Warren Ward Associates

Dining Room Economics

My in-laws are wonderful people from several perspectives. They welcomed me into the family 39 years ago, raised eight children and are now comfortably retired following a lifetime of saving and investing. I am in no way surprised that they have been successful investors as they began teaching practical lessons in behavioral economics right at the dining room table.
 
Behavioral economics, you may remember, is the study of why people - regardless of their education or sophistication - sometimes make less than optimum financial decisions.
 
The past eighteen months have given us an perfect example of behavioral economics at work, albeit one that I certainly hope isn't repeated anytime soon. Although none of our clients chose to take their money out of the markets during the recent correction, several of them called asking for reassurance that remaining invested was truly in their best interests. Other individuals with whom I spoke had chosen to withdraw from the markets and they too wanted confirmation that they had made a good decision.
 
Investment management firms like Warren Ward Associates are staffed by human beings who are in no way immune from experiencing fear. However, our clients depend on us to process that fear very carefully before responding to it. In the case of both the 2000 and 2008/9 corrections, we avoided making a fear-based decision to sell. We kept our clients in the markets, thus allowing them to participate in the subsequent upturns.
 
The decision to sell stocks and bonds (i.e. leave the market) necessarily involves two different steps. First - obviously - is choosing the right time to sell. As fear levels increase, people are more likely to take that step. When fear reaches the point that the idea of actually taking a loss becomes more appealing than worrying about how much more might be lost, they act. Once that happens, investors face the second decision: when should the money be returned to the markets? A fairly common answer is "when things look better" but using that rationale guarantees that the investor will have sold low and bought high (or at least higher). This is one of the very few life situations in which generally rational people resist buying things which have gone "on sale".
 
Such apparently irrational decisions led researchers to study behavioral finance. A very simple example involves two people being asked to play the "ultimatum game". The players are known as the proposer and the responder and each starts with no money. The proposer is given a sum of money to be shared with the responder in the proportions of his or her choice. However, neither gets any money unless the split is agreed to by the responder. Logic would suggest that any split would be a good one since, regardless of the percentage the responder might receive, it is greater than nothing. As the game is played, however, it is common for the responder to reject any offer very far from 50:50, even though such rejection means that neither player gets any money. Whether that response is driven by a sense of fairness or the same fear of loss that makes people decide to sell investments below cost, the most common response isn't a rational one.
 
By standing between investors and their investment decisions, planners can ask their clients to pause and reconsider their fear-driven urges, encourage them to take the longer view and try to help them achieve better long-term results.
 
Incidentally, in case you were wondering about my in-laws' dining room lesson, it was really quite simple. The family rule was that one child got to cut the dessert, then another choose the first piece. Behavioral economics at its most basic level.

What a Difference a Year Makes

Investments are rarely the most important thing in anyone's life, yet the 24/7/365 coverage of markets can make them seem so. Recent headlines suggest that people are becoming more optimistic about the economy, a significant contrast to the mood which permeated society last year around this time.
 
In mid-September of 2008, the venerable brokerage firm Merrill Lynch was forced to merge with Bank of America and investment bank Lehman Brothers was allowed to fail. The next day, the multi billion dollar Reserve Primary (money market) Fund, which owned nearly $800 million in Lehman bonds, endured a "run" on its assets. That forced bond sales which briefly took share values under $1.00, something that had never happened to a "retail" money market fund before. In response, the government began a series of almost unprecedented interventions in the day-to-day activities of the markets. Among other steps, it guaranteed the value of all money market funds to halt the run on the bond market. Although most of us prefer that the government keep its distance from our personal affairs, there were very few complaints about its actions, due to the general level of fear which affected the populace.
 
Today, people seem to be more confident in some sort of reasonable future. Stock and bond markets have rebounded significantly. President Obama spoke of "green shoots" and, two weeks ago, Federal Reserve Chair Bernanke suggested that the recession was "very likely over". The Fed met last week and kept rates near zero, hoping to keep costs low for borrowers.
 
I think the term "mixed message" sums up the current year's situation fairly well. Our economy is certainly on the upswing. There is an improving market for stocks and real estate transaction are once again being completed. However, things are not back to normal yet. The stock market has risen on very little volume, suggesting that a significant selling trend would be difficult for the limited number of active buyers to absorb. Similarly, even though some areas of the country are enjoying a rebound in housing sales, portions of Florida, Nevada and California may face real estate illiquidity for years to come.
 
