Find an 8-1/2″ X 11″ sheet of paper, fold it in half, then look at the smaller rectangle you just formed. If you divide the long side length by the short side length the result will be a number like 1.545, a “nice” proportion but not perfect. In a perfect world, the ratio would be 1.618… a very satisfying proportion to us humans. If we are designing a floor plan, the façade of a building, or the shape of a bottle, chances are we will employ a 1.618 ratio for the rectangular image. Humans have been doing this for two thousand years, surrounding us with rectangular projects that conform to this ratio. We’re crazy about it… just search for “Golden Ratio” on your computer and you’ll see. You will recognize the perfect floor plan when you see one, or a favorite classic painting, or even your own financial plan, simply because “it just fits.” In each case, chances are fair to good there is a 1.618 ratio somewhere in the construction. Leave the numbers for competent professionals to fuss with, and task them to build you satisfying dimensions you can enjoy the rest of your life.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
We have strayed from the intent of these words, starting with form a more perfect Union. We have let ourselves become a divided nation no longer focused upon a more perfect union, or the shape of a future that can accommodate our politics, our social values, our general welfare, our military, our finances, and our changing weather patterns. Competent financial planners always start their fact-finding sessions with personal questions about people like us who want to become clients: we the people …who we are and who we want to become during the years left to us, and what strategies we can agree to pursue together. Our nation’s original architects started their operating manual at the very same place. If we take a fresh look at their work, we might be inspired to tune up our national mechanism to run a bit smoother.
What’s the difference between a growth stock and a value stock? Common shares of Apple and Google are examples of growth stocks: most investors want to trade in them today because the companies are doing well and boast strong earnings. By contrast, in 2011 Bank of America was facing serious legal issues that clouded its prospects for the foreseeable future, and its common stock fell to as low as $5 a share. 6 years later the company is thriving, earnings and dividends have increased, and those shares now trade for $24 a share …a pleasant outcome for those investors who accepted the risk back in 2011. This describes a value situation. So, which is better, growth stocks or value stocks? Both. Not all value situations have happy outcomes, and not all growth stocks continue to grow, so buying several different company stocks in each of these two asset classes makes sense. Look for index-fund-like, asset-class-specific, no-load mutual funds available in a few fund companies, such as Dimensional Funds and Vanguard. If you like the idea but would appreciate guidance to get started, there is value in locating a licensed advisor who can help you grow your portfolio.
* Image courtesy Yahoo Finance
If our household checking and savings and investment reserves equal the amount we owe for living expenses and loans, our budgets balance. If our reserves exceed our deficits, we feel good that we have money to spare. If our personal and business deficits exceed our reserves beyond any hope of achieving balance, we are bankrupt. That’s the way things work for us at home and for businesses. That’s not the way things work for governments that print their currencies… as ours does. At the national level, reserves held by the private sector (our households and businesses, and maybe foreign lenders) are matched by an equal level of deficits assumed by the government… because the actual value of the currency and credit that resides in the private sector relies upon the full faith and credit of the Treasury to redeem its currency and meet its credit obligations. Shrinking the government deficit serves to shrink private sector cash flows… and vice versa: expanding government deficits tend to increase private sector cash flows. There is an upper limit when government deficits outstrip Gross Domestic Product at full national production capacity in the private sector. And there is a lower limit when shrinking government deficits reach zero, drying up cash flow and production in the private sector. We have been there, done that, at each of the two limits; history marks them “hyperinflation,” “Great Depression,” and “Great Recession.” Balancing our personal household and private business accounts is a virtuous goal. As the graph above shows us, balancing our government’s budget by shrinking its deficits to zero choked our national economy several times in the last 50-plus years… nothing virtuous about it. That’s because our government was designed to enhance the health, safety, commerce, and general well-being of its citizens: it is not a business.
In June 2017, financial advisors who recommend retirement plan investments will be required by the Department of Labor to act as a FIDUCIARY by putting your financial best interests ahead of theirs.
You may ask, “Don’t they always do that?” Not necessarily.
One mark of a FIDUCIARY relationship is the fact that your advisor is paid a mutually agreed upon fee for services rather than by commissions on investment and insurance products. This flat-fee payment model negates one conflict of interest: if an advisor gets paid to sell certain products, those products are more likely to end up in your portfolio. Free of commission incentive, advisors will offer a wider array of products to meet your goals.
If your 401(k) or 403(b) retirement plan is funded by an annuity, the plan was probably offered to your company by an insurance company or securities firm salesperson. The combined costs, fees, and commissions involved in the sale will retard growth of your account values for years and years. You may have noticed that the mutual funds you have chosen in your plan account are cloned from identical funds available outside the plan, except your annuity fund values are lower than values reported daily for the original, non-annuity funds. That is because you are paying the insurance company its fees and costs for issuing and servicing your annuity, and a hefty commission to the salesperson who sold the plan to your company, and a fee to an affiliated investment management firm for organizing the menu of investments available to plan participants. There is a better way to fund your retirement plan.
Let’s say you contribute $1000 a year for 30 years to a retirement plan annuity for which 5% of values go to pay fees and costs, while at the same time the underlying original, non-annuity funds actually average 6% a year. In 30 years when the insurance company sets your life-time income based on the value of your account on retirement day, your account will be $44,273 smaller than it could have been. That’s significant.
The advisor who sold your company the annuity-funded retirement plan was not acting in your best interest. The US Department of Labor’s ruling requires full disclosure of fees and costs built into retirement plan products, and those advisors who are paid for advice by commissions on products they recommend must announce in writing that they do business with your best interests at heart, as your FIDUCIARY. And they must be able to prove it. Don’t forget… June 2017. It’s a giant step long overdue.
Starting on 17 April 2017 maybe someone you know, or their tax preparer, could be chatting on the phone with a tax collector contracted by the IRS. No kidding:
The calls will not be unannounced, and the contracted collector will offer instructions on how to make electronic payments to an IRS account, or where to send a check payable to the U.S. Treasury. Aren’t you glad you have an advisor to keep you up-to-date?