the year from your IRA or 401(k), your tax-deferred bucket. Remember, everything from that bucket is taxable, so you are now at $77,400 in taxable income. To get to your income need of $90,000, you withdraw $12,600 from your Roth IRA or 401(k) accounts, your tax-free bucket. By following this plan, you have accomplished your income goal and did not push yourself into the next tax bracket.

Implementing this strategy will rarely be as clean as our simplified example, and it will vary from year to year. But managed properly, you can get the cash flow you need and control the tax consequences. After all, a dollar saved in taxes is another dollar that you can use however you want in retirement.

How Do I Replace My Paycheck When I Retire?


While it doesn’t seem like it, saving for retirement is easy. You set aside a certain amount each month, or each paycheck, and invest it in your IRA or 401(k). That is, of course, an oversimplification. But once you retire and need to figure out how to replace your paycheck, the process becomes a lot more difficult.

While you are working, you are in what is known as the “accumulation phase.” You have a couple of big decisions to make: how much you can afford to save for your future, and how you’re going to invest those savings dollars. If you are lucky enough to have an employer-based retirement plan, you simply decide what percentage of your paycheck you can put into the plan and then choose from the menu of investment choices that the plan offers. If you are saving for retirement outside of an employer plan, saving is a bit more involved. You must be disciplined to put money away on a regular basis without the benefit of payroll deduction, and you need to develop an investment strategy.

There is obviously more to “accumulating” than that. You want to make sure that you build a portfolio that is properly diversified. Your mix of investments should reflect your tolerance for risk as well as your need for risk. You should also keep an eye on the costs of your portfolio, which isn’t always easy. Mutual fund expense ratios, trading costs, account fees, and management fees can all add up and hurt the performance of your portfolio. You also need to manage the portfolio so that it stays appropriate as you move through the stages of your life.


But all of that is a piece of cake compared with what it’s like when you finally retire and get to the “decumulation stage.” Before retirement, you receive a paycheck. When that paycheck stops, you need a plan to replace the income that you have been living on. There may be several pieces of the retirement income puzzle that you will need to put together.

Most of us are eligible for a Social Security benefit. The timing of when you begin your benefit will be a big part of your retirement income plan. Most people begin receiving benefits at age 62, even though they know they will receive a smaller benefit. It often makes more financial sense to wait until you reach your full retirement age, which is 65 to 67, depending upon your year of birth. At least then you will be getting your full benefit. You can also receive a higher benefit by delaying it until you reach age 70. Each year you delay, your benefit will increase by 8%, up until the time you turn 70. When should you start your benefit? That, of course, depends upon your situation.

Pensions used to be a big part of the retirement puzzle, but not many of us are lucky enough to have one these days. If you happen to be eligible for a pension, you may need to decide when to start receiving benefits. Like the Social Security decision, many plans allow you to take a reduced benefit at an earlier age and a full benefit at another. You will also typically have to decide whether to take a benefit for the rest of your life, or to take a reduced benefit and provide for your spouse at your death. Your best strategy? Again, it depends.


Finally, you’ll need to come up with a plan on how to start drawing cash flow from your investment accounts. You should note that I said “cash flow” and not “income.” It might simply be a semantics issue, but I’ll explain. All too often, I see retirees trying to generate enough income from their investment portfolio to meet their spending needs. They think of “income” as interest and dividends and will tend to focus on investments that pay higher levels of both. Unfortunately, that mindset can often lead to problems with their portfolio. When “chasing higher yields,” investors are taking on more risk. When they go after higher dividends, we often find them heavily concentrated in large dividend-paying stocks. This approach leaves them with little or no exposure to other important asset classes. I recommend taking a cash flow approach, where the cash flow is made up of a combination of interest, dividends, capital gains, and occasionally principal, from the investment portfolio.

The tax status of your retirement investments will also have an impact on your cash flow decisions. You may have some money in after-tax investment accounts, some in tax-deferred accounts like an IRA, and some in tax-free accounts, like a Roth IRA. By properly managing your distributions, you can exert some control over the taxes that you will pay in your retirement years.

It’s easy to see that making the transition to retirement involves a lot of planning. You have several decisions that need to be made, and many of them will have long-lasting effects on your retirement lifestyle. Make sure you understand the implications of each decision. And if you would like some help, feel free to reach out. This is what we do, and we are happy to help.

Investing in Your Company’s Stock—Good Idea?


We all want to feel confident in the company we work for. We also like to think that we are contributing to the company’s success. If possible, we also like to share in that success. Some companies allow you to share in their success by allowing you to own some of the company’s stock—then, if the company does well and the stock price goes up, you build wealth along with the company. It’s a win-win. You are motivated to do your job well so that the company does well.

But can it be too much of a good thing?

There are several ways that you can invest in your company. A lot of companies will offer their employees a discount on the company stock. They will allow you to have some money deducted from your paycheck and will use that money to buy shares of the company stock. They usually offer it at a discounted price that can range from 5 to 15%. Other companies may offer their stock as part of a match that they make to your qualified retirement plan. And other companies make the stock available as a choice in the menu of investment choices in their 401(k) profit and/or profit sharing plans.


