Mortgaging Our Futures

A recent article listed Arizona as the #1 housing market in the nation.   As a state and as a country, we’ve been on roller coaster over the past decade. The article got me thinking about how retirees and pre-retirees are handling the real estate market.

The answer is: not well.

 

A recent report spotlights the mortgage debt challenges faced by a growing number of older Americans:

  • Exponentially more seniors have mortgages.
  • Median mortgage debt for seniors increased by 82% from 2001 to 2011.
  • Available housing is less affordable.
  • Senior delinquency and foreclosure rates increased fivexs after financial crisis.

 

And then I remembered hearing about how Americans used to have parties after making their final mortgage payment to the bank. Wikipedia says these parties are now a forgotten practice and highlights the reasons behind the disappearance of them.   Interestingly, the article cautions against holding these parties because doing so would be tacky.  It’s troubling to think that such a party would be in poor taste and that having one today would be considered bragging.

 

I think the opposite. I think paying off your home mortgage is absolutely a cause for celebration.

 

Dave Ramsey has the same idea and invites people onto his show to do their “Debt Free Scream.” The basic idea is celebrating people’s journey of getting out of debt. It’s been an important part of his show for a long time and there’s even a waiting list. If you haven’t seen it, it’s pretty fantastic.

 

So what’s your plan?

 

You and I don’t have time to worry about what the media, government, financial institutions, or your friends and neighbors have to say about the housing market or how to manage your home mortgage. In order to ensure you’re in a good financial position at retirement age, the time to act is now.

An Inside Job

“Jill, this is sergeant Sacker. Listen to me. We’ve traced the call… it’s coming from inside the house. Now a squad car’s coming over there right now, just get out of that house!”

This is the famous line from the 1979 horror film “When a Stranger Calls” letting the terrified babysitter know her would be attacker is in the house. If you’ve not seen the movie, or it’s been a little while, it’s worth checking out.

In today’s dynamic information-overload environment of social media, news and now, fake news, we can find ourselves in an echo chamber (for example, a sports bar outside of Wrigley Field in Chicago filled with only Cubs fans).   With that in mind, each of us knows we should take an objective view on new information as we receive it, but that doesn’t mean that our brains are cooperating.

Financial losses are processed in the same area of the brain that responds to mortal danger, so losing money in the stock market is treated the same as the threat of being eaten by a lion.

This threat makes us want to pull money out of an investment when it goes down in value. Similarly, our minds scream “run” if we encounter a hungry predator like a lion. With investments, the loss has already occurred—the value has gone down (you’ve been eaten by the lion)—so it may be wise to leave your money in the investment with the knowledge that it could go back up to its previous value.

There are dozens and dozens of cognitive biases we can fall prey to and in order to avoid doing so, we need to be aware of them. Those that relate to investing behavior include:

  • Overconfidence Bias– We’re more confident in our abilities than we really are. “I’m an excellent driver and all the other drivers are not.” “I’m better at spotting investment opportunities than others.”
  • Illusion of control– If we invest only in the things we are familiar with, somehow we have more control over our portfolios. “I worked at GE for 30 years, so I know it will always be a great investment.”
  • Regret avoidance– Once bitten, twice shy. “My 401(k) at my last job went down so I’m not going to participate at my new job because that will likely happen again.”
  • Loss Aversion– How we deal with losses as opposed to how we deal with gains. Often, the pain or fear of loss can be twice as strong as the potential for gain. “I’d rather invest in more conservative vehicles so I don’t lose money.”

On a broader scale, Confirmation bias, the most common bias, is very important to be aware of in today’s polarized world. Often referred to as “myside bias,” it’s the tendency to seek out information that justifies our pre-existing beliefs. This can manifest itself in almost every aspect of our lives, for example going to the Boston Globe for information on the Patriots.

Knowing that our minds can play tricks on us, it can be helpful to play devil’s advocate with ourselves; to clarify our current thinking or position on an issue and to then seek out the other side. As Americans, if half of us can’t have a civil dialogue with the other half on many of the major issues of today, we’re in for a rocky future.

A Butterfly’s Effect

The butterfly effect is the concept that small causes can have large effects. The United States elected a new president and it’s uncertain what the effects will be. We can, however, look at what has happened historically and, specifically, what happens to the stock market when a new president is elected.

Historically, here are the presidential election’s effect on the stock market:

  • Since 1928, the S&P (a popular measure of stock market performance) has dropped an average of 2.8% in presidential election years that don’t include an incumbent seeking re-election.
  • Of the eight years in a two-term presidential cycle, the final year of the second term, when the incumbent can’t run, is the only year with average negative market returns.
  • By contrast, in years when the sitting president is up for reelection, the S&P has average returns of 12.6%.

