Looking at Your Account Values Too Often?

Michael D. Lam, Senior Editor for Horsesmouth, wrote an interesting article entitled, “A Painful Example of Short-Term Thinking.”  In it, he reviews and summarizes a new book, Fooled by Randomness – The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb.

Lam believes that investors who pore over their portfolios every instant are only hurting themselves. Too much scrutiny causes investors to mistake volatility for returns – or, to use the language of communications theory – to confuse noise with information.

As a hypothetical example of how and why this happens, imagine a retired investor who spends his time tending his nest egg. Assume two things about the performance of his portfolio:

  1. He can expect a rate of return of 10% in excess of Treasury Bills.
  2. Annually, returns will vary by 8% from this average.

So by definition, over the long-term, the return should average 10%, but there will be years when the return actually dips to 2%. In fact, under extreme conditions (see returns for 2000 and 2001) the return could dip another 8% to -6%. So, even though the long-term return is 10%, the swings from year to year can be considerable.

The problem is, for short-term thinkers, randomness has some unexpected and somewhat shocking results. According to Lam’s article, if the investor looks at his investments every day, he’ll see a loss slightly less than half the time. If he reads only his monthly statements, however, he’ll be pleasantly surprised two-thirds of the time. And, if he calculates his net worth only once a year, he’ll be pleasantly surprised 19 out of 20 times.

If you consider that the pain of loss is more deeply felt than the thrill of equivalent gains (by 2 to 2.5 times), psychologists note our investor’s high frequency review of his accounts would prove painful.

The moral of the story is to stay disciplined.  Resist the lure of short-term thinking, which results in an over-investment of time, attention, and analysis in what is at best, strictly meaningless, or at worst, very detrimental to your portfolios.

Sending Your Children the Right Money Message?

In difficult times, what message are you sending to your children?

Even though some parents can still afford luxuries, no one wants to send the wrong signals to their children and friends in a struggling economy.  Many people are not making ostentatious purchases, such as a high priced luxury vehicle.  Instead they are driving their car another year, and not taking the expensive vacation.

What information do you give your children about your finances?

Being a parent is all about walking the fine lines, and there is no finer line than the one between informing and scaring your children.

In these troubling times, sparing your kids the “money talk” is no longer an option.

We do, however, have to watch what we say and how we act.  “It is important that you be calm and reassuring,” says Jon Gallo, co-author of The Financially Intelligent Parent.

“Whether you lost your job or half of their college fund, younger kids take what their parents say quite literally.  If you say, ‘We don’t have any money,’ or ‘We are going to be broke next week,’ unless it happens to be true, the kids are going to think it is true,” Gallo adds.

Also, listen to your kids.  Ask them what they think and what is concerning them. Then, accept their feelings and empathize with them.

Next, ask them to help out.  Gallo recommends enlisting your kids as part of the solution.  Ask them for ideas on how you might be able to save money.  Consider having a regular “family money night.”  Instead of feeling deprived, getting the kids involved gives them the feeling they are helping with the solution and that they are participants.

Lastly, try to keep the situation in perspective. “If you are making less money, you are not necessarily losing your home. If you are losing your home, you don’t have cancer. The world is not ending,” says Gallo.  “No matter how bad it gets, there are other people in worse shape than you are… try to help them. There are always people out there who need help, and the greatest way to make yourself feel good is to help other people,” he adds.

Gallo strongly recommends the website VolunteerMatch.org, which posts opportunities for hands-on involvement. You can input your zip code and sort opportunities by categories such as children, teens, seniors, or community.

It is a great way to build family unity and help other people.

And, that is a great message to send to your children.

The W’s In Your Will

We can all remember our English teachers explaining the uses and benefits of the “W” questions when writing: Who, What, When, Where, Why and How. These questions still periodically come up at critical points in our lives. Who should I marry? What should I study at college? When can I retire? Where do babies come from? Why does my daughter need such an expensive wedding?  How did I get so old?
The “W” questions are particularly important when it comes to your will. Who will I leave my assets to? What will I leave for the people I love? When will it become available after my passing? Where will I store my will? Why am I making these decisions, and am I being fair to my heirs?
Then come the all-important “how” questions. When it comes to wills, these are the ones that don’t get asked frequently enough:
“How come?”
“How often?”
Sometimes we might ask these questions when creatinga will, but not when updating it.  But keeping your will up-to-date is as important as creating it in the first place—otherwise, it might not truly reflect your wishes.  So the next time you update your will, consider these “how” questions first:
“How come?” Legally the executor of your will is obligated to follow your written instructions. What might this mean? If your will states that your assets should go to your spouse; then that’s where they will go. Easy enough. But what if you’re divorced and you haven’t updated your will? Well, your assets will go to your ex. And what if you re-marry? Surely, you would think, the courts will recognize that you want your current spouse to receive your assets. They won’t; unless you’ve updated your will. Another common situation is when your spouse passes away. Many people would assume that their assets would immediately pass to their children. Not necessarily. You need it in writing. You don’t want your children, spouse, or grandchildren to not receive what you worked so hard to leave them. But there is a simple solution: updating your will.
“How often?” Anytime you’ve gone through a change-of-life event, you’ll want to make sure that those written instructions, i.e. your will, is up to date with your wishes. I’ve already addressed what a change in marital status might mean. But there are many other circumstances you’ll want to consider. You may have sold a house or some other asset that you would like to include or remove from your will.
I often talk with people who haven’t had a recent life altering event or transaction take place. If you fall into this category I would still encourage you to review and update your will. A general rule of thumb is that you should review your will with a professional at least once every five years. This is done because we change as people. What seemed important five years ago might seem very trivial today; your heirs and their needs may have changed as well.
Many people avoid this process because it can be uncomfortable to address end of life issues. However, doing so can save your loved ones untold amounts of grief. Far too often I hear or read about a family who is dealing with the probate process, or squabbling heirs. This is not only financially stressful, but more importantly it is emotionally stressful. They are forced into a situation where they are required to continually revisit the personal loss of a loved one, prolonging an already difficult healing process.
If you have not recently reviewed your will, please give me a call at 215-886-2122.  I can help you review your assets and make sure that your wishes will be carried out the way you want. I can also help you structure your estate to protect your assets and prevent unnecessary taxes. There is peace of mind in knowing that you have your affairs in order and that you can leave a legacy for your loved ones, not an unnecessary source of stress.