As I've said before, stock markets are leading indicators of an anticipated strengthening of the economy. The phrase "jobless recovery" often appears in the headlines during the early stages of an economic recovery. Unfortunately, such recoveries don't offer much help for home purchases, increased 401(k) investing or retail sales.
 
Dinah Washington's 1959 release What a Difference a Day Makes earned her a Grammy and provided me with a framework to approach this subject. The second verse of that song begins: "My yesterday was blue, dear, Today I'm a part of you, dear". If you will accept the substitution of year for day, you may agree that the song captures the change in mood from last year to this. While Dinah declares her love as "being a part of" someone else, all of us are part of our economy locally, nationally and globally. None of us will enjoy a sustained economic recovery until all of us have an opportunity to participate.
 
In managing money on behalf of our clients, Warren Ward Associates concentrates on the strategic allocation of their assets. Our aim is to use this diversification to do better during market pullbacks while generally matching the markets during upswings. We did not sell investments during the correction, so remain fully invested on our clients' behalf.  We do expect to begin hedging some of their gains as the S&P moves above 1100 or so. Over-optimism isn't likely to be good for the long-term economic heath of our clients, regardless of how big a difference a year may have made. 

As Seen on TV

Not too long ago, I saw a program on CNBC about selling via infomercial. Even though I’ve never availed myself of the opportunity to “act in the next five minutes and enjoy free shipping”, I found the show interesting. It featured Ron Popeil and others who invent clever gadgets and then make infomercials to sell them to the rest of us. The show made the point that infomercials are typically well produced making each item offered appear useful, unique – and unavailable elsewhere. Of course, without a great infomercial, the products would never sell.

I am not a gardener but I have heard that a tomato plant which produces ten pounds per season is doing pretty well. A friend went to visit his father the other day and noticed two shot glass-size cups on the window sill. When he asked about them, he learned that they were tomato plants which, according to the infomercial, could be counted upon to produce 60 pounds per plant per season. Time will tell if that particular offer meets expectations.

In addition to plants and pocket fishing rods, you can also find investment advice on television. Regular readers of my articles know that I don’t watch much TV but new acquaintances are sometimes surprised to learn that I don’t tune in to Jim Cramer every night to hear his investment ideas. Mr. Cramer was apparently a successful hedge fund manager (apparently because hedge funds are subject to very little regulation so their true performance is difficult to accurately determine) but, more critically for television, he is entertaining. According to research I have found, his investment advice has not been any better than average, although he certainly does make some good recommendations. The article I cited is not the only one which evaluates his skills. According to Google, the next most popular story about him comes from a source I consider to be one of his competitors, the Motley Fool. Like Mr. Cramer, that organization provides free investment advice in order to bring viewers to its articles and website. Those viewers make it possible for the Motley Fool organization and CNBC to sell advertisements. Of course, there’s nothing wrong with selling ads but when that’s the reason a site (or column or infomercial) exists, it certainly increases the value of an entertaining presentation.

You may be familiar with two additional sources of investment advice: Suze Orman and Dave Ramsay. Ms. Orman hit it big on Oprah but began her career somewhat more humbly, selling insurance in California. She now receives fees from the annuity products she endorses which makes me wonder if her advice can be truly unbiased. Mr. Ramsay offers very practical advice, then recommends local salespeople to implement his strategies. These individuals apparently agree to follow his approach in working with their customers but before buying from one, you might want to ask if any of their sales commissions are shared with Mr. Ramsay. While both of these nationally known figures have undergrad degrees, neither has earned professional certification in financial planning. That makes me a bit unsure about why their advice should be considered inherently more trustworthy than that available through any other infomercial, selling any other product.

Information is critical when making investment decisions. Whether you count on a guru or subscribe to professional publications, all the research in the world won’t guarantee success because investments don’t always perform as expected. Warren Ward Associates utilizes a “slow but sure” approach, employing the Nobel prize-winning strategy known as Modern Portfolio Theory. We have always agreed with famed economist Peter Bernstein that the future is unknowable, so we allocate investments among a range of categories. The downside of this approach is that if one segment does extremely well, i.e. technology stocks in the late 1990’s or housing stocks in the recent past, our clients are going to miss out on some of the excitement. On the other hand, when the inevitable correction follows each bubble, our clients receive protection through the diversification, again avoiding some of the excitement.