So, what can go wrong? Just like most things in life, moderation is key. A little bit of something can be good. Too much of something can become a problem. Owning too much of your company’s stock can become a real problem. If the company runs into a rough patch, your personal wealth can suffer. In fact, it can be a bigger problem because your paycheck and your investment accounts both depend upon the success of your company. History has many stories of companies that at one time seemed solid and in a short period ran into hard times—think Enron, Kodak, and Lehman Brothers, just to name a few. A lot of employees in those companies lost their jobs and their retirement because they never would have imagined the hardships that hit their company.

We all know that one of the most basic rules of investing is to not put all of your eggs in one basket. We know that we should be diversified. But when it comes to our company stock, we sometimes let our emotions replace our logic. We want our company to do well. We think we are helping it be more successful. Whether it’s through an employee stock ownership plan (ESOP), discounted shares, or shares we’ve purchased in our retirement plan, we accumulate small pieces of our company over a period of many years. It can often become a much larger part of our overall investment plan without us even realizing it.


Don’t get me wrong; I’m not against owning company stock—although I admit I’m not a real fan either. If you are confident in the future of your company and you want to take an ownership stake, there’s nothing wrong with that. But just make sure to diversify. If 5–10% of your overall investment portfolio is invested in your company, that is probably OK. It’s when the stock becomes a bigger piece of your investment pie that you are taking on more risk than you might know.

I’ve seen several situations recently when company stock made up 20, 30, 40, even 80% of someone’s investment portfolio. That’s extremely dangerous—no matter what company it might be. Think about it another way. There are around 4,000 actively traded public companies in the U.S., and that number doesn’t include private companies that have employee stock available. Of all those companies, which one would you invest nearly all of your money in? Amazon? Apple? Starbucks? Your company? It’s a big risk to put too much of your money in one basket. Would you take that risk with any other company?

Volatility Is Back—with a Vengeance


OK—now it’s obvious that we’ve been spoiled. For most of the last year and a half, it seemed like the markets only went up. Deep down, we all knew that’s not how it works. Markets go up, and markets go down. They always have, and they always will. Over the long term, the trend has always been for markets to move higher. But in the short term, there’s no telling what’s going to happen. Last year seemed to lull us into a false sense of security.

This is a top-of-mind subject for a lot of folks right now because of the recent activity in the market. As I write this, we are coming off the worst week in the markets since January 2016. We saw a 700-plus point drop in the Dow on Thursday, and a 400-plus point drop on Friday. By the time you read this, we could be well on the road to recovering that lost ground.Or we could be lower.

Markets are historically a lot more volatile than we’ve seen recently. A good measure of volatility is a daily move of more than 1% in the S&P 500. Looking at market data all the way back to 1901, we see that the markets have averaged about 53 days per year with moves of more than 1%. That’s the average. In 2008, during the financial crisis, we had 134 days, and in 2009, there were 118 days.


In 2017, we had 10 days of 1% moves. Ten. There’s only one other time in history that comes close to the calm we enjoyed last year. During the years 1963 through 1965, markets experienced similar stability.

So far this year, we’ve already had 23 days of moves more than 1%. It’s not even the end of March, and we almost have twice as many as last year. Recency bias makes the moves of the past week seem even more dramatic. It’s like we’ve been sitting in a nice, lukewarm bath when someone suddenly douses us with ice water.

We shouldn’t be surprised by the market moves, but we are. We’ve had the perfect storm of events to get us here. We’re nine years into the longest bull market ever, and even a strong bull gets tired. We’re finally seeing an uptick in inflation, which has led to an increase in interest rates. That’s usually bad news for stocks. Saying that we are in a volatile political environment would be an understatement, and the unpredictability of the current administration just provides more fuel for the fire. All that, and now the potential danger of a trade war, has put investors on edge.


It’s not all bad news, though. The recent tax cuts have put more dollars in most paychecks, and corporate earnings are still pretty good. And while inflation is back, it doesn’t appear to be problematic yet.

So, what’s an investor to do? My advice is always the same. First, make sure that you have adequate cash reserves so that you can stay invested during tumultuous times. Don’t let moves in the market, no matter how big, lead to reactionary moves with your portfolio. Make sure that you are properly diversified across the major asset classes and that you have an appropriate mix for your personal situation. Finally, rebalance your portfolio when it’s necessary to maintain your mix.

Keep Mediocrity at Bay—in Running or Finances


“You gotta fight every day to keep mediocrity at bay.” That’s the opening line of one of my favorite Van Morrison songs. If you are reading this and you happen to be under 50 years old, you may have just thought, “Who is Van Morrison?” And even if you do recognize the name of this classic rocker, your next thought might be to wonder why I’m writing about him. I’m not. I’m writing about his song.

