FLBC 005: The Building Blocks of a Financial Plan – Part 1

Podcast Details:

Podcast Title:  The Building Blocks of a Financial Plan – Part 1
Podcast Series: Financial Literacy Boot Camp

Full Illustrations available on YouTube Version here.

Questions/Issues We’ll Address on this Episode:

  1. What are the building blocks of a good financial plan?
  2. Life insurance is a component of your risk management portfolio but why should you buy and how much?
  3. Major reason why should the average person insure?  Threat of Loss
  4. What should you pay?
  5. How much do you need & how long should it last?

Helpful Links:

Where to Find Us:

Website: https://www.djh-capital.com
Blog: http://www.djhendersonsr.com
LinkedIn: https://www.linkedin.com/in/dhendersonsr
Facebook: http://wwww.facebook.com/djhcapital
Twitter: @PVGrad98 #FinancialLiteracyBootCamp

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams. Dominique regularly contributes to Investopedia’s Advisor Insights where he provides advice to help individuals better understand financial topics.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

The Fallacy of Chasing Market Returns – Part 1

In the classic movie, The Wizard of Oz, there is the memorable scene that has the wizard being revealed as the small little man that he is. By this time though, Dorothy et. al. have gone through enough trials to have confidence in dealing with a “bully” as it were. The quote that I’m referencing is, “pay no attention to the man that’s behind the curtain”. And although I rarely do this, I’m going to give you the punchline of this blog right up front. Resist the urge to try to keep up with the markets. There you have it. I am proverbially “dropping the mic”, and exiting stage left. (For those of you that want just a little more, read on.)

As a veteran of the industry, I feel I should justify my position. After all, I ran a municipal trading desk for nearly five years and booked annualized returns of 7%, so I’m not talking out the side of my face. For years though, I felt the elixir that the financial markets was drinking seemed too good to be true.  And regardless of my gloating a few sentences ago, I realized then (and am acutely aware of now) that I was not the smartest guy in the room, so I often spent time asking [a lot of] questions of a lot of people. The majority of them echoed the same sentiment…”things are weird out there”. They meant in both the bond and equity markets. (I realize there are more asset classes than just those two, but they cover most of what retail investors have to choose from.) So that led me to evaluate what was so weird….

# 1 Weird thing…Equity markets have gone up [way] more than corporate profits.

So you might say, Dominique, this will always happen because investors look at P/E ratios and are essentially willing to pay for earnings that have yet to happen. But let me warn you, there’s a reason that “past performance is no guarantee of future results”.  So here are some facts for you.  Per the Shiller PE ratio, the market trades at an average 16x multiple, although it is currently at 27x.  Also, understand that on average, and a fairly recent average (e.g. 1984-2014), equity markets returned 10%.  So here comes the weird…I began to realize that nearly every investor, especially those with most of their investable net worth in company retirement plans: a) rarely has the option of building a fully diversified portfolio (more on that later), or b) has the discipline to stick with an investment strategy for more than one market cycle. So let me address two major issues that I just ran past. The first is that the market by nearly any estimation is overpriced as it relates to actual corporate earnings.  Next, is the lack of “real” choice in 401(k) plans combined with investor psychology. I’ve written previously on corporate profits and market valuations here, but the refresher course is that corporate profits have actually appreciated about 38% (since about July 2008, whereas equity markets [measured by the S&P 500] have appreciated about 87%.  Could it be that 401(k) deposits are pushing the market higher instead of corporate earnings? Quite possibly.  This wide variance can also be attributed to the result of a lot of stock buybacks by corporations due to the relatively inexpensive carry trade. Corporations have used the low-interest rate environment as an opportunity to issue debt at phenomenally low rates and use the tax shield provided by the interest deduction to lower their tax rates. This concoction allows company XYZ to raise a lot of cheap funds by issuing bonds while using the cash to buy their stock.  More buyers of stock, raises the price and begins to inflate valuations. Next point. Defined contribution retirement plans force most participants into a “long-only” [mostly equity] position regardless of their risk tolerance and time horizon with a menu of 10-15 funds (and I’m being generous). I’ve looked through several 401(k) plans and have been left scratching my head at the dilemma for plan participants.  And if after you finally decide on an allocation, then you get to read and hear all the “doom and gloom” of BREXIT, China’s economic implosion, Japanese helicopter money and the like.  The majority of investors are thrown into a panic in which they end up selling too low and buying back in too high. This is the reason that while the S&P 500 averaged 10% from 1984-2014, the average investor only made 3%.