I believe that most people who offer free advice do so in hopes of selling something, whether it’s products for the home or investment products. WWA’s only source of compensation is the fees paid by our clients, so our advice is never influenced by our desire to sell anything. If you’d like to receive unbiased advice, instead of a sales pitch disguised as advice, give us a call.

The Philosopher's Stone

Those of you who were better history students than I may remember the philosopher's stone from your study of the Middle Ages, although it was Van Morrison’s song of the same name which recently piqued my interest. The philosopher’s stone is a legendary alchemical tool, supposedly capable of turning lead into gold. In the view of some early scientists, even one as otherwise advanced as Sir Isaac Newton, it would provide its owner with enlightenment in addition to extreme wealth.

Clearly anything possessing the ability to turn lead into gold would have value literally beyond measure. But, in fact, I think a large number of us have cooperated to accomplish something quite similar over the past six months. Through our combined efforts, we have turned the lead of our investment portfolios into gold or, at least, have increased most account values considerably.

Following an up-and-down start at the first of the year, the market (as measured by the S&P 500) gained about 17.5% through the end of July. When I wrote back in November and December that we were going to remain invested on behalf of our clients, one of the reasons I did not include is that selling into a declining market requires not one but two decisions. After having chosen to sell, you have to decide when to buy back in. When I hear from people who are considering that step now, the usual reasoning is something like, “It looks as if the recovery is real.” The problem is, having absorbed whatever loss accompanied their decision to sell, they are now significantly behind the market and may feel the need to assume an overly aggressive approach in hopes of catching up.

It’s important to remember that stock markets are a leading indicator, that is, their rise predicts an improvement in the overall economy. I believe it’s too soon to say that the recession is over, thus too soon to declare that a long-term positive market trend has begun. Back in December, I quoted Warren Buffett’s comment: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Greed is one of the primary drivers of people’s return to the markets. I have become concerned that those amateur investors who tend to do the wrong thing at the right time (or vice versa) are preparing to leap into a market that’s not yet ready to sustain significantly increased buying.

Peter Bernstein was an economist and historian whose writings I have followed for many years. He maintained that, regardless of the amount of information available, the future will always be unknowable. Even though some analysts claim to have forecast the market’s meltdown in response to the mortgage crisis, I don't know of any whose overall predictive successes are greater than chance. Thus I continue to believe that Bernstein is correct: it is impossible to predict the future, including market declines. Our underlying investment philosophy is to protect our clients from the worst of the market’s ravages through diversification. That has worked for us in the past and worked again during this most recent correction. One additional advantage of this approach is never having to decide when it’s the right time to get back into the markets.

That said, the further bullish sentiments spread, the more concerned I become. Although markets have made a good showing so far this year, I suspect that we’ll get at least one more pull-back so I am repositioning some of our clients’ assets in hopes of once again helping them avoid significant losses.

Unfortunately, the philosopher’s stone has eluded me just as it did the thinkers of the Middle Ages. I have achieved neither the promised enlightenment nor the ability to turn my clients’ assets into gold. However, I can safely reiterate our firm’s commitment to a strategy that tries to protect them from market-related losses while also allowing them to participate in market upswings.  Unless and until I obtain the philosopher’s stone this seems the most prudent course of action. 

Warren Winston and Forest

I learned long ago that I’ll never have all the right answers, although that doesn’t stop me from trying to improve my percentages. I spend a lot of time reading articles and books by different authors covering a wide range of fields. Let me turn to the thoughts of a couple of them as I close the year with an update on the markets and resultant changes in our investment strategy at Warren Ward Associates.

I am one of many who appreciate the work and wisdom of Warren Buffett, arguably the most successful investor of our age. He has always maintained that his investment process is basically the application of common sense and that he never invests in a business he can’t understand. He is very conscious of the extreme swings which markets endure, having offered this insight on the topic: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” Here’s another of his thoughts, regarding how he makes the decision about whether to be in the market or not: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. With consumer confidence at its lowest level since the index was created in 1967, perhaps fearful is not too strong a word to apply to the current situation.

Winston Churchill, while not quite as approachable as Mr. Buffett, proved to be exactly the right leader for his time. One of his better known quotes is: “Pessimists see problems in every opportunity. Optimists see opportunities in every problem.” I consider myself more a pragmatist than either of those but must confess to feeling somewhat optimistic right now, at least about the future of the markets.

