Financial Planning for Life

My wife and I were on vacation in Tofino, in the rain forest on Vancouver Island, British Columbia, several years ago. Our host at the bed-and-breakfast supplied us with heavy-duty rain gear. He said, and I will never forget it, "There is no such thing as bad weather, there is only inappropriate clothing." With the right clothing, we were fine, thank-you-very-much. When we recently went on a self-guided walking tour of the Cotswalds (in England), we brought our rain gear to be prepared for the frequent rains which keep the countryside green. It rained, and we were fine there, too.

Rain and bad weather happen. They are normal. Without them we would have only desert. Effectively dealing with variable weather conditions means being prepared.

Downturns in the markets and economy are also normal. The economy cannot grow effectively without a business cycle, which includes both sunny periods and times of rain. A single individual can control the economy no better than the weather. And an individual has only very limited capabilities even to predict either of them.

Being prepared to weather economic storms has several components.

• In the past on average you would have had better results venturing outdoors and participating in the growth of the markets than sitting indoors or on the sidelines. Just remember to have the appropriate clothing or portfolio.

• To construct an appropriate investment portfolio, you should assume that there will be both good and bad weather, always. Diversify so that you can have a good time in the good weather and not drown in the bad weather.

• Remember that it is possible to have a long stretch of bad weather or markets. Plan for it.

• Don't try too hard to outguess the weather or the markets - it doesn't work enough of the time to justify the effort. Without planning and preparation, chances are you will occasionally get soaked.

Let's say that there is a nonprofit organization that you feel passionate about and would really like to support in a much bigger way. Perhaps you have been periodically contributing modest amounts of money and your even scarcer resource - your time.

Here are some reasons why you may not be making a major contribution now: times are tough, you are saving for or spending money on college or a wedding or a home down-payment for your children. Or maybe family members - children or parents or others - need your help.

You might have concerns about the future. Will you have enough money to meet your lifetime need for income? What will be the future needs of family members that you might want to help? What about providing for your own future health issues and expenses?

To solve this issue, why not make your favorite cause(s) the contingent beneficiary(ies) of some of your IRAs (or 401(k)s or 403(b)s, etc.)? Your spouse/partner could remain as the primary beneficiary of the IRA so that you would both have access to that money during your lifetimes. After both of you have died, then the money would go to your cause.

Here are the advantages of this approach:

• If you need the money over your joint lifetimes, you have it. Money goes to your charity only after you are both done with it.

• It is really easy to do. You just need to get an IRA (or 401(k)) beneficiary form, fill it in, and then send it back. This is much easier than redoing your will.

• You can change your mind if you need to, simply by changing your beneficiary.

• You can do it on any scale, subject only to the amount you have in IRAs (or 401(k)s).

• You can easily leave a 5- or 6-figure amount to charity without materially affecting your children's inheritance.

• If you left this money to your children, they would have to pay taxes on it. Charities will not have to pay taxes.

If you want a way to amplify what you are already doing, seriously consider this method of contributing.

The stock market has recently and frequently been in the news because of its large daily swings. This raises several questions: Are the swings really new? If so, why are they happening? What do these swings mean?

To answer these questions, I downloaded to an Excel spreadsheet the daily closing values of the Standard and Poor's 500 index since the beginning of 1950. (The S&P 500 is an unmanaged marker of the values of the 500 largest publically-traded U.S. companies.) From changes to the values I was able to calculate the daily swings. Every swing of more than 1% in the S&P 500 I identified as a large one. Here is what I found:

Daily swings are not new. Every decade has had 2-6 years of large daily market swings and also years of relative calm. This year is one of those with many large swings. The most recent calm year was 2006.

The size of the daily swings has gotten larger. Every decade since the 1950's has had at least 2-5 days over the decade of very large daily swings - more than 4%. The 1980's had 13 days of very large swings over the decade. The 2000's had 51 over the decade, 28 of which occurred in 2008. The first 9 months of 2011 have had 6 days with those very large swings.

Years with many large daily swings are not necessarily bad news. In fact, of the 23 years (over the last 61 years) with high volatility since 1950, 56% of them (13 years) resulted in overall increases in the market through the year.

Years with large annual changes are not necessarily the result of many large daily swings. So what effect do daily swings have on the net overall performance for the whole year? Annual returns varied substantially from year to year. The largest annual change in the market since 1950 was an increase of 40.5% in 1954, which was not a year of large daily market swings. The year 2008 was a close second with a decrease of 40.1%. (That year had the largest swings.) Other years with changes of 30% or more in the S&P 500 were 1958, 1975, 1995, 1998, 2003, and 2009. Four of these six years had large swings; two did not. All six of these changes were increases in value!

