Obituary for Common Sense; unknown author

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Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years. No one knows for sure how old he was since his birth records were long ago lost in bureaucratic red tape.

He will be remembered as having cultivated such valuable lessons as knowing when to come in out of the rain, why the early bird gets the worm, why life isn’t always fair, and how, on occasion, maybe it was my fault.

Common Sense lived by simple, sound financial policies (don’t spend more than you earn) and reliable parenting strategies (adults, not children are in charge).

His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a six-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition.

Common Sense lost ground when parents attacked teachers for doing the job they themselves failed to do in disciplining their unruly children. It declined even further when schools were required to get parental consent to administer aspirin, sun lotion or a sticky plaster to a student; but could not inform the parents when a student became pregnant and wanted to have an abortion.

Common Sense lost the will to live as the Ten Commandments became contraband; churches became businesses; and criminals received better treatment than their victims. Common Sense took a beating when you couldn’t defend yourself from a burglar in your own home and the burglar can sue you for assault. 

Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.

Common Sense was preceded in death by his parents, Truth and Trust; his wife, Discretion; his daughter, Responsibility; and his son, Reason. He is survived by three step brothers; I Know my Rights, Someone Else is to Blame, and I’m a Victim. 

Not many attended his funeral because so few realized he was gone. If you still remember him pass this on. If not, join the majority and do nothing.

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Common sense is a basic ability to perceive, understand, and judge things, which is shared by (“common to”) nearly all people and can reasonably be expected of nearly all people without any need for debate.

Our education system gets a failing grade when it comes financial literacy. Everyone should know some basic money lessons like how to budget, the time value of money, implications of too much debt and how credit works.

Making financial decisions and managing  your investments still requires some common sense. You will be successful if you have some.

 

Does Your Debt Die With You?

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My daughter asked me this question while having dinner at her house.  It started with me complaining about how some of my boomer friends were living beyond their means and had mountains of debt. I had to reassure her that we were not in that situation. (It is not uncommon that your family dinner conversations included some financial topics)

I explained that she and her brother had nothing to worry about. Children are not responsible for any debts belonging to their parents.

Generally, the estate pays off debts, as long as there’s enough money in an estate to pay them all off. Any remaining money goes to beneficiaries. There is an order to how debts must be repaid. Funeral expenses, income & estate taxes and secured debts are the top. Unsecured debts, such as credit cards, lines of credit are near the bottom. If the estate does not have enough money to pay back all the debt, creditors are out of luck.

Remember that jewelry, antiques and other valuables must all be added to the total value of the estate. You might be forced to sell some of them in order to pay back creditors. Very important, the executor of the will could be liable if he or she pays money out to the beneficiaries from the estate before all the debts are settled, creditors could make a claim against the executor personally.

Creditors could also go after an individual’s retirement account and proceeds from a life insurance policy if no person is named as beneficiary. Those funds would automatically be included into the total value of the estate. However, in Canada, retirement accounts can to transferred tax-free to the surviving spouse.

Joint ownership or loans that have been co-signed are different. You will be responsible to pay them back. You don’t inherit your parents’ or your children’s debts unless you guaranteed them.

It is very important for young people to check their own credit report periodically to make sure you are not still holding debt for someone who isn’t in your life anymore. Credit cards that you have co-signed years back may still be active and you could be also on the hook for apartment leases even if you moved out.

Estate laws vary depending upon where you live and can be very complex. Get some good legal advice, talk to a tax specialist and pick a knowledgeable executor. You can’t take it with you! However, avoid giving it to the tax man and leave something to your love ones instead.

 

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Bank of Mom & Dad, Cutting the Purse Strings

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It’s natural for parents to want to help and support their children. But should that help continue well into adulthood? By helping too much, parents run the risk of imperiling their own financial future and creating dependence. The reality is that you are not doing the adult kids any favors  by always bailing them out.

The Great Recession rewrote some of the rules of financial independence for many young adults. With jobs being scarce, student debt soaring and high household debt, it wasn’t uncommon for grown children to take refuge in their childhood homes.

Those were unusual circumstances when even hardworking children found themselves in financial straits. It is okay to help them if they are financially responsible but have fallen on hard times. However, an “open wallet” policy is dangerous for parents as well as children. Always coming to their rescue can jeopardize both your child’s drive and your retirement security.