I have written before that, among its other activities, the St Louis branch of the Federal Reserve keeps track of the “immediately available” segment of the domestic money supply – what is known as Money at Zero Maturity (MZM). This figure now stands at its highest level since I have been following it. At the end of November, it was over $8.8 trillion and increasing at a compounded rate of about 3.8% annually. If it gets much higher, it will reach the gazillion level made famous by Tom Hanks in the movie Forrest Gump. To put that number into perspective, the US government stimulus package signed into law in early October totaled about $700 billion. US consumers and businesses have more than ten times that much on the sidelines and ready to put to use. It is our experience that most of those MZM dollars make their way into the stock and bond markets as people’s fears subside. We hope to keep our clients positioned so their account values are lifted as that tide rises.

A common thread running through many of the investment-related articles and newsletters which have appeared recently is “there’s been no place to hide”. Regardless of which of many investment strategies is being discussed, the song has remained pretty much the same. Our approach to investing has always centered on the prudent allocation of assets among multiple segments of the stock and bond markets. The reason is simple: in the past, that strategy has offered our clients protection against market downturns, in part because investors typically buy bonds as they are selling stocks. This time around, bonds have been sold as well and, as others have reported, there has simply been no refuge other than cash – which has led to the increase in MZM.

Although our managed accounts have shown losses, in many cases they appear to have been smaller than those suffered by the broad markets. Asset allocation has not eliminated losses for our clients but it has buffered their account values as we intended. We will continue to utilize that strategy even as we attempt to refine it.

The US economy is clearly not the only one in the world but I do think it remains the most important. It seems to me that both recessions and recoveries have a tendency to begin and end here, with the rest of the world following in turn. Although WWA invested in Japan on behalf of our clients about a year ago, we have closed those positions and have also reduced our broader overseas exposure. We will redeploy those assets domestically, adding to the large cap value and small cap growth sectors. Also, since oil and most other commodity prices have fallen dramatically, we are adding a small position in the natural resources sector as a hedge against a future upswing. We will also begin to transition to a less volatile approach to owning bonds on behalf of our clients and will include tax-free municipal bonds in those accounts where it makes sense.

As always, these changes will be made automatically for our wealth management clients. We suggest that those who read my articles but are not yet clients discuss ongoing strategies with their own advisors.

This has been a very difficult period to be an investment advisor. I am an almost compulsive reader, perhaps hoping that the next book or article will be the one that provides the key to unlocking even better performance for our clients. Although no single right answer has appeared so far, we continue to make incremental improvements and use the wisdom of people like Warren Buffett, Winston Churchill and even Forrest Gump to guide us. Life’s “box of chocolates” has included some pretty unpleasant selections this year but WWA continues to employ a diversified strategy aimed towards improving our clients’ returns in both up and down market situations.

Planning for the Proverbial Rainy Day

The economic downturn has brought finances and the need for planning into the headlines. As people consider the reality of job loss, the concept of having a rainy day fund evolves from proverb to reality. Having some easily accessible savings to cover an emergency is generally a good idea but it may not be easy to decide how much to set aside. One of the main reasons this is true is because saving money is always accompanied by an opportunity cost. That is, if people are building up their savings, they are not doing something else with their money. For example, if they’re not funding their retirement account, they may be trading one problem for another.

Since prudent planning generally includes having emergency funds available, we must decide how much is enough. I have often heard “six months spending” suggested as a target but I have found that to be a frustrating goal for many. When a target amount seems too imposing, some people will see no way to reach it and simply quit trying. Before he retired from the Wall Street Journal, Jonathan Clements once wrote that people with equity in their homes didn’t need such a fund as they could always borrow via a second mortgage. I believe he later retracted that statement but I think it might be a concept worth considering. Even though home equity was sometimes poorly used leading-up to the recent market meltdown, I think planning on utilizing a second mortgage remains a sensible option for many.

Such available equity allows the necessary savings to be smaller, so the correct amount might be the answer to the question: “How much do you want to be able to tap without having to borrow?” When I work with individual clients, I often suggest a range of things, not dollars. I.e., do you want to be able to have your car’s transmission repaired or buy a refrigerator or re-roof the house? I think people are often better at answering thing questions because not everyone still thinks in terms of costs these days. Over the years, many have gotten more used to payments instead.