I believe that the stock market has more swings when there is more uncertainty about the intermediate- and long-term future of companies and the economy. The daily swings may have become larger for two reasons: first, there is more information available for investors to act on, and second, any changes can be acted on much more quickly. These changes in technology have amplified the normal market changes.

We do not know in what ways history will repeat itself. It is likely, however, that some years will continue to have large daily swings and some will not. Some years will have large annual gains and some will not. Unfortunately, no one can predict with any accuracy which will be which.

As proprietor of Plan for Life, Mark Fischer is required to post the following notice: Securities offered through Multi-Financial Securities Corporation, member FINRA, SIPC. Plan for Life, LLC is not affiliated with Multi-Financial Securities Corporation. Investors cannot directly invest in indices. Past performance is not a guarantee of future results. This information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Work and unemployment in this country are constantly in the news. Here are three central ideas that are not in the news that you should be thinking about.

1. Some of the unemployment is a direct result of structural changes in the workforce, caused directly and indirectly by the march of technology. Their affects will be long-term, i.e. they will last longer than the current business cycle:

• Transportation and communication have improved. It is now feasible to hire lower paid workers overseas.
• Computers easily transmit information from the top to the bottom of a business and vice versa. Therefore, businesses need fewer middle managers.
• Robots and other machines can do some of the work instead of people.
• Human creativity, in general, results in getting the work done with fewer people.

2. There are and will always be jobs available. Some require technical training; some jobs support other more highly trained specialists. The Bureau of Labor Statistics, as listed in the AARP Bulletin, July-August 2011, says that the jobs in highest demand will be:

• Medical and Healthcare: aide, both home health and home care; medical assistant; skin-care specialist; dental assistant and hygienist; veterinarian technician; physical therapist assistant and aide; skin-care specialist; biomedical engineer.
• Technical: computer software engineer; network systems and communications analyst.
• Financial: compliance officer; financial examiner.

3. The leading edge of baby boomers has not yet retired. They are behind schedule, because in general they have not been good savers and their investments have fallen with the market decline in 2007 - 2009. Eventually, they will retire, and there will not be enough younger workers to replace them. There will then be a substantial shortage of trained workers.

Perhaps you are thinking of changing jobs or careers. Maybe you are thinking of an encore career where you can give back to your community and still be paid. Or you may have children or grandchildren who are looking for work. Even in these times of high unemployment there are many opportunities. When times are tough like now, you should do your research and get more creative in your job strategy.

General Disclosure Statement
Plan for Life offers securities through Multi-Financial Securities Corporation, a member FINRA, SIPC. Plan for Life, LLC, is not affiliated with Multi-Financial Securities Corporation. The views are those of Mark Fischer and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

How do you know if your investments are behaving as they should? Are you on track to achieve your objectives? The idea behind a benchmark is to measure your own progress and compare it to some standard. Then you can measure effectiveness and take appropriate action.

Here are three ways of answering this question, for which you can use entirely different benchmarks.

a. Benchmark: S&P 500 Index. Here you could compare your own portfolio to this unmanaged market-value weighted average of the prices of the 500 largest companies traded on the NYSE, AMEX and NASDAQ exchanges. You can compare price appreciation, i.e. performance, return. You can also compare drawdown, i.e. maximum decline from the peak, a measure of risk. With this benchmark you can evaluate your investments from the standpoint of growth and safety - do you have the right mix for your situation and risk tolerance?

b. Benchmark: a mix of indexes that parallels the mix in your own portfolio. For example, if your portfolio is a mix of 40% US stocks, 20% foreign stocks, 35% US bonds, and 5% cash, then your benchmarks could be a mix of the S&P 500 Index for US stocks, the EAFE Index for foreign stocks, an Index of long-term bonds, and the Consumer Price Index for cash - in the same proportions. A benchmark of this type could help you evaluate the effectiveness of your money managers in selecting individual investments. The more closely this benchmark parallels the composition of your own portfolio of investments, the better it will work for this purpose.

c. Benchmark: your own goals. For example, let's assume that you had estimated that you needed to save 12% of your income and have your investments grow at a 7% rate in order to be "on-track" for retiring or being financially independent in 7 years. You should compare what has happened with what you had hoped to happen. This comparison will give you some ideas about your choices, progress, and changes you need to make.

Here are some key questions to ask yourself as you establish benchmarks:

• What do you really want to accomplish, before you go to the trouble of monitoring progress?
• What can you control and what not?
• Will a proposed benchmark be appropriate for answering the questions you have and guiding you to take the right actions?

Remember, investors cannot directly invest in indices, and past performance does not guarantee future returns.

If you are as busy as most of the people I know, you are constantly juggling a number of work and personal responsibilities. There is not enough time to do everything you want to do. Some of the responsibilities you have you may not be particularly interested in doing because you have priorities and interests more important to you. Yet if the responsibility is an important one (e.g. paying taxes, managing your financial affairs, keeping your family ties meaningful), it could be critical that you do things right.