I ran a 10-mile road race this morning. If you’ve known me for any time at all, you know that running is a part of me. My wife and I have made running our main form of exercise for almost 15 years. We used to travel the country with the goal of running a full marathon (yes, that’s 26.2 miles!) in every state. Unfortunately, some knee issues have made me stop the marathon quest, but thanks to modern medicine, I am still able to do some pretty good distances and participate in some fun events.

Usually when I run I listen to podcasts or audiobooks. I enjoy the opportunity to learn something, or be entertained, while I’m getting in some miles. I started the race this morning listening to an audiobook. But I quickly found that it wasn’t going to be a day for learning. It was a day for music. I’ll listen to music on my runs when I want to be entertained and lose myself in thought, or when I need some motivation. I’ve been recovering from an injury, so this morning I needed motivation.


It took me almost an hour and 50 minutes to cover the 10-mile course. (No, I’m not very fast!) You can listen to a lot of songs in that time. About six or seven miles into the run, when my body was starting to hurt and ask why I was out here running 10 miles, the song “Keep Mediocrity at Bay” came up on my running playlist.

Music can make you feel happy or sad. It can make you feel love or mourn a lost love. It can also make you motivated (think “Rocky’s Theme”). A lot of the messages we get from music depends upon where we are and what we are doing. I’m sure that when you hear certain songs, you are transported to a different time in your life, when the song had a special meaning, creating an important memory. Van Morrison’s song had an impact on me this morning.

“You gotta fight every day to keep mediocrity at bay.” I don’t want to settle for mediocrity—in any area of my life.

As I listened to the words and message of the song during my run, it gave me the answer that my body wanted. I run because I want to stay fit. I want to stay fit not only to look and feel better, but so that I can age well. It’s also the reason that my wife and I get up at oh-dark-thirty every morning to work out. We’re fighting every day to keep mediocrity at bay.


I don’t want to be mediocre when it comes to my family’s financial situation. My wife and I both work hard to save for our future and to make good financial decisions. We are willing to do the things necessary to provide us with a secure financial future.

And, I don’t want to be mediocre when it comes to helping the clients of our firm. It’s the reason I attend numerous educational conferences each year—so that I can help clients make good financial decisions. It’s the reason we invest in the tools that we need to help keep our clients on track and to provide them with an experience that helps keep them focused on their financial future. We don’t want mediocrity for our clients either.

“You gotta fight every day to keep mediocrity at bay.” So now you have an example of some of the stuff I think about when I run. The inspiration for this post came to me as I struggled through the last few miles of a tough run. Thinking about the message of the song got me through miles seven and eight. It also helped that the next song on my playlist was “Stronger” by Kelly Clarkson. You know, the one that goes, “What doesn’t kill you makes you stronger …”

Emotions—You Can’t Avoid Them, but You Can Control Them


Emotions can be a good thing. There are positive emotions like love, joy, surprise, excitement, amusement, and gratitude. Emotions can also be a bad thing. Negative emotions include fear, panic, anxiety, anger, sorrow, greed, and hate. We would obviously prefer to experience positive emotions, but sometimes life’s circumstances get in the way and we face the negative ones far too often.

When it comes to money, it’s best to leave your emotions out of the mix. You should note that I said that it is “best” not to mix money and emotions. I didn’t say it was easy. Money is a very emotional issue. It is possible to have positive emotions about money. You can feel surprise and joy when you get an unexpected bonus at work, or you can feel gratitude or thankfulness when you think about your life compared to others. However, most of the emotions that surround the topic of money are negative. You might experience anxiety about your job status; fear that you won’t have enough money to meet your long-term goals; or even panic when your investment portfolio takes a sudden and unexpected hit.

In the first two months of this year, we’ve seen investors experience a wide range of emotions, and they are all negative. Many of us have experienced the emotion of greed as we’ve watched the financial markets rise steadily over the last several years. We might have wished that we had a more aggressive allocation in our portfolio because those darn bonds were just holding us back from those big gains in stocks. And that cash we’ve been sitting on certainly hasn’t been earning us anything for years!


I learned a new term as I listened to the financial pundits try to explain what was driving the markets higher recently. It was FOMO or the "fear of missing out." It’s just another, less negative way of describing greed. For those of us old enough to remember, we saw it in the stock market during the dot-com era at the turn of the century, we saw it in the real estate markets in 2005, and we've seen it recently in the cryptocurrency markets. When you are investing because you are afraid of missing out on the big gains going on around you, it usually doesn't end well.

After a year like 2017, when it seemed like the stock markets only knew one direction, it didn’t take long for us to be reminded that what goes up, can also go down. In 2018 we have already experienced more volatility in the markets that we did in all of 2017. And with the sudden return of volatility, we’ve also seen an increase in the emotions that can wreak havoc on a long-term financial plan.

We need to keep that volatility in perspective. When the Dow Jones Industrial Average (the Dow) is at 25,000, a 300-point move is only a little over 1%. It’s never been unusual for stock markets to move up or down by 1% in a day. So, while the number looks big, and the media will do everything they can to make it sound big, it’s not that big of a change.