This approach usually allows us to arrive at an appropriate size for the fund, bringing us back to the question of the best way to build it. If we choose to do so over time, some sustainable amount must be named. Rather than offer a suggestion like reducing your latte intake by 2 per week and using that $10 to fund the account, I think a more useful approach is to consider Nike’s slogan: Just Do It. The target balance can be divided by 52 to yield the amount to be saved weekly. If you pay yourself first, you will adjust your budget around those extra savings. When time doesn’t appear to be an issue, it may be easier to start with something like half of the next raise or a lump sum like a portion of a tax refund.

Once the funding is completed, of course, a decision must be made about what to do with that extra money. As planners, we are likely to suggest that the saving be continued and added to college or retirement savings.

With as many different situations as clients, no one answer is ever going to suffice for all. We work with each client trying to guide the process, usually starting with a short test aimed at learning about each one’s tolerance for risk. Depending on the situation, we might also employ additional tests which help us discover the role money plays in a person’s life. These tools allow us to learn enough to make appropriate suggestions for each question. Once a “rainy day fund” is established, it has been our experience that saving very often becomes a self-fulfilling prophecy: when people see the account growing, it’s reinforcing. They become more wedded to the idea, eventually ensuring their saving success.

Warren Ward Associates does not have the answers to all financial questions, although we almost always have suggestions for our clients to consider. Whether related to developing an emergency fund or deciding how to meet a long-term goal, we are always willing to listen and offer advice.

Who is Charles Ponzi and Why Are People Saying Such Terrible Things About Him?

Our Securities and Exchange Commission (SEC) defines a Ponzi scheme as “a type of illegal pyramid scheme named after Charles Ponzi”. This, of course, begs the questions of who Ponzi was and how he came to the attention of the SEC. Back in the 1920s, Ponzi defrauded thousands of New England residents by helping them speculate in postage. He promised investors at least a 40% return every 90 days by taking advantage of the differences in value between U.S. and foreign currencies used to purchase international mail coupons. Again, the SEC: “Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921!” Although he paid off the earliest investors to make the scheme look legitimate, subsequent investigations found that he had only purchased about $30 worth of coupons.

Ponzi was probably not the first to pull off such a trick but, 90 years later, we still use his name to describe schemes which use money from later investors to pay off earlier ones. These early investors inadvertently bring new investors into the fold by sharing stories of their success. At least “until the whole scheme collapses” (quoting the SEC one final time).

This past year has brought a spate of similar scams to light. Withdrawals are not a problem for the perpetrator as long markets are doing well. During bull markets, people are comfortable letting their investments (apparently) continue to grow along with the markets. However, when markets decline, people often decide to lock in some of those profits, leading to requests for withdrawals and the sort of implosions we have seen. The June 12th The Washington Post reported that the FBI had nearly 500 Ponzi scheme investigations underway.

These frauds sometimes feature recurring themes, such as an affinity group, to attract investors. Ponzi was an immigrant and played on his Italian heritage to bring in trusting investors. Bernie Madoff used his Jewish connections to do the same. In other ways they are different: Ponzi targeted uneducated investors, describing himself as a populist. Madoff famously catered only to the elite. Being a Madoff client carried considerable caché, at least until last fall when investors requested $7 billion and only about $200 million was available.

Ponzi offered to let people get rich quick, while Madoff promised consistent returns regardless of market conditions. Ponzi perpetrated his fraud before the existence of the SEC while Madoff basically ignored it. Both of them duped thousands of investors, neither actually invested the money they raised and both built unsustainable pyramids which ultimately collapsed.

Ponzi pleaded guilty to a federal charge and spent about 14 years in prison before being deported. Madoff pleaded guilty last winter to 11 felony counts of orchestrating a fraud. Apparently he told his sons that it would amount to $80 billion, although that probably includes fictitious profits in addition to the money originally invested. According to the records I’ve seen, very few of his clients were Indiana residents. This might be basic Midwestern conservatism at work or simply that his sales machine had not yet begun to focus on the heartland by the time he confessed.

Regular readers of my articles have heard these words before but in light of recent abuses, they bear repeating. If you encounter an investment which seems too good to be true, it almost certainly is.

At Warren Ward Associates, we begin the process of investing on behalf of our clients by asking two questions. First, who will buy this investment when it’s time to sell? And, second, if the safest investment in the world is paying a given percentage, what additional risks will our client have to take to earn some multiple of that? Our investment process generates wealth by reducing losses, not providing extraordinary gains. Our approach is strategic and evolves with the markets. It does not offer a way to “get rich quick” but then neither do most other investment opportunities, as Ponzi, Madoff and others so ably demonstrate.