You need three ingredients to manage your affairs effectively over a long period of time: time, interest, and skills. It is clear how the first two of these work, less so for the third.

Skill has two key components, the first of which is knowledge. Knowledge can come from a book or from discussions with other people. At its best, knowledge means not just knowing how things work, but also why they work the way they do. In that way you can better apply what you know to new situations. Knowledge is necessary to have skill, but by itself it is not sufficient.

Experience is the second component necessary for skills to develop. Without the opportunity to apply what you know, you have just "book knowledge." Wouldn't you rather hire a surgeon who has done your required surgery many, many times before, rather than a surgeon who says, "That's interesting. I have never done one of those before, but I have read about it and have always wanted to do the procedure. Let's give it a try."

Carefully weigh your skill level - especially in regard to your finances. In which areas do you have both knowledge and experience? Those areas are good candidates for you to handle on your own if you wish. Which areas are you lacking either knowledge or experience? Consider finding a professional to help you in those areas. When hiring a professional, be sure to look into that person's expertise and experience. In other words, hire them for their skill.

Dr. Robert Sanderson (not his real name) is a friend of mine who teaches medical students how to care for their patients. One of his pet peeves is other physicians who describe their patients in such terms as "the stroke in room 423." Dr. Robert says "No, it is Alice Williams in room 423 who has had a stroke." Do you see the difference?

Alice is more than a disease that she has recently experienced. By being designated as a disease, she is being stripped of her very identity and therefore her dignity. Alice Williams is a person - with all that means. She has a family, a career, and a lifetime of rich experiences. She needs medical help but she also needs respect.

If you are like Alice, you do not want to be stereotyped based on your gender, age, health, family circumstance, or even your religion, political beliefs or the clothes you wear. You are more than any of those and want to be treated as an individual. The special details of your life situation may actually be the most critical factors for you when you need to make an important decision.

Stereotyping cuts off serious thought and interactions. The opposite of stereotyping is active communication which has three parts:

1. Serious disclosures. If you do not disclose what you really need and want and why, then whoever is supposed to help you will not have the information to give you good advice.

2. Active listening. Your helper must listen actively to what you say. They must care enough to ask good probing questions, and they must approach this process with an open mind.

3. Thoughtful analysis. Your helper must use their skills and analysis to give you the right advice.

When you look for help, you probably first consider your helper's competence and ethics. Great, you should. But make sure that good communication is part of the process. You need to get the right answers for you and your particular situation. This is true for medical advice from your physician, and it is equally true for other kinds of advice you need, from finances to family issues.

Let me tell you a story about a client of mine who had some real challenges in his journey toward financial independence. Let's call him Scott.

Scott was an independent business owner, age 50, with several employees. He really enjoyed his work in many ways. He earned a decent livelihood and met many people whose lives he made better. He built up his business and was recognized in his personal and professional communities for the quality of his work. He liked the day-to-day tasks that he himself did, and he also enjoyed helping his staff grow professionally.

However, Scott was worried. Some large competitors were moving in and his whole industry had its regulatory and profitability problems. Scott's lease was up. He was already working longer and harder than he wanted to.

Should he just find a new place to rent and continue as he had? Should he bring in a family member to help and possibly take over his business someday? Should he just sell his business? If he sold his business, should he retire, start a similar or different business, or work for someone else? He was left with more questions than answers.

What a ride Scott had over the next few years. He did it all. First, he bought his own building and set up his business there. That way there would be enough room for a family member who had expressed an interest to work with him. But then the family member changed his mind and went elsewhere. Scott then brought in a different family member, and that did not work out well either.

Scott negotiated with a few large firms to buy his business. The negotiations were on-again, off-again over a number of years. Finally, one firm bought him out. This firm hired him to work for them and set them up to be successful. He was able to bring his staff along with him.

Although the process through those years was sometimes agonizing, the story had a happy ending. Scott was able to take all of the value out of his business and invest it elsewhere. He was no longer threatened by changes in his industry. He was able to continue his good work, which he enjoys, and have a positive impact on his community. In addition, he has more free time for himself and his family.

The story is not over. Scott still has plenty of time, energy, and assets to provide for many further opportunities and a great life. Who knows what he will be doing several years from now!

Not all stories like this have a happy ending. What did he do that helped him navigate through this long and complicated process? What can you learn that will help you on your own journey?

1. Over a period of time Scott was able to articulate better and better exactly what he really needed. He always knew what he wanted, but he was not sure how to get there. What helped him was to do modeling of his financial alternatives so that he could see how much money he would really need to get for his business so that he could become financially independent. His first offers were insufficient. When he eventually got a higher offer, he knew that it was enough. He grabbed it.