It’s imperative to pay attention to history’s lessons. However, here we are at the beginning of the year with a new President and the Dow Jones Industrial Average (DJIA) is hitting record numbers.

You’ve probably heard the DJIA is over 20,000 for the first time in history which makes people ask: “What exactly is the DJIA,” “How is it calculated,” and “Should we pay attention to it?”

Business News Daily provides a great explanation of the DJIA:

“The DJIA is a stock market index created by Wall Street Journal editor Charles Dow. Founded on May 26, 1896, it is named after Dow and statistician Edward Jones. The index itself shows how 30 large publicly owned U.S. companies have traded during a standard trading session in the stock market.”

 The DJIA is designed to provide a clear view of the current stock market, which in turn reflects the state of the U.S. economy. For a detailed explanation of how it is calculated, click here.

The DJIA’s uses and applications are numerous:

  • The DJIA monitors market conditions, enabling investors to identify overall trends and make smarter investment decisions.
  • The DJIA can indicate the future performance of stock holdings, mutual funds, and ETFs relative to the performance of the index.
  • Rather than investing in companies individually, investment directly into the DJIA allows for a diversified portfolio.
  • The DJIA can be used as an effective benchmark to gauge other portfolios and individual investments. A strong portfolio would outperform the DJIA, for example.

Here’s a list of companies currently on the DJIA:

Apple Goldman Sachs Nike
American Express Home Depot Pfizer
Boeing IBM Procter & Gamble
Caterpillar Intel The Travelers
Cisco Systems Johnson & Johnson UnitedHealth
Chevron JPMorgan Chase United Tech
Coca-Cola McDonald’s Visa
DuPont 3M Company Verizon
ExxonMobil Merck Wal-Mart
General Electric Microsoft Walt Disney

What will the butterfly effect of the election be on the stock market in 2017? The DJIA is at its highest point ever, but history tells us the market will drop 2.8% this year. As always, time horizon and asset allocation are two of the main keys to focus on when it comes to saving for retirement. Where will the DJIA be at the end of the term? Only time will tell!

Take a Little Off the Top

 

Happy New Year! Hopefully you are full of hope and promise for 2017!

Any resolutions? Here’s the top 10 from last year, according to statisticbrain.com:

  1. Lose weight
  2. Get organized
  3. Spend less, save more
  4. Enjoy life to the fullest
  5. Staying fit and healthy
  6. Learn something exciting
  7. Quit smoking
  8. Help others in their dreams
  9. Fall in love
  10. Spend more time with family

If more time with family and or loved ones is a priority, you’re in good company. According to Project Time Off, more than half of American workers (55%) left vacation time unused in 2015, totaling more than 658 million unused vacation days. While there are many reasons why this happened and continues to happen, I advocate there is a practical solution; take it off the top. Schedule your time off now. If your intention is to take it off the bottom, or schedule it later, there won’t be any time left over to take off. For those workaholics among us, there is documented value in time off.

Parkinson’s Law tells us that work expands to fill the time available for it’s completion. If you’re not protecting your time off in advance, your work will expand to consume it.

There is enormous value in how technology has connected our lives and certainly that applies to our calendars. That being said, there is also value in using a paper calendar. Get a highlighter and start marking off the days you’re going to take off.

Odds are, there are events (weddings, etc.) that need to be blocked off, so start with those dates. From there, block out the rest of your time off. Planning one quarter at a time is a great place to start and if you can look at the entire year, go for it. Click here for a blank downloadable calendar.

Can you think of anything else this applies to? Saving money of course! You’ve got to pay yourself first (save money), because if you’re in the habit of paying everyone else (paying bills) before you pay yourself, there won’t be any money left over. An automatic way of accomplishing this goal is to increase the contribution percentage for your retirement plan at work.

My Five Things

As we enter the final month of 2016, I want to share two things with you. First, the idea of a Masterpiece Day and second, the value of practicing gratitude.

A Masterpiece Day

If you could design your perfect day, incorporating all of the elements of your life (Family, work, community, hobbies, etc.), what would it look like? In a perfect world, how would they fit together? If we’re not working to make this happen, to do it purposefully, it’s probably not going to happen.

One of the key elements to a Masterpiece Day is the idea of bookends. What activities will you do when you wake up, and what activities will you do at the end of the day? We theoretically have more control over these two times versus the middle of the day when most interruptions occur. Perhaps morning is the best time for you to exercise, eat with your family or do some reading. Maybe you prefer to get your exercise in at the end of the day, enjoy family dinner and then watch a favorite TV show.