Here’s what normally happens to individual investors: They see the big gains that are going on in the markets and they want in, so they buy; then, when the markets go through a quick and seemingly severe drop, fear kicks in and they sell. Buying high and selling low is not how to make money in the investing world.


We need to accept the fact that we are going to be emotional about our money. We can’t avoid it. Once we know that we can’t avoid the emotions that surround money, we need to learn how to control them. How do we do that? We put a plan in place. Your plan will be different from everyone else’s because you have your own individual goals and circumstances. Your plan should consider your tolerance and capacity for risk, your investment time horizon, and your liquidity or cash flow needs.

But putting a plan in place is only helpful if you have the discipline to stick to it. When the markets are hitting record highs, you must ignore the noise and stick to your plan. And when it seems like the markets are in free fall, you have to ignore those pundits and the headlines and stick to your plan. In fact, if your portfolio is properly diversified, and you rebalance your holdings when market moves affect your allocations, you will be forced to buy low and sell high. And that is how you win at the investment game.

Getting Your Financial House in Order—Part 5: Estate Planning? Oh, Boy!


“I’m excited about doing my estate planning” … said no one … ever. No one likes to talk about estate planning. It’s not something we look forward to. Who wants to talk about death or becoming disabled? Nobody.

Not all of us will face a disability during our lives, but some of us will. And I’m pretty sure that all of us will eventually face death. As we work toward putting our financial house in order(remember that New Year’s resolution we made?), having an updated estate plan in place is an important piece. It’s much easier to have your estate plan in place before something happens than to face the tough and emotional decisions that you might have to make when the doc tells you to make sure your affairs are in order.

Some people think that estate planning is only important for rich people. If you are fortunate enough to be a member of the ultra-high-net-worth segment of society, estate planning is important to make sure that the wealth you want to pass on to your kids and grandkids is not eaten away by taxes. But what about for the rest of us?

Estate planning simply means that we are making decisions about the way we want our affairs handled when/if we no longer can. Wouldn’t it be better for us to make those decisions before something happens than to have someone else have to make them for us afterward? We can put those plans in place now, while we are healthy and of sound mind. That’s much better than forcing a loved one to make them while under emotional stress.


Making sure that you have a solid estate plan in place doesn’t have to be daunting. In most cases, you will need only a few documents. I typically recommend that you visit with a qualified estate planning attorney (not a real estate, criminal, or divorce attorney) to get these documents drafted. It’s not as expensive as you might think, and you can have confidence that it will be done properly.

Below is a brief description of the main documents you will need. Keep in mind that I’m not an attorney (and I don’t play one on TV), so this is not legal advice. My goal is to give you just enough info to get you going in the right direction.

WILL: Most of us need a will, often referred to as a “last will and testament.” This is the legal document that allows you to express your wishes for how your property will be distributed when you pass away. It also serves the purpose of naming the executor of your estate, or the person you want to assume the management of your estate until it is completely distributed. You want that family heirloom or your baseball card collection to go to a specific family member? Here’s where you spell that out. A will is especially important if you have minor children because it’s the document where you would name a guardian for them if something were to happen to you.

TRUST: Not everyone needs a trust. In fact, in my opinion, most people don’t need a trust. A trust can be necessary when you have special circumstances that go beyond what a will can do. A will is subject to probate and the public record. A trust is not. So, if privacy is an important issue, a trust can be helpful. A trust is also helpful when you have a “blended” family or you want to exert some “control from the grave” on how your assets are distributed. For example, you might want to leave your grandchildren some money, but not want to give it to them all at once at a young age. A trust can allow for them to receive distributions from your estate upon reaching a certain age (or ages). There are many different types of trusts. For the purposes of this discussion, I refer to a “living trust,” which you can change up until the time of death, when it becomes irrevocable. Trusts can be very complicated, so I strongly recommend legal guidance when setting one up.

POWER OF ATTORNEY: This is the document that allows you to name the person who will make decisions for you if/when you cannot. This process generally has two parts. You want to name someone who will make your financial decisions and pay your bills if you are unable to. You also want someone who will make your health care decisions in case you can’t. Often it will be the same person, but that’s not a requirement.

LIVING WILL: This document lets family members and medical professionals know your wishes when it comes to the level of care you desire when nearing the end of your life. It’s the document that will detail your desires regarding medical treatment. Most of us remember the drama surrounding the Terri Schiavo case several years ago. Terri was in a vegetative state for many years while her husband and parents battled over whether she should be kept alive using a feeding tube or be allowed to die. If she had a living will in place, the battle would not have occurred.


The documents discussed above are the ones I generally suggest for most people. Keep in mind that they may be named differently or be prepared as combinations, depending on where you live and the attorney you work with. The main thing to remember is that these are decisions that will ultimately have to be made. I contend that it’s better for us to make them ourselves.