2. Scott had to do much wrestling through those years. He believed that he had to get this decision right - he would not have a second chance. It was particularly helpful for him to talk over his alternatives with his trusted advisors along the way. It was always his choice what to do, but he made better decisions along the way by talking the issues through.

I believe that you can learn from Scott's story. Do your best to figure out what you want and then talk over the alternatives with knowledgeable professionals so that you know what you need. Doing these two things could help you make better decisions.

Let's assume that you are really committed to making an important change. You have a clear vision of what life will be like after the change. You have planned out what you will do to make the change happen. In fact, you are so committed that you have written the plan down. So why not just do it? Because sometimes you will run into problems along the way. This blog will discuss how to get better prepared and make the changes happen.

3. Preparing to change in spite of problems
Most likely, you will not be perfect in the execution of your plan to change. You will have obstacles including distractions and temptations to abandon your plan and go back to the old way of doing things. They can cause setbacks and slip-ups.

You can prepare for these obstacles in two ways. First, identify some of the more likely obstacles that you will encounter and what you will do to get back on track. Second, make sure that your actions have consequences. Reward yourself for keeping on track and punish yourself for straying. Just make sure that you do not get too focused on punishments - keep a positive and forward-oriented focus. Some behavioral scientists suggest that you should have at least four times as many rewards as punishments.

When your change becomes difficult, it will be especially helpful to refer back to your written plan, which contains a vision of why you decided to change. Again, the clearer your vision is, the more helpful it will be to your success.

4. Just do it
Many people find it easier to commit to a change if they "have more skin in the game." One of the more common ways of doing this is to tell other people about your program of change. Then they can ask you about your progress and encourage you for your successes along the way.

Another approach is to pay money for the change. Out-of-pocket money may encourage you to follow through - you would not want to waste the money you spent. For example, if you have a new weight goal, it might be helpful to become a member of a gym or hire a personal trainer.

Both of these relate to the idea of accountability. You can have an accountability partner who is a friend or family member. You can also hire a personal coach who will make him/herself available on a regular basis to develop a plan, ask about progress, and help you overcome any obstacles.

Good luck on your journey.

I've really got to change my ....

This is the season for resolutions. Yet like other people, you could have a difficult time doing what is in your own best interests. Why is that? What can you do to be really effective?

Let's assume that you are interested in making big and important changes to who you are or what your situation is. You find yourself saying, "I've really got to ...." Those changes could be to your weight, exercise program, relationships or career, among others.

What holds you back from going all the way in the change? The problem most likely is the transition itself - the process of going from where you are to where you want to be. The transition can involve a cost of time, money or pain. You must take the costs into account, or you will not succeed.

There are the four key areas that can be the difference between success and failure in making important changes in your life: committing to the change, developing the plan to change, preparing to change in spite of problems, and just doing it. This blog will discuss the first two of the key areas.

1. Committing to the change - knowing exactly where you are going
You are never going to be successful in carrying through the change until you are committed to it. That commitment must be more than a wish or a dream or a resolution. Especially if the change is difficult, you must have the "no matter what" attitude. This takes courage and faith.

You must be prepared to focus on this change if it is important enough for you to be committed to doing it. Simplify your life while making the change, if you can, so that you can concentrate on it.

To end up somewhere new, you have to know where you are going. Just what is your vision? Why is it important to you? Defining your vision is absolutely critical for success. Spend time literally describing, in writing, what your new life will be like. The more detailed you are, the better, because the detail can drive your passion and commitment. What is the situation, what do you hear and see and smell and taste? Later on if you get sidetracked, you will need to keep coming back to your vision so that you can bring yourself back on course.

Procrastination is a huge issue. Why make a change today if you really do not need to? What difference does a day make? Why give up activities that you are familiar with and maybe even enjoy on a day-to-day basis for the uncertainties and difficulties of change? Why go out of your comfort zone?

You can use a new year, a birthday or other milestone as an excuse to get started. But if it so important to change, why wait?

2. Developing a plan for change - figuring out how to get there
Determine what the concrete steps are that you will need to take. What will they cost in time and money? What is your timeframe? Think about what you will give up during the transition, because the transition will cost you time and money, both of which are finite.

It will help you to break your change into many small and doable steps. You need to be able to say, "This step is not so bad. I can do it."

The best plans are always written down for many reasons: written plans facilitate sharing and feedback, permit you to come back later and recall your approach, and serve as a guide to manage your change, especially if you set milestones for your journey.

How to carry out the steps in the plan may not necessarily be obvious to you. What do you need to figure out? What have other people done? What has worked and not worked? Having a clear vision and a written preliminary plan will help you identify what you need to find out.