Tough Love: Teaching Financial Responsibility

The best defense against dependent children is increasing financial responsibility as children grow. You need to start the process when your children are young. Counting on the school system or waiting until after they graduate college can be a costly mistake.

I strongly recommend pushing your young children to get part-time jobs. If they are driving the family car, make them pay for some gas or a portion of the car insurance. Paying for some or all of their cell phone bill is another way to teach financial responsibility. Avoid always acting as their personal taxi service, make them take public transportation once in a while.

My son never wanted to use the family van when going out with his friends while living at home. Going away to university, he spent two years taking public transportation, that experience really changed his attitude. He was so grateful that I gave him our 10-year-old van instead of trading it in.

It’s okay to say no! My eight year old daughter asked for horseback riding lessons. I honestly didn’t take her request seriously. I said that riding lessons are expensive and we didn’t have the money right now. She came back with the job section of our local newspaper. She pointed to an ad that was looking for delivery people. “Is this enough money to pay for riding lessons”? It wasn’t but we said yes to riding if she was willing to give us half her earnings from the paper route. (We invested her money and gave it back when she graduated from university).

The Right Kind of Help

  1. If your children need a car to get to work, consider giving them an old family car that is still reliable. A few repair bills can teach them some added responsibility and give them an incentive to save for a new car.
  2. If your children are paying a high rate of non-deductible interest on their student loans, loaning them money at a lower rate of interest can be helpful. Put all the details of the loan in writing and make sure that your children make regular monthly payments to you.
  3. Some assistance with a down payment for a house is okay as long as your children are willing to disclose their financial situation. Bank of Mom & Dad should ask the same questions as your local banker. Are they paying off their credit card balances every month? What are their fixed monthly debt payments? Add the estimated mortgage payments, property taxes and heating costs to those payments, if it exceed 40% of their gross income then they probably can’t afford to buy the house.
  4. Help your children save for retirement. Deposit money directly into a retirement account that generates a tax refund. The refund gives them a little extra cash but the compounding effect from investing the money early can increase the chances of a successful retirement.
  5. Some children will never be financially responsible, skip a generation and open an education plan for your grandchildren.

As a financial advisor, I encountered financial mistakes made by some of my wealthier clients. For example; a client  gave his newlywed daughter and son-in-law enough money for the entire down payment for a house.  Three years later, they got divorced and the ex-husband walked away with half the proceeds from selling the house including half of the Dad’s down payment.

As a parent, you need to protect yourself, get some legal advice when transferring large sums of money.

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Gifts vs. Loans

For U.S. citizens there is a gift tax on sums greater than $14,000 or $28,000 per couple. In Canada, there isn’t a gift tax on money given to adult children. However, transferring investments or property to your children can trigger capital gains tax which must be claim on your tax return. Be extra careful transferring investments to a minor, the parent incurs tax on any interest or dividend income from those investments until the minor turns eighteen.

Be aware that the tax man requires a minimum interest rate charge to loans made to family members. The interest rate varies from year to year. The current rate for Canadian families is only 1% with no time restriction regarding payback.

However, Internal Revenue Service rules are different, in March the Applicable Federal Rate was 0.40 percent for loans up to three years, 1.47 percent for loans of three to nine years and 2.19 percent for loans longer than that. If your children don’t pay it back, it becomes a gift.

Keep in mind that a child in their 30s or 40s has lots of options for generating income; a retiree does not.

Money & Life Lessons from My Immigrant Father

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In honour of Father’s Day, this post is dedicated to my father who left this earth way too soon. You may find some of these money lessons in this post out dated but I hope that it will  inspire you to make some positive changes in your life.

The first life lesson that I learned from my Italian father is “Life is not fair!” In 1939, my father was forced to serve in a war that he didn’t believe in. He was only 18 years old at that time and was lucky to have survived. He rarely talked about his war experiences except that he ate potato peels that he found in the garage because he was so hungry.

Life after the war in Italy must have been horrific for my father to come to Canada, leaving his pregnant wife to earn some money. I can’t imagine going to another country with no marketable skills and not being able to even speak the language. He found that the streets of Toronto were not paved in gold. Two years later, my mother & I left Italy with only a suitcase and a few dollars in our pockets. A whole new meaning to “Desperate times requires desperate measures!”