The Little Known Tale of the Three Businessmen and the Financial Planner

Once upon a time, three businessmen were talking together and discovered that each of them had encountered a financial planner. However, each had a different experience, so they decided to talk further to see if they could agree on the definition of a financial planner.

The first one said, “I own a small business. The retirement plan I had was sold to me by an insurance agent who was unable to offer personalized advice to me and my employees. When I began to work with the financial planner, I learned what I was getting and exactly how much it cost. Finding someone who knows investments and is able to provide planning advice to my staff has been a great help. All of my costs are clearly disclosed so I know what I’m paying and what I receive for my fees. A financial planner is like a detective who can figure things out for his clients.”

The second businessman responded that the first man must have been mistaken and told his story. “My wife and I met a financial planner who took time get to know each of us. She asked us to complete a risk tolerance questionnaire to see what type of investments might be most suitable. Then the planner recommended specific stocks, bonds and mutual funds to meet our needs. She got to know us as individuals and handled our investment management needs so that we were comfortable with the level of risk we were taking while keeping our costs as low as possible. I would say that a financial planner is more like an investment expert who places a client’s needs ahead of her own. That’s a financial planner.”

The third businessman disagreed, saying neither of the others had described what he had experienced. “We didn’t need advice about either retirement plans or investments but the financial planner we met helped us through several of life’s transitions. There was the time our kids left for college, then the time we received an inheritance, then my retirement. The planner reviewed our insurance coverage, filled-out our children’s FAFSA forms, answered our questions about the estate, then helped us make the transition into retirement. I think a financial planner is more like a great travel agent. Figuring out where we are going and helping us get there – that’s a financial planner.”
 
This story may remind you of the slightly better known fable in which three blind men each felt part of an elephant. The first described the animal as being like a tree after touching its legs. The second said it was like a wall after touching its body. And the third said it was like a snake after touching its tail. No one of them had a full picture of the animal until they shared what they had learned. Financial planning is not unknown to most people but neither is it as well understood as professions like dentistry or architecture. It may be news to some but there are many aspects of people’s lives in which financial planning can be useful.

If your own situation involves a retirement plan with details you are not certain you understand, it might make sense to ask for some advice. We regularly discover extremely high costs, often not clearly disclosed. Other times, the fund choices are average or even below and it’s rare that advice is available from the sales person. If, as a business owner, you are not certain of your plan’s 404(c) compliance, you may also have personal liability should problems with the plan be discovered sometime in the future.

If your investment decisions are driven to any extent by headlines, it might be a good idea to develop a long-term plan based on managing risks as well as trying to maximize profit. There is almost unlimited information available but few have time to read, let alone digest it. Managing investments is a key component of financial planning and is a specialty of Warren Ward Associates.

Life transitions can either be expected or appear out of the blue. It’s possible to anticipate at least some of them through preparation of a financial plan but it’s always going to be easier to face one, whether expected or not, with a competent, knowledgeable advisor at your side.

Should any of these situations seem familiar, please consider taking advantage of one of our free, one-hour “get to know you”  consultations. Like your CPA and attorney, WWA always puts a client’s interests ahead of our own standing by our motto: “Financial planning as individual as you are.”

One Day You're Eighty . . .

I was having dinner with a friend not too long ago. He had recently visited a woman he’d known for many years who now lives in a nursing home. While they were talking, she spoke about how quickly time seems to pass, commenting: “One day you’re eighty and the next you’re ninety-four. Where does the time go?”

Five years ago, a childhood friend suffered a heart attack and died at the age of fifty-seven. As I shared the news with some other friends, I said it didn’t seem fair – heart attacks were supposed to happen to older folks, going on to define older with an age younger than some of those in the group. As you might suspect, this led to some bemused comments around the table. For many people, the definition of old is “about twenty years older than I am right now” and rich is “about twice what I have”.

As I found out when sharing the news of my friend’s death, age is relative. Back in 1909, 62 was pretty old. Today, with all the advances in nutrition and health care, those of us who are that age may not feel quite so old. This was brought to mind recently as I read an article in Science News about different ways that age can be measured. One of the newer approaches is to consider both a person’s current age and the number of additional years she or he is likely to live. This research suggests that the world’s average age is about 30 (with 44 years left to live) and North America’s average age is about 37 (with 43 years left to live). While it’s not surprising that we are among the group with the longest expected life span, that fact certainly influences the way financial planning must be approached.