As I mentioned earlier, you’re probably not going to be excited to go through the estate planning process. But once you do, you will experience a peace of mind, knowing that it’s done and knowing that you’ve taken the steps to make your financial house that much stronger.

Getting Your Financial House in Order—Part 4: What’s Your Investment Strategy?


It’s almost Valentine’s Day! That means we are about six weeks into the new year. How are you doing with the “Getting Your Financial House in Order” project? So far in this series, we have built a nice foundation for your financial house. First, we focused on getting your saving and spending top of mind. Then we worked on making sure you had a good defense in place, protecting your income and your assets. As we move our way up the financial planning pyramid, our next area of focus is investment planning.

With the recent headline-making activity of the financial markets, it’s a great time to make sure that you have a proper investment strategy in place. It’s important, especially in times of extreme market volatility, to make sure you have a plan that allows you to stick with it when things get tough.

There are two basic approaches that you can use to build an investment strategy. Most advisors—and investors—follow what I call an “active” management style. This is an approach that is based on some type of information that the advisor, or investor, thinks gives them an edge in selecting their investment holdings. They might employ some type of fundamental analysis that is based on corporate earnings, growth projections, economic conditions, etc. Or they may use a form of technical analysis, making their decisions based on the price movements of an investment. Technical analysis usually involves some form of charting.

For our clients, and for our own investment portfolios, we follow a different approach. Our experience and, indeed, the academic evidence show that no one, even the best active managers, can consistently predict what is going to happen in the markets—even with all the fancy tools that are available today.

Instead, we follow what is often referred to as a “passive” investment strategy. That simply means that we don’t try to forecast which investments are going to do well and which ones are not. So, we own them all. We build our portfolios using a globally diversified mix of low-cost funds based on our clients’ risk tolerances and needs—a strategy known as “strategic asset allocation.” That means that we own a mix of stocks and bonds that give us broad exposure to many asset classes (such as U.S. equity and real estate).

Broadly speaking, our portfolios are built with stocks and bonds. Then we go a little deeper. The stock side of our portfolio is made up of:

  • U.S. stocks: From the largest publicly traded U.S. companies to the smallest; not just the Dow 30 or the S&P 500, we own them all.

  • International developed: Large and small companies from across the developed world, giving us exposure to Europe, Australia, and the Far East.

  • International emerging: Large and small companies from the emerging markets around the world; this category gives us exposure to less-developed countries, like the Philippines, Brazil, Mexico, and South Africa. It is important to note that this asset class is very volatile, so we limit our exposure to it.

  • Real estate: These are companies that get their income from rental properties; office building companies, hotels, storage facilities, and retail developers are examples.


The bond side of our portfolio is also diversified. It consists of:

  • Short-term, high-quality: Government and high-quality corporate bonds maturing in three years or less; not just from the U.S.

  • Intermediate-term, high-quality: Similar to our short-term exposure, but these bonds mature in 3–10 years.

  • TIPS(Treasury Inflation-Protected Securities): Basically U.S. government bonds with an inflation rider.

The purpose of diversifying your portfolio is to reduce the overall risk. We are trying to diversify away as much of the risk that is inherent in investing that we can. We are spreading our investment dollars across asset classes that are “non-correlated.” We own stocks because they behave differently than bonds, and international stocks because they behave differently than U.S. companies. Where the riskiest portfolio possible would be holding one stock or one bond, we spread the risk across thousands of different securities. It’s the proverbial “don’t put all of your eggs in one basket” strategy.

It’s important to note that a well-diversified portfolio will not experience all the gains when “the market” is rising, but it also won’t suffer the extreme losses when things go the other way.

Your specific allocation should be based on several factors. You will want to consider your cash needs, time horizon, risk tolerance, risk capacity, and need for risk. Someone with an aggressive portfolio will generally own more stocks than bonds. More conservative portfolios will lean more toward bonds.


It’s important to remember that building an investment portfolio is not a set-it-and-forget-it process. Once you are invested, you need to make sure that the portfolio stays in balance. As asset classes move in and out of favor, you want to make sure that your mix stays true. For example, an investor who had a 60/40 stock-to-bond mix at the beginning of 2017 may have finished the year at 70/30 because of the big rally in stock prices. If not rebalanced, the portfolio would be taking on more risk. A disciplined rebalance strategy will bring the mix back to 60/40 by selling some of the stocks while their price is up and buying some of the bonds while their price is lower. Buying low and selling high is how the investment game is supposed to be played.

We know that we cannot control or predict the markets, so we don’t try. Instead, we work on controlling what we can control. We can control the risk in the portfolio by the asset allocation mix. We work to control the costs of investing by using low-cost vehicles and limiting trading. We also try to control the tax consequences by managing gains and losses as much as possible.

Your financial house is starting to look good. We have your spending and savings squared away. We’ve reviewed your insurance coverages to make sure you have a good defense in place. Now we’ve built a solid investment strategy for your savings. Coming up, we’ll look at your retirement plan, review your estate plan, and do a little tax planning. Keep up the good work!