#2 Weird thing…Short interest is high in equities and bonds.  

The smart money (as it is sometimes called) has seen the trends I’ve named above for years now and have promptly taken the other side of the trade.  So if not smart, definitely enterprising.  As Mr. Ray Dalio says, “if you’re at the poker table wondering who the sucker is, then it’s probably you”.  This crass use of Ray’s words will hopefully help me bring home a point I intend as a gut punch to all individual investors reading this blog right now.  There is a grand fallacy in trying to beat the market. Between all the computer programs that trade markets in hundredths of a second, and the mountain of institutional cash out there with access to up-to-date information, the average investor is up to an insurmountable task in trying to beat market returns. The collective market is hard to beat.  Then, why should you?  Before I answer that…I was saying, the smart money has taken the other side of the trade and sold short a lot of what the average investor might be buying in the company 401(k). Sorry if this was a big secret to you, but it is happening. I recently was reading that this year has only seen 5 weeks of positive equity fund flows, but yet the market is up 6% as of this writing. Well how is the market still going up in the face of so much selling? This is when it helps to realize that the buying that is taking place is actually the covering of short positions. How much short covering? A lot.

So what does all this mean? It means that trading in your 401(k)—regardless of how large it is—is up against a huge wall of money going the opposite way “in trend”. Which means that if you try to keep up with beating the market you might wind up feeling like the carpet has been pulled from beneath you before long. This necessitates you looking at your investment strategy totally different and with a disciplined perspective—not a in and out mentality.

#3 Weird thing……Low interest rates.

Now, low-interest rates are not exclusively weird since there has been precedent. Also, easy money policy or low-interest rate policy (“LIRP”) serves to induce spending to stimulate an economy and keep it from deflation. Trust me, when choosing between deflation or inflation you want inflation—see Japan. So, my point is that this is not a discussion on whether or not interest rates are artificially low (they are) or that the government is printing too much money (who cares). I want you to take a look at the macro picture which I feel is really the only thing that matters.  Think of the US Central Bank’s current monetary policy as potentially disruptive to global economic growth, since many countries are still attempting to recover from the 2007-2008 financial crisis. Most economies abroad are still having problems growing GDP (as are we). Let me back into the explanation….a country can’t raise its interest rates as long as growth is stalling. So instead, they lower interest rates to induce spending (and spur growth).  But what can happen as a result? First, your currency can depreciate which is not all bad because it can give you a competitive advantage with [relatively] cheaper goods to sell.  However, there are other ramifications to consider.  Alternatively (or co-currently), lower interest rates can drive investment capital offshore to higher interest rate economies.  Since capital generally seeks the highest return, this has been seen in some emerging economies.  This can dovetail into eroding the competitive edge gained by currency depreciation and cheaper goods.  The eroding effect happens when the foreign capital headed for “greener pastures” is due to be paid back in a devalued currency.  Quite literally, the cheap currency has bought an advantage that they can’t capitalize on because the interest and principal due on the foreign loans is much more than what was borrowed.  Ideally, a depreciated currency would have stimulated enough economic activity for the foreign capital to remain in the economy.

The fallacy of chasing market returns graphic

However, other factors in an interdependent global economy don’t allow for the ideal all the time.  A recent example of this was the commodity panic in 2015 on the back of lower oil prices.  Only the strongest of emerging economies have survived the revaluation of their currencies.This is what I feel is the most alarming about global economics and another reason why I maintain that the US is still the “cleanest dirty shirt”.