I am amazed that within four years my parents who were illiterate, with no education, manage to save enough money to buy a house. They earned extra income by renting a portion of our house for many years to assist with the mortgage payments. My mother used her sewing skills to earn extra money making bridesmaid and wedding dresses.

As a kid, I never played in the backyard because it was turned into a vegetable and herb garden. It never occurred to me how much that garden help reduced our family’s grocery bill until much later in life.

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Homemade food products that also reduced the grocery bill:

  • Pasta sauce – we still make a year’s supply of pasta sauce every September
  • Pasta – my mother’s ravioli & cannelloni would make even top chefs envious
  • Pizza dough / pizza
  • Cured meats – ham, bacon, salami …etc.
  • Sausages
  • Wine & sometimes vinegar
  • Preservatives – jam, peaches, peppers, pickles…etc.

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My father had a background in farming back in Italy and would often purchase some meats directly from local farmers to save money. Chickens, rabbits, pigeons and quails found their way into a large chest freezer and later on to our dinner table. For years, my father raised his own rabbits in the garage. (Rabbit is still one of my favourite meals)

Other ways that my father saved money:

  • Avoided eating out, told people that restaurant food made him sick
  • Always took a bag lunch to work – thermoses full of leftovers & coffee – ate by himself to avoid ridicule from his co-workers
  • Paid cash – never own a credit card
  • Rarely borrowed money – only from family and always paid them back
  • Car pooled to work
  • No pets, in his opinion, a total waste of money
  • Restricted vacations to going back to Italy to visit family
  • Limited his entertainment to visiting friends & relatives (plus weddings of course)

When I was in high school, my father got me a high paying summer job at the industrial plant where he worked. He stressed that doing the most boring, dirty and repetitive jobs well would guarantee that I would get rehired next summer. Following his advice, I ended up working at the same plant all through high school and university, graduating debt free. (After three summers, I was put in charge of an all student afternoon shift)

My father taught me that it is easy to excel in jobs that you enjoy but surpassing expectations doing lousy jobs can have its benefits. In my opinion, the real irony was the work experience from my summer job was more valuable in running my own small business than my university education. An argument that I never won with my father even after his plant shut down and he had to come to work for me. “You will always have that piece of paper to fall back on!”

Considering that my father was a teen during the Great Depression and then drafted into World War II, he enjoyed the simple things in life to the fullest. Despite all his hardships, he was proud to own the roof over his head. He really enjoyed sharing a home cooked meal with his friends, along with a glass or two of  his homemade wine. To honour all the sacrifices that he made, I followed a old Italian tradition and named my son after him.

wine   Salute Papa!

 

HAPPY FATHER’S DAY

 

 

The Power of Negative Thinking

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Love is blind is an adage often used for someone who is in love but cannot see any faults in the other person. It can also apply to investments. Keeping emotions out of your investment decisions is easier said than done.

Falling in love with certain stocks or sectors is a common mistake made by the average investor. Being overly optimistic or hoping that a losing position will regain its original purchase value can damage your investment returns.

Negative Thinking Can help you Avoid:

Bottom Fishing

Investing in stocks that are cheap because of a problem with the company or the economy. A bottom-fishing investor speculates that the stock’s depressed price is temporary, will recover and make for a profitable investment. Bottom fishing is a risky strategy because the company’s stock price is depressed for a reason and may not bounce back.

Value Trap

A stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period. Stock traps attract investors who are looking for a bargain because these stocks are inexpensive. The trap springs when investors buy into the company at low prices and the stock never improves.

Dollar-Cost Averaging

The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.  I found averaging down on a losing position will result in losing even more money. (Averaging up on a winning position is a much better strategy)

Don’t Catch a Falling Knife

Most people just can’t resist a good bargain. But the stock market works in a different way. Stocks that seem high in price tend to go even higher. Stocks that fall usually go lower. Buying a falling stock can have the same effect as trying to catch a falling knife: You’ll get hurt, almost every time!

Dead Cat Bounce

A dead cat bounce is a price pattern used by technical analysts. It is considered a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but is quickly followed by a continuation of the downward price move.

Pigs get Fat, Hogs get Slaughtered

The market can punish greed through unreasonable expectations. An investor who is doing well might expect to do even better in the future ignoring reversion to the mean. This may cause the investor to hold onto stocks past the optimal time to sell them or overpay for new holdings. This mistake commonly occurs in market bubbles.

