2nd Anniversary of Smart Money: Lucky number 2

In sports, no one cares who came in second. The number 2 rating of a stock is a buy. There are two sides in investing, you can be either bullish or bearish.  Number 2 in Chinese Culture is an auspicious number because Chinese people believe that good things come in pairs.

“The symbolic meaning of number Two is kindness, balance, tact, equalization, and duality. The number Two reflects a quiet power of judgment, and the need for planning. Two beckons us to choose. The spiritual meaning of number Two also deals with exchanges made with others, partnerships (both in harmony and rivalry), and communication.

2 number

What is the 2nd best investment that you can make?  The number two  investment really depends upon your age, where you live, your risk tolerance, your income level, your time horizon and your family situation. The number two investment choice for someone in their 20’s could be paying down debt. For someone in their 30’s, it could be buying a house.  For a high income earner, it could be maximizing their contributions into their retirement account. For someone who lost their job, it could be starting a small business.

So what is number one?  My answer is YOURSELF because our education system gets a failing grade regarding financial literacy. All these choices requires some financial knowledge and some basic math skills in order to be successful. I was shocked at the results of a recent financial literacy test.

Would You Pass the Global Financial Literacy Test?

Question 1: Suppose you need to borrow 100 U.S. dollars. Which is the lower amount to pay back: 105 U.S. dollars or 100 U.S. dollars plus three percent

Question 2: Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today

Question 3: Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?

Question 4: Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?

Question 5: Suppose you had 100 U.S. dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? (a) $150 (b) more than $150 (c) less than $150

 

literacy

Highlights of the survey:

  • The U.S. lags behind other major English-speaking economies in its percentage of financially literate citizens. Citizens of Canada and the United Kingdom beat the U.S.
  • Only 35 percent of respondents around the world got the right answer to Question 3.
  • Many homeowners can’t calculate the basic interest owed on their loan payments. About a third of adults in the U.S. have an outstanding housing loan; three in 10 don’t understand how their debt accumulates.

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Answers to the literacy test

  1. 100 U.S. dollars plus three percent
  2. the same
  3. put your money into multiple businesses or investments
  4. more money in the second year
  5. (b) more than $150

Some may argue that personal financial literacy isn’t the number one investment because you can always pay a professional. I would agree if you are lucky enough to select a good one. In twenty years of running a small business, I changed accountants three times. I changed stock brokers countless times until I became a do it yourself investor. I have dealings with three different banks to meet all my financial needs. Plus selecting the right professional still takes some financial knowledge, the ability to understand the advice and act on it.

In reality, the first and best investment that you should make is in educating yourself. Did you get take the financial literacy test and did you answer all five correctly?

Moms rule and Dads drool: Happy Father’s Day

Sorry dads, but more money is spent on Mother’s Day than Father’s Day. The National Retail Federation expects Father’s Day spending to reach $12.7 billion. That sounds like a lot of money, but it doesn’t stack up to what was spent on Mother’s Day: $21.2 billion. There are a number of factors that contribute to making Father’s Day a lesser commercial holiday when compared to Mother’s Day.

Let’s face it, the majority of Moms prepare the family meals, so it is easy for restaurants to promote giving Mom a break from cooking by offering a Sunday brunch special. I asked the food & beverage manager at my golf club why they did not offer a Sunday brunch for Father’s Day. Her answer; “We tried it but had to cancelled due to lack of interest”. By the way, the mother’s day brunch is sold out every year.

Father’s day spending is now competing with Memorial Day, graduation and of course, June is prevalent for weddings. It is easy for children to justify spending less on dad who is laid back enough to be okay with receiving a smaller gift. Plus buying for Dad is tricky: Mom is probably going to appreciate flowers and chocolate more than Dad is going to dig his Daffy Duck novelty tie.

The most popular Father’s Day gift: quality time, it costs nothing.

father day

 

But Dads do matter: they really have an important role to play

Human beings are social animals and we learn by modeling behavior. In fact, all primates learn how to survive and function successfully in the world through social imitation. Those early patterns of interaction are all children know. It is those patterns that effect how they feel about themselves and how they develop.

Fathers are central to the emotional well-being of their children; they are capable caretakers and disciplinarians. Children who are well-bonded and loved by involved fathers, tend to have less behavioral problems, and are somewhat protected against alcohol and drug abuse.

Studies show that if your child’s father is affectionate, supportive, and involved, he can contribute greatly to your child’s cognitive, language, and social development, as well as academic achievement, a strong inner core resource, sense of well-being, good self-esteem, and authenticity.

How fathers influence our relationships.

Girls will look for men who hold the patterns of good old dad. If father was kind, loving, and gentle, they will reach for those characteristics in men. Girls will look for, in others, what they have experienced and become familiar with in childhood. Because they’ve gotten used to those familial and historic behavioral patterns, they think that they can handle them in relationships.

Boys on the other hand, will model themselves after their fathers. They will look for their father’s approval in everything they do, and copy those behaviors that they recognize as both successful and familiar. Thus, if dad was abusive, controlling, and dominating, those will be the patterns that their sons will imitate and emulate. However, if father is loving, kind, supportive, and protective, boys will want to be that.

As a father of two, a boy and a girl, I have accepted the fact that Moms will get a lot more attention than Dads. It doesn’t mean that your children love you less. Your reward comes from knowing that your sons or daughters will be successful academically, become well-adjusted members of society, be in loving relationships and have good careers. Hopefully, they will eventually become good parents.

This post is dedicated to my Dad who was done too soon and to my son who has begun his journey as a great Dad.

 

 

 

How to Make Volatility Your Friend

2-doors

This article was written by Joshua M. Brown

I am on vacation.

Here are two doors you can walk through:

Door number one – you spend 15 years putting $1000 into an investment every month, with the possibility of seeing that investment get cut in half twice.