Getting Your Financial House in Order—Part 3: You Need a Strong Defense

Interesting that we’re talking about a strong defense after a Super Bowl that barely had any …


OK, so here we are, one month into the new year. A new year is a great time to start putting your financial house in order, and this is the third article in the series that is designed to help you do so.

The first article focused on spending and saving. The second discussed how to start protecting your assets. That post offered ideas on protecting against personal risks, like death or disability. This post will offer ideas on protecting your physical assets, like your home, cars, and other physical possessions.

Most of us have had auto and homeowner’s insurance for years, so we have a pretty good idea of how it works. Unfortunately, I have found that most people put their property and casualty policies on autopilot, where they effectively set it and forget it. Clients often tell me that they have been with the same insurance company for 10, 15, 20 years or more. That’s not a good idea for many reasons.


First, it’s going to cost you money. You might think that the insurance companies would do their best to take care of their longtime, loyal customers. But you would be wrong. In fact, they do just the opposite.

When it’s time for premium increases (which seems like every year), they pass along the biggest increases to the clients who have been with them the longest. That’s because they know that you are not shopping around and will just renew without question. Their best rates are often saved for newer policyholders. I’ve heard this referred to as the Loyalty Penalty.

If you’ve been with the same carrier for a few years, shop around when you get your next renewal notice. You may be surprised by how much you can save.

You should also review your policies on a regular basis because of changes in your life. For example, when you are young and don’t own many financial assets, you might carry lower liability limits than when you are older and have more substantial assets to protect.


Not many young couples have a need for the extra liability protection that an umbrella policy offers, but once you have some assets, you don’t want to leave them open to a lawsuit, especially in the litigious world in which we live.

When reviewing your homeowner’s policy, it’s also important to make sure that your coverages are keeping up with the value of your property. As construction costs and the value of your property increase over the years, you want to make sure that your coverage limits are keeping up.

A lot of policies have built-in inflation increases, where the coverage amount will increase each year. You should review to make sure that the policy increases have not outpaced the increases in home value. While it’s important not to be underinsured, you don’t want to be over-insured either.

Here are some other points you should consider when reviewing your property and casualty risks:

  • Check to make sure that your homeowner’s policy includes replacement cost for your personal property. If not, you will have actual cash value coverage. That means that, if you suffer a loss, the insurance company will pay you what the item is worth at the time of loss, not what it would take to replace it.

  • Check your homeowner’s deductible. You don’t want to make small claims against your homeowner’s policy, so bump up your deductible. It will save you money on the premiums you pay.

  • Check your auto policy deductible. I keep my collision deductible higher than most—I’ll only pay it if I’m in an at-fault accident. The way that I look at it is, if the accident is my fault, I’ll pay the penalty of a higher deductible. In the meantime, I’ll benefit from lower premiums.

  • Have you acquired any personal items of considerable value? Items like jewelry, art, and collectibles typically have limits within your policy. You can purchase separate riders to make sure those items are covered.

Make sure to review all your policies—auto, homeowner’s (or renter’s), boat, condo, motorcycle, RV, etc. It won’t take a lot of your time, and it could reap substantial savings. Or it could help prevent big losses when that claim hits. Remember, being successful financially means doing a lot of little things right.

Getting Your Financial House in Order—Part 2: Your Plan for Protection


OK, we’re a month into the new year. How many of your resolutions are you keeping up with? In our last post, we talked about how this was going to be the year that you managed to get your financial house in order. After all, you (we) are not getting any younger.

In the first article in this series, we talked about spending and saving (It’s a New Year—Time to Get Your Financial House in Order). By understanding where you are spending your money and making sure that you are saving for emergencies and for the future, you will have a good foundation in place. The next step is to make sure that you have a good plan for protecting your assets. That will be the topic of this post.

Your plan for protection will depend on what stage of life you are in. A young professional will need a different protection plan than a retiree. That’s because the assets that they need to protect are different. The young professional’s biggest asset is her ability to earn an income. She has more human capital than financial capital. A retiree, on the other hand, has no human capital if he is not working any longer, so his biggest asset is a financial asset. That could be real estate, an investment or retirement account, or a business interest.

You can protect your assets from financial loss by transferring risk. You transfer risk by purchasing insurance. When you buy insurance, the insurance company assumes some of the risk. A good rule of thumb for all insurance decisions is to transfer the risk when the cost of a loss would be devastating. In other words, insure against the big loss. Let’s discuss some of the common risks you might face and how you might put a plan together that is appropriate for your situation.

Loss of Income 


If you are in your working years, your biggest risk is likely to be the loss of income. That risk is compounded when you have others depending on you and your income. There are a few different ways you can lose your income. If you lost your job, your protection plan needs to include the emergency fund that I discussed in my last post. Having a few months of living expenses set aside makes a temporary job loss less of a problem.