Cockroach Theory

A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative news that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that are many more that remain hidden.

A Rising Tide Lifts all Boats or Even Turkeys Fly in a Strong Wind

Two old stock market clichés that says, all stocks tend to go up when the market has a large powerful upward move. Although there is an element of truth in this, many stocks were left behind in the second quarter of 2009.

Buy on Rumour, Sell on News

You often see stocks rise in the lead-up to earnings announcement, only to fall immediately after the good news has been revealed. This is because savvy investors will buy stocks on the first sniff of good news and then take profits once the news has been released. (I believe that information is often leaked to the business media ahead of time)

Ever wonder why advice from parents or grandparents tends to lean more on pointing out the negative side of things?Does wisdom come from age or do past experiences with making bad decisions make older people more cautious?

The real power of negative thinking is being objective and putting equal weight to the pros & cons to your decision-making process. It shouldn’t stop you from taking risks but it should prepare you for things that could go wrong. For example: I started my own business knowing that 80% of Canadian small businesses fail within the first 5 years. I put money aside to cover six months of living expenses and updated my resume just in case. 

Part 1: Are U.S. Millennials Destined to be Worse Off Than Their Parents?

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Millennials are the second largest age group surpassed only by their boomer parents. The road a head is anything but smooth.  Millennials, born in the early 1980s, entered adulthood just as the dotcom bubble burst and terrorists took down the World Trade Center. Just a few years later the housing market crashed and the country plunged into the Great Recession. Even the youngest Millennials are entering a job market that is still recovering.

More than 70 percent of students leave college with school debt and the average loan balance is growing. The class of 2014 graduated with the most debt in history estimated at $33,000 per student and this year’s graduating class is on track to top that. Millions of college graduates are facing big loan payments and it may feel like the end is nowhere in sight.

A new study finds that Millennials, who will dominate the U.S. labor market, may face another problem. They’re less prepared for today’s job market than many of their international peers, putting them at a distinct disadvantage in an increasingly global economy.

A recent report by the Educational Testing Service (ETS) examined data from the Programme for the International Assessment of Adult Competencies (PIACC), which showed that American Millennials are badly lagging behind in numeracy, literacy and problem-solving skills. The study shows that even the top-performing Millennials are not measuring up to their counterparts overseas.

“We did not do well across the board in all three of the skills that we looked into, particularly in numeracy,” said Madeline Goodman, director of research at the ETS and one of the study’s co-authors, adding that the report presents troubling implications for the future of American competiveness.

Nearly two-thirds of Millennials scored below the minimum standard in math. “If these individuals are going to be trained for jobs that have remuneration … then they need to have basic skill level” she said.

Among the 22 participating countries, U.S Millennials 18 to 34 years old ranked 21st in numeracy — only Spanish Millennials had lower scores. In literacy, half scored below the minimum proficiency level, ahead of only Spain and Italy. For problem solving in technology-rich environments, 56 percent of American Millennials met the minimum standards, behind every other nation.

One of the central paradoxes of the ETS study is that the millennial generation is the most educated and the study’s authors make the case that many post-secondary institutions are not adequately providing students with the skills necessary to be successful in the job market. The skills from a liberal arts / general studies grads are not marketable.  Another problem facing Millennials is their baby boomer parents are postponing retirement, working longer because of lack of retirement savings, which limits older Millennials  access to higher paying jobs.

One-third of employers said they plan to offer higher pay than last year, according to a new CareerBuilder.com survey of 2,175 hiring managers. While 26 percent said they plan to offer salaries under $30,000, another 26 percent said they do plan to offer at least $50,000. (Certified nursing assistants, teaching assistants and bank tellers are among the worst-paying entry level jobs, according to an analysis by Wallethub.)

 

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“Millennials are facing strong headwinds in securing satisfactory careers,” said Peter Miller, certified financial planner and president of Zoe Wealth Management in Charlotte, N.C. They’re also entering the workforce at a time when pensions are fading away, and unlike their parents, they’re wary of depending on Social Security payments to cover expenses later in life, he said.

Their pessimism has prompted many to start saving earlier and to participate more in their retirement savings accounts than baby boomers did at their age. Millennials have been less inclined to take on consumer debt, perhaps because many have seen their parents struggling with massive debt loads. It is difficult to take on more debt when they are already carrying the burden of large student loan debt.