Door number two – you spend 15 years putting $1000 into an investment every month, with the same annual performance of what’s behind door number one, but no drawdowns.

Which would you choose?

On the surface, you’d choose door number two. Of course you would, who wouldn’t?

But it’s the wrong choice. The trick here is to remember that you’re adding to the investment at a rate of $1000 per month. That’s when you realize that door number one, with its twin 50% crashes, is the better option.

It’s the harder choice to live with, of course, but that’s what the money’s for. Had you done this over the disappointing period for stock returns between 2000-2014, you would have lots of money to show for your troubles. Much more money than had you chosen the steadier option.

Eric Nelson at Servo Wealth explains how this is possible, by looking at an investor who chose to buy $1000 worth of the S&P 500 each month over the 15-year period versus the investor who chose to buy the more stable Vanguard Short Term Bond Index.

Despite only saving $180,000 cumulatively, your total ending portfolio value was $352,202—twice as much as you saved—for a rate of return on your contributions of +8.5% per year!     How can this be?  The S&P 500 only averaged +4.1%.  But not all of your savings averaged 4%.  Some money went in after 2001 and 2002 and 2008 and 2011 when shares were extremely depressed and subsequently earned returns of +12%, +15% and +20% or more…

We can see the opposite effect when we observe the outcome of dollar-cost-averaging the same amount into the low-risk bond fund.  Remember, it had the same annual compound return over the 15-year period.  But the amount of accumulated wealth was only $228,294, almost $130,000 less than what you netted from the S&P 500.

Josh here – The magical part is that the two investment choices both did around 4.1% annually on average. But by taking advantage of the short-term declines – systematically (which is the key) – investors can learn to embrace the volatility that ends up punishing some, but rewarding others with higher than average returns.

Conditioning yourself to love drawdowns is not easy – and the more money you have at risk, the harder it is. Younger people with 401(k) plans and newer brokerage accounts can use the power of DCA (dollar cost-averaging) – this is one critical advantage they have over their parents and grandparents. If they take advantage of it, the magic of compounding doesn’t take very long to appear.

Don’t flee from volatility, understand how it helps you and make it your friend.

joshuambrown

He is a New York City-based financial advisor at Ritholtz Wealth Management. He helps people invest and manages portfolios for them. You can also find him on CNBC’s “Fast Money” show.

In my humble opinion, you can even get more bang for your monthly investment plan by putting your money to work on days that the stock market is down 1.5% or more.

Disclaimer – Past performance is not a guarantee of future results. This content is provided for informational purposes only! It is not to be viewed as a recommendation or endorsement of any particular security, products, or services. 

 

 

My 100th Post: If Money doesn’t buy Happiness, than you are spending it Wrong

sad-face-plus-money-equal-happy-face

I wouldn’t have worked as a financial advisor or be writing a financial blog if I didn’t believe that most people have a happiness number.  Your happiness number will be adjusted over time based on changes in your lifestyle choices.

You don’t need a degree in psychology to recognize that happiness is a state of mind. I have to admit that after a modest level of income, there isn’t really any evidence to suggest that people’s happiness increases with their wealth.  Money is not going to turn an unhappy life into a happy one. Some people are unhappy no matter how much money they have. However, I have also seen where spending money that you don’t have can turn a happy life into an unhappy one. Whether you are loving life or hating it, I do believe that it could really depend opon how you are spending your money!

“I’ve been rich and I’ve been poor. Rich is better.” This insightful bit of personal financial wisdom has been credited to entertainer Sophie Tucker, comedian Joe E. Lewis, comedienne Fanny Brice, actress Mae West and many others.

Some tips on buying some happiness:

Tip 1 – Buy experiences instead of things

Who we are as individuals is the sum of our experiences not the sum of our possessions. The joy of buying something new tends to deteriorate over time but creating memories last a lifetime. Sharing those experiences with family or friends can make you even happier.

Tip 2 – Many small pleasures might be better than a few big ones

Will you be happier saving money for a big-ticket item like a luxury car or indulging in small things like going to a spa or out to dinner with friends. You may be surprised at how many small pleasures can add up to a happier lifestyle.

Tip 3 – Spend on others and not yourself

There is a lot of merit to the saying “it is better to give than receive” The holiday season is just around the corner. Isn’t seeing the reaction of family & friends opening a gift that is thoughtful and unexpected, priceless?

Tip 4 – Rent a dose of happiness

You can enjoy something without having to own it. Rent a cabin hideaway if you enjoy the great outdoors. If you love the thrill of driving a luxury sports car, rent one occasionally or sign up for a weekend racing experience.

Tip 5 – Before you buy think about all the downsides

Often people buy with rosy colored glasses, they only see the good buying points and forget all the shortcomings. For example; some people think that owning a truck and a large trailer would be a great way to see the countryside. What they don’t see is having loud neighbours at camp sites, buzzing insects, traffic jams and vehicle breakdowns. Happiness is often in the small details.

 

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During my career as a financial advisor, I helped many clients find their happiness number. For some it was buying their first home, for others it was seeing their children graduate or get married will little or no debt. In my own case, my happiness number allowed me to retire early and spend more time with family & friends.

I am very fortunate to go south every November to play golf with my buds. We started 13 years ago with a total of 8 golfers, we now have 20 and there is a waiting list to join our group. We have so much fun that one of my house mates made a surprise comment. ” I would have to be on my death bed,  for me to miss this golfing trip” (Money well spent!!!)

When you think about it, money has no real value except that it can be exchanged for goods & services that we need and want. In my humble opinion, the whole purpose of having wealth is to use it as a tool to create a life you desire, enhance the lives of people you care about and hopefully leave a legacy that you are passionate about.

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