What if you get sick or injured? Statistics show that you are much more likely to become disabled than die at certain ages. For example, for a 32-year-old, it is 6 1/2 more times likely you will suffer a disability than die. A long-term illness or injury can wreak havoc on a family’s finances. “Long term” can mean as little as three months.

The way to protect against this risk is to carry disability insurance. You can purchase short-term and long-term disability policies. Short-term disability insurance starts paying 60–70% of your income after being out of work for a few weeks and will generally pay those benefits for three to six months. Long-term disability policies pick up where the short-term policies leave off, usually starting to pay benefits after you’ve been out on disability for three to six months and paying for an extended term. Some policies will pay benefits until you reach age 65.

You can often get a group policy through your employer. You get the benefits of lower premiums through the group, but if/when you leave the employer, you can’t take the disability policy with you. Individual policies are sometimes a bit more expensive, but they are portable.

What about if you were to die? If you were to pass away, your personal need for income goes away. But if you have a family depending on you, the need to replace your income can go on for years. That’s when it gets more complicated. That’s why you should review your life insurance coverage.


Term life insurance can be a very inexpensive way to protect your family against the loss of your income. There are many different types of life insurance, but in most cases, a level premium term policy is the right choice. You can buy the amount of coverage you want, for the term you need, like 10, 20, or 30 years. Many people get their life insurance through their employer. It’s the same as with disability insurance—it might be less expensive because it’s a group plan, but it’s not portable if you were to change jobs.

So, if you are midcareer and have started a family, you’ll want to make sure that you have your emergency fund in place and that you have appropriate life and disability coverage. If you are a retiree, the emergency fund is important, but chances are you might not need life or disability insurance any longer.

In this post we looked at the different ways you could lose your income, and we discussed ways to protect against those risks. In upcoming posts, we’ll discuss some of the other financial risks that you may be facing. We’ll also discuss ways that you can mitigate those risks by putting a solid protection plan in place. We’re getting your financial house in order, step by step.

It’s a New Year—Time to Get Your Financial House in Order


New Year’s resolutions—almost everyone makes them; hardly anyone keeps them. Along with exercising more and eating healthier, getting our financial house in order is one of the most common promises we make to ourselves each year–and one that we continue to break. But this is the year that’s going to change. This post is the first in a series that will give you some ideas on how to finally get it done. Getting your financial house is order doesn’t really need to be so hard. If you do a little heavy lifting and get a few of the basics squared away, the smaller details will be a lot easier. For the next few weeks, these posts will focus on some ideas that will help you with those basics.

Spending and Saving 

One of the first areas that typically need to be addressed is your spending. I understand that nobody likes to budget, so I don’t recommend wasting the time or energy that it would take to set up a budget. However, understanding how much you are spending is an important part of planning for your financial future. If you know what you are spending, you’ll know whether you are living within your means. And if you are living within your means, you are well on your way to building a successful financial life. Knowing how much you are spending will also begin to give you an idea of what you might need to maintain your standard of living in your retirement years.

Getting a handle on your spending doesn’t have to be hard. There are many online tools and apps that can help. Most credit cards companies offer you a chance to categorize your spending, or you can use account aggregators like or Money Center, the tool we provide for our clients. While it helps to see where you are spending your money, an even easier way to know what you are spending is to use a simple calculation. Add up your income and then subtract the amount that you are paying in taxes and the amount that you are saving. The amount that’s left over will be the amount that you are spending. If you need some ideas on how to reduce your spending, here’s an article that can help: “23 Ways to Cut Costs and Save More Every Month.


Once you have an idea of what you are spending, it’s time to address your savings. No doubt you’ve heard the term “Pay yourself first.” It sounds very basic, but it’s very true. The way to build wealth is to make sure you are setting aside money on a regular basis, like from every paycheck.

When it comes to how and where to save, the most important place to start is with your emergency fund. You should build up your cash savings until you have an amount equal to three to six months of your monthly expenses. This is the money you’ll need if/when something unexpected comes up. These funds should be held in a cash savings account, either at your local bank or one of the online banks offering slightly higher interest rates. Knowing that you have enough cash reserves to keep the bills paid in the event of a major home or auto repair, or an interruption in your monthly income, will provide a level of confidence that will allow you to move to the next step of building your financial foundation.

Once you have a solid emergency fund in place, it’s time to address your long-term savings. This is the savings that you’ll need to accomplish some longer-term goals. Maybe you are saving for the down payment on a house or to buy a new car. You build these accounts the same way you built your emergency fund—a little at a time. If you are going to use the money within two or three years, it should stay in cash, in the highest-yielding savings account you can find. You don’t want to subject short-term money to investment risk. It wouldn’t be good to find the house you want to buy in two years and have a decline in the markets reduce the amount available for your down payment.