Millennial investors have trust issues even though the stock market is booming and the economy continues to grow, the 2008 financial crisis is having a lingering effect on many young adults’ willingness to take risks. They have seen the executives of major banks continue to receive eight-figure salaries and bonuses even as they were belittled before Congress for causing a worldwide financial crisis. Millennials have avoided putting money into the stock market after watching what happened to their parents’ retirement portfolios in 2008.

They are equally wary of financial advice from the mainstream media and traditional “experts.” Millennials are more likely to form opinions based on what they hear from friends, social networks and their own research. They want tutorials and an interactive website with links, videos and smartphone-capability. They’ll consider all the information in making their determination.

A Bankrate  report showed that Americans age 18 to 29 are more likely to choose cash as their favorite long-term investment over any other age group. In fact, 39 percent said cash was their preferred way to invest money not needed for 10 years or longer.

No surprise that Millennials have been forced to delay moving out from their parent’s homes. They are not getting married or starting a family until much later than their baby boomer parents. They are avoiding  home ownership due to their inability to save enough for a down payment.

Canadian Millennials face the same challenges as their U.S. counter parts. Their student debt load maybe a little less based on provincial differences in tuition fees and living expenses.                   ($20,000 – $27,000)

Why should you care if  Millennials are delaying adulthood? A recovery in housing depends on first time home buyers. Your house in the suburbs may take longer to sell and sell for less. If you invest in  stocks, lower retail sales and slower wage growth could lead to years of below normal economic growth. Slower growth means future  stock market returns could be in the single digits.

Ignoring the “ME” Generation could be hazardous to your financial well-being.

Next Post

 Part II : Top Ten Stocks Owned by Millennials

 

 

 

 

Are you a financial wizard?

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I am a big fan of Harry Potter, if you haven’t read the books or seen the movies then this post will be very confusing. Sometimes my kids think that I am a wizard when it comes to money. It seems that I just have to wave my magic wand and money appears. I wish it was that easy.

I believe that behavioural phycology plays a bigger role than analytical skills in successful investing. What kind of financial wizard are you?

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Ron can be scared and confused sometimes when it comes to investing. He wants to invest, he knows that he should! He comes from a family of very good investors which intimates him. There are periods that his investments aren’t very good but every so often he does comes up with a brilliant investment idea.

 

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Harry is a bold and reckless investor. He jumps in without thinking. Even when he does make an investment plan, something always goes wrong. He has a lot of natural talent but most of his successes comes from just blind luck. Without the aid of his investing friends, he would have lost everything.

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Snape is a market timer and sometimes a day trader. He thinks he is smarter than the whole market. He can invest for the  long-term or short sell the market. He gets in and gets out of the market numerous times but ends up losing everything. (Snape could also represent the mind set of Hedge fund managers)

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Dumbledore is an overconfident and arrogant type investor. Although, he is very knowledgeable and a seasoned investor, he refuses to get any advice. He makes many mistakes which eventually destroys his portfolio.

 

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Hermione is a hard-working, dedicated and insightful investor. She comes from a non-investing family but that doesn’t discourage her from being the best in her class. She is always doing research and see things that others miss. She is always prepare and reacts well to pressure. She not only invests wisely, she knows how to protect her portfolio and gets excellent investment results.

 

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These people look like they all work on Wall Street?

 

When it comes to making investment decisions, does gender play a role? There are some interesting theories and studies available. I found these two thought-provoking:

“A six-year study by two professors, Brad Barber and Terrance Odean, found that men trade 45% more than women, and it reduces their net returns by 2.65 percentage points per year as opposed to 1.72 percentage points for women. The study involved using account data for over 35,000 households from a large discount brokerage.”

“There are three significant ways in which men and women differ on financial decisions, as described in a new analysis by Nelli Oster, director and investment strategist at BlackRock. “Several studies, including a national survey by LPL Financial, show that women tend to research investments in depth before making portfolio decisions, and the process, as a result, tends to take more time,” explained Oster. “Women also tend to be more patient as investors and consult their advisors before adjusting their portfolio positioning, whereas men are more prone to market timing impulses. To gather information, women often prefer group discussions to men’s more independent learning approach.”

What do you think, does gender play a role in making investment decisions? Which fictional character above defines your investment decision making process?