However you arrange your bookends, I want to encourage you to incorporate the practice of gratitude into one of them. I started practicing gratitude at the beginning of this year and found it to be incredibly valuable, and like other things that fall into that category, I stopped doing it. As I encourage you to get into the habit of doing it, I’m committing to getting back into it for the remainder of 2016.

Why practice gratitude? Practicing gratitude helps keep life in perspective.

A lot of the news we consume is focused on negatives versus positives and it’s important to be mindful of focusing on the good as well.

Practicing gratitude reminds us of what we already have versus focusing on what we don’t.

How does one do it?

There’s not a right or wrong way. To get started, decide what time of day you’re going to do it and put it into your calendar or set a reminder. Find a place to sit where you’ll be able to focus for five minutes. With a notepad, journal or piece of paper begin by writing the date at the top followed by “My five things.” From there, think about your day and what you’re grateful for. This may come very easily some days, and a little harder on others. If you’re struggling, here are some prompts to consider:

Family    Community   Health   Career   Hobbies   Spirituality   A pleasant interaction with someone   Coffee/Wine/Food   A good night’s sleep   Weather   Friends

Parents, you may consider talking with you kids about what you’re grateful for and asking them what they’re grateful for.

Try this for the next couple of weeks; I think you’ll be glad you did.

Happy Holidays

Just Do It

And so, my fellow Americans: ask not what your country can do for you — ask what you can do for your country.

John F. Kennedy’s Inaugural Address, January 20, 1961

 

11/9/2016, 12:57 Mountain Time

 

As the final votes come in for the 2016 Presidential election, the popular vote is almost equal, with Hilary Clinton leading by a couple hundred thousand. Donald Trump will be our next President as he has secured 290 electoral votes.

If someone completely unfamiliar with the two candidates were to look at the result, they’d probably assume it was a race between two worthy candidates who fought up until the end. We know the story to be what it’s been.

 

My hope is that we will follow Kennedy’s words and focus on what we can do as individuals to impact our Country and our communities. The ability to vote is certainly one of the most important parts of our society. So too is the ability to have an audience with our elected officials; have you had such an audience? If you’re not happy about “politics as usual” in DC, or in your city, have you voiced that displeasure to your elected officials? Do you know who your elected officials are?

 

As Nike tells us, Just Do It. Clicking HERE will provide you with a list of your elected officials as well as the means for contacting them. Be persistent, be patient and be polite, and know that they are always interested in hearing from their constituents.

 

Clearly there is passion and enthusiasm on both sides and now it’s time to engage in a time honored, though rarely utilized political tool: Compromise. It’s been said the three most important words in politics are “compromise, comprise and compromise.”

 

When you communicate with your elected officials, demand they work with their counterparts from both parties to get positive change enacted.

 

Lastly, I wanted to share The Allegory of the Long Spoons.

 

One day a man said to God, “God, I would like to know what Heaven and Hell are like.”

God showed the man two doors. Inside the first one, in the middle of the room, was a large round table with a large pot of stew. It smelled delicious and made the man’s mouth water, but the people sitting around the table were thin and sickly. They appeared to be famished. They were holding spoons with very long handles and each found it possible to reach into the pot of stew and take a spoonful, but because the handle was longer than their arms, they could not get the spoons back into their mouths.

The man shuddered at the sight of their misery and suffering. God said, “You have seen Hell.”

Behind the second door, the room appeared exactly the same. There was the large round table with the large pot of wonderful stew that made the man’s mouth water. The people had the same long-handled spoons, but they were well nourished and plump, laughing and talking.

The man said, “I don’t understand.”

God smiled. It is simple, he said, Love only requires one skill. These people learned early on to share and feed one another. While the greedy only think of themselves…

Benchmarking the Holidays

Pumpkin spice is in the air (and has been since September 6th). While that means different things to different people, it signals the holiday season for me. Thanksgiving, parties, cookies, and holiday cheer! If you’re not careful, there’s weight to be gained. Despite all of the temptation and opportunity for over consumption, the reality is that, on average, Americans gain just over a pound during the holidays1.

In terms of retail consumption, according to Gallup, adults will spend $785 on holiday gifts this year. With that as the benchmark, will you come in above or below? With 51 shopping days left before Christmas, I’d encourage you to make that decision now. Ask yourself, “How much will I (or our family) spend on gifts this year?”