While providing planning services to our clients we often hear the desire expressed to “not be a burden” on anyone, especially children. That requires us to plan so that our client’s assets last as long as they do, even when they live to age 94 or beyond. One of the strategies we sometimes suggest is purchasing long term care (LTC) insurance as retirement nears. Although I once shied away from recommending it, a couple of things have changed. First, some insurers have now been offering such policies for almost 30 years. Hopefully, that gives them enough experience to calculate premiums with a reasonable degree of accuracy. Second, Indiana was one of the very first states (and is still one of only about twenty) to have joined the government’s Partnership Program. This allows a certain level of LTC coverage to exempt an individual from Medicaid’s spend-down requirement. These changes combine to make LTC worth considering by most of our clients as they approach retirement.

Another way to “not be a burden” is by being candid with your family. This usually means that, at some point, parents must have that often difficult discussion about finances with their adult children. In our experience, people are generally reluctant to speak about their financial situation, even with family members. Perhaps they have been raised to hold that type of information closely or are simply uncomfortable revealing that there’s either more or less than might have been expected. Whatever the cause for reticence, holding back is rarely a helpful strategy. Trusting your family with such information is likely to have a positive outcome. While every situation is unique, we have helped people hold this discussion many times and might be useful in facilitating a meeting. Interestingly, we have been asked to help about an equal number of times by each generation.

Several years ago, I wrote that dying is not a decision we are allowed to make, although we are often able to make certain choices about how we live our last years. I was reminded of that by this quote from George Burns, which provides a fitting way to close this article.

"You can't help getting older, but you don't have to get old."

Poor Man Wanna be Rich, Rich Man Wanna be King

I am not an expert on TV programming but according to Wikipedia, winning money has been a theme since the advent of “Cash and Carry”, hosted by Dennis James on the DuMont network in 1946. The great popularity of “Who Wants to be a Millionaire?”, first in the UK and then the US, suggests that becoming rich remains of interest to many. However, defining rich may not be as simple as it seems.

Money is obviously important. We all understand that not having enough to meet basic needs is unpleasant. On the other hand, we might suspect that the wealthy already have all the money they need and getting even more wouldn’t make much difference. Interestingly, that’s rarely the case. Hard as it might be to imagine, even those featured in magazines and tabloids are often living paycheck-to-paycheck or nearly so. Just as things have a way of expanding to fill all available space, spending has a way of expanding to consume available income – and often a bit more.

Even though the rich and famous appear to enjoy lifestyles quite different from the rest of us, their lives touch ours in ways that may not be obvious. By regularly enjoying gourmet meals and attending the theater, they help ensure the availability of that fancy restaurant or play we might sample during a visit to the big city. Their flying first class reduces the cost of coach seats. And, don’t forget that the top 5% of US earners pay over 60% of all income taxes.

Warren Ward Associates’ clients are quite diverse, encompassing a wide range of financial situations. Naturally, they have varied attitudes about money and risk-taking. Some feel confident regarding their current and longer-term finances while others feel less secure. Regardless of their circumstances, our process allows them to step back and put their entire financial picture into perspective. Using the wide range of tools at our disposal, we help all of our clients find a balance between their hopes & dreams and income & assets.

While markets tend to dominate the headlines, we have learned that we can’t discuss people’s investments intelligently without an answer to the underlying question of what it’s going to take for them to feel comfortable. In other words, how rich do they need to be? Once we understand their goals, we suggest strategies to move them in the right direction. In fact, the longer we know each of our clients, the more we learn about them. Over time, their responses guide us toward the most appropriate strategy for each stage in their lives. Sometimes, people are further from their goals than they hoped which might lead us to suggest a different investment strategy. Other times, we are able to begin conserving assets even before retirement. Regardless of what we discover, we always structure investment accounts to reduce market volatility.

Bruce Springsteen probably believed that he was describing all of us when he wrote the line I borrowed as the title of this article. In real life, Jalene and I have learned that people can adjust to almost any situation, once they understand the facts and we understand their resources and goals. Financial planning is not the process of making poor clients rich or rich clients royalty but of helping all clients find peace of mind with what they have or can reasonably hope to amass.