Finally, we’ll address even longer-term savings. Most of us would like to retire one day. Building a solid retirement account is the best way to make it happen. There are several types of accounts you can use to build your retirement fund. The most popular are individual retirement accounts (IRAs), either traditional or Roth, and employer-based accounts like a 401(k) or 403(b). Most of these accounts are funded through payroll deductions. They are the best way I know of to “pay yourself first.” The rule-of-thumb says that you should contribute 10% of your paycheck into your retirement account, although with our increased life expectancies, that rule could be bumped to 15%. If you are lucky enough to have a 401(k) or other employer-based plan that comes with a match, it’s free money! At the very least, make sure you are putting enough away to take advantage of the full company match. We’ll discuss how to invest those longer-term accounts in an upcoming post.

Taking control of your spending and getting a plan for your short and long-term savings are a couple of solid steps in keeping that resolution to get your financial house in order. More to come next week. For now, I’ve got to eat these vegetables before heading to the gym.

‘Tis the Season: Our Annual Review of Market Predictions Vs. Reality


This is my favorite time of year. Christmas has always been a very special time for me. I have many happy memories of the holiday. These memories go all the way back to when I was a child, they extend through the years when my children were young, and they continue all the way through my Christmas present, when my wife and I celebrate the warmth of the season with extended family and friends.

There’s another reason that this is my favorite time of year. The end of the year is the time when the investment gurus make their predictions for how the economy and the financial markets will perform in the new year. The investment strategy that we use at our firm is based on the belief that no one, even the best and brightest minds in the investment world, can accurately and reliably predict the markets. So, for many years now, I have kept track of those end-of-the-year predictions, and then I look forward to this time of year, when I can compare the predictions with the results.

The year that is about to end, 2017, has been one to remember in the financial markets. The global stock markets have had a remarkable year. It seemed like the news media were reporting on new records in the Dow, the S&P 500, and the Nasdaq almost every day. As of this writing, which is a week before the year ends, the Dow has gained 28% for the year. The S&P 500 is up 22%. The international markets have also been strong. The EAFE Index, which includes Europe, Australia, and the Far East, has gained over 23%, and the emerging markets index, which includes China, India, Turkey, and Latin America, has enjoyed a gain of 34%. On the bond side of the financial markets, it was a bit more subdued, with the US Aggregate Bond Index returning just under 3% for the year.

So, how did our investment gurus do? Once again, they validated our strategy of not trying to play the guessing game with our clients’ money. Here’s an abbreviated report card on how the highest-compensated, best-educated minds in the financial world fared with their predictions:


Vanguard’s Chief Global Economist called for global equities to gain 5–7% for the year. He got the direction right but only missed by 15–20%. He was better with his bond prediction. He called for a 2.25% yield on the 10-Year U.S. Treasury note. It currently sits just below 2.5%. He called for growth in the U.S. economy of 3% for the year and was close. GDP for the third quarter of the year was 3.3%.

Ameriprise’s Chief Market Strategist predicted a return on the S&P 500 of 4.5%. The index actually gained 22%, as noted above.

State Street Global Advisors’ Chief Investment Strategist made three predictions and wasn’t close on any of them. His guess of a 3% gain for U.S. large-company stocks missed the mark. The Large Company index showed a gain of 23%. He was cautious toward international stocks and underweighted his recommendation in Europe and Asia. That index gained 23%, so he didn’t do his clients any favors.

Robert W. Baird, an international investment management firm, predicted that the S&P 500 could reach 2,400. I guess we have to give it to them on this one. The index blasted through 2,400 before the end of May and currently sits just below 2,700.

Byron Wien, the Vice Chairman of Blackstone, one of the world’s largest investment firms, predicted that the S&P 500 “could” top 2,500; that the yield on the 10-year bond would approach 4%; and that oil would stay below $60 per barrel. He underestimated the S&P 500 and missed the yield on the 10-year bond by a mile, but he nailed the oil prediction. Oil prices have stayed below $60 all year and currently sit at $58/barrel.


Bob Doll, the well-known Chief Equity Strategist of Neveen Asset Management, didn’t get either of his major calls right. He predicted that the yield on the 10-year Treasury note would be 3%. As mentioned earlier, it has stayed below 2.5%. Mr. Doll also predicted an end-of-year reading on the S&P 500 of 2,350, a gain of 5%. The index, currently at 2,684, gained 22%.

Nicholas Atkeson and Andrew Houghton, co-founders of US Capital Wealth Management, had the best call among the analysts making their predictions. They predicted that the S&P 500 would gain 12% for the year. That’s the best guess of anyone, but they still missed their mark by almost 50%.

Once again, the financial markets have proven that they are unpredictable by nature. When even the best and the brightest can’t get it right, who can? We don’t think anyone can. A better plan is to follow a diversified, disciplined, low-cost investment strategy. We can help you with that.

But as the year comes to an end, the investment gurus, undaunted by their dismal performances, have already started coming out with their predictions for 2018. But don’t worry, I’m tracking them and will look forward to sharing their results with you again next year.

In the meantime, we wish you and your family all the warmth that is the holiday season and hope that you have a happy and prosperous new year!