Take it one step further. How much will you spend eating out and on other holiday related activities? Here are some helpful tips from Investopedia if you’re inclined to pinch pennies this year:

  1. Set Limits for Total Holiday Spending
  2. Make Your Own “Naughty” or “Nice” Lists
  3. Budget Based on Your Own Finances
  4. Become a Coupon and Coupon Code Collector
  5. Give Your Time
  6. Give Yourself a Better Spending Habit
  7. Give Personalized Gifts Instead of Expensive Gifts
  8. Organize Group Volunteering Instead of Holiday Parties

This is my favorite part of the year because of time spent with family and the opportunity for introspection. It’s a time to reinforce how grateful I am for what I have. One of my favorite traditions is going to the mall to get a Christmas Angel. If you’re not familiar with this program put on by the Salvation Army, donors purchase a paper “Angel” to put on a tree that represents a gift for a child or family in need. This is a poignant exercise for anyone or families, particularly if you have children, to reinforce perspective and instill gratitude, as well as promote charitable giving.

 

Have a safe and happy Holiday Season!

Back to the Future

Do you remember the Deep Water Horizon? I suppose the release of the Mark Wahlberg movie about the disaster put it back into the forefront of my mind. I remember helplessly watching the footage of oil spewing into the ocean, knowing it would end at some point, but not knowing when.

 

Those feelings are similar to the feelings I had during the financial collapse of 2008. I remember helplessly watching the 24-hour news cycle for what felt like forever, knowing it would end at some point, but not knowing when. The major difference between those two events for me is I had (and continue to have) no background or knowledge in deep sea oil drilling. In 2008, I had been in the financial industry for seven years, living and breathing the markets every day. But honestly, those seven years didn’t make it any easier.

 

How did you feel? How did you react? Did you stay the course? Did you invest more money? Did you sell everything and get out? Many people did sell everything and got out of their investments at the lowest point, which proved to be a mistake. The reality is this: if you had stayed the course, you would have enjoyed the unprecedented growth of the past eight years.

 

Here’s the most important question: what will you do the next time the stock market goes down dramatically? I don’t have a crystal ball, but I do have a time machine.   My time machine goes backwards and I can research market cycles. Those market cycles show me that bad markets (Bear Markets) turn into recoveries that turn into good markets (Bull Markets) that eventually go back down and the cycle continues.

 

I think we all intellectually understand how it works. But it’s not our intellect that gets us into trouble; it’s our emotions. Because we’re aware of the powerful influence our emotions have on our actions, I advocate you prepare in advance.

 

An Investment Policy Statement (IPS) can provide helpful guidelines to curb emotional responses during bad markets.

 

When visiting a new destination, it helps to map out the directions. Upon arrival, you decide on an activity plan. If you’re going to a state park for a hike, you determine how to get there and next, which trail to follow at the park. Similar to an expedition, an Investment Policy Statement (IPS) is a guide to your financial future.

 

Perhaps an Investment Policy Statement is right for you and I’m happy to help you develop one. Either way, the next time the stock market has a negative event, please rely on logic over emotions when making investment decisions.

The Danger of Comparison

We’ve been trying to “Keep up with the Jones’” since before 1879 when a comic strip with that title first appeared. The phrase refers to the comparison to one’s neighbor as a benchmark for social class or the accumulation of material goods. Fast forward 137 years and the Kardashian’s have left the Jones’ in the dust. This phenomenon is neither new, nor is it going anywhere anytime soon thanks to things like Instagram and Facebook.

 

As the saying goes, we’re always looking to see what others are doing and making comparisons. Good or bad, we all do it.   This type of social comparison led to two things: Conspicuous consumption and materialism.

 

Those two things led us to desire more, better and different things than the things we had or didn’t have. Those desires led to the ability to purchase via credit, which then led to consumer debt, so on and so on.

 

Consumer debt had been steadily building since the introduction of credit until finally slowing after 2008’s meltdown.

 

The recovery of the past eight years has brought it back. In reality and to be fair, the Jones’ are not completely to blame according this report by NerdWallet.

 

The report tells us part of the problem is that household income has grown by 26% in the past 12 years, but the cost of living has gone up 29% at the same time. And some of our largest expenses like medical care, food and housing have significantly outpaced income growth.

 

The danger of comparison is that it can lead to discontentment. That discontentment can lead to overconsumption, which can lead to debt. Debt limits our ability to fully pursue our passions because we’re stuck in a rat race trying to make money to pay that debt off.

 

Let’s get a sense of where we are. Not just in our neighborhoods, not just in our country. Let’s take a global perspective.

 

Compared to the most of the world, we are wealthy. You are wealthy.

 

What’s most important in your life? To your family? Keep that in mind the next time you catch yourself falling victim to comparison.