So what do I suggest? Well, that will have to be saved for part 2 because after nearly 2 decades in the industry I feel there is a way to overcome this market weirdness, but it has nothing to do with trying to beat the market.

(TO BE CONTINUED)

FLBC 004: That Thing Called Human Capital aka You

Podcast Details:

That Thing Called Human Capital aka You
Podcast Series: Financial Literacy Boot Camp

Full Illustrations available on YouTube Version here.

Questions/Issues We’ll Address on this Episode:

1. How are you treating arguably your most valuable asset?
2. You have the ability to exchange your time and expertise for money. So what are you doing to maximize this in your overall financial plan.

  • Pay yourself first.
  • Stay debt free if possible
  • Pay less in taxes by finding tax-efficient or tax-free investment strategies to add to your financial plan.

3. What should your priorities be knowing that your time is a non-renewable resource?

Helpful Links:

Where to Find Us:

Website: http://www.djh-capital.com
Blog: http://www.djhendersonsr.com
LinkedIn: https://www.linkedin.com/in/dhendersonsr
Facebook: http://wwww.facebook.com/djhcapital
Twitter: @PVGrad98 #FinancialLiteracyBootCamp

 

Bio:

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams. Dominique regularly contributes to Investopedia’s Advisor Insights where he provides advice to help individuals better understand financial topics.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 003: Aligning Your Money with Your Values-Part 3

Podcast Details:

Aligning Your Money with Your Values-part 3
Podcast Series: Financial Literacy Boot Camp

Questions/Issues We’ll Address on this Episode:

  1. why do people have a hard time finding traction with their financial plan?
  2. why people don’t have plan:
    • There are obstacles.
    • Goal articulation is absent.
    • Accountability is needed.
  3. 3 Things You Can Do:
    • Break out your spending into 2 categories: discretionary and non-discretionary.
    • Write down your goals in 3 columns: short term , medium term and long term goal.
    • Then place your goals in each of those categories so you can prioritize them.

Where to Find Us:

Website: http://www.djh-capital.com
LinkedIn:https://www.linkedin.com/in/dhendersonsr #FinancialLiteracyBootCamp
Facebook: http://wwww.facebook.com/djhcapital #FinancialLiteracyBootCamp
Twitter: @PVGrad98 #FinancialLiteracyBootCamp

Bio

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams. Dominique regularly contributes to Investopedia’s Advisor Insights where he provides advice to help individuals better understand financial topics.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

Audio Player

FLBC 002: Aligning Your Money with Your Values-Part 2

Podcast Details:

Aligning Your Money with Your Values-part 2
Podcast Series: Financial Literacy Boot Camp

Questions/Issues We’ll Address on this Episode:

  1. why do people have a hard time finding traction with their financial plan?
  2. People generally don’t align their use of capital or access to capital with their values. They don’t put there money where there “heart is”.
  3. How does one achieve 100% overlap with their values and their use of capital?
  4. Two initial steps to help:
    • Step 1: Write down what is important to you in regards to values – relationships, education, family, work, volunteering, charity, etc. If you had all the time and resources in the world how would you spend them?
    • Step 2: Figure how much of your monthly paycheck is going to that list?
  5. If you were able to align your use of money with your values, picture how much easier your life would be. Would you have less anxiety more peace? Wouldn’t you be able to live your best life?

Where to Find Us:

Website: http://www.djh-capital.com
LinkedIn: https://www.linkedin.com/in/dhendersonsr #FinancialLiteracyBootCamp
Facebook: http://wwww.facebook.com/djhcapital #FinancialLiteracyBootCamp
Twitter: @PVGrad98 #FinancialLiteracyBootCamp

Bio

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams. Dominique regularly contributes to Investopedia’s Advisor Insights where he provides advice to help individuals better understand financial topics.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

FLBC 001: Aligning Your Money with Your Values-Part 1

Podcast Details:

Aligning Your Money with Your Values-part 1
Podcast Series: Financial Literacy Boot Camp

Questions We’ll Address on this Episode:

  1. why do people have a hard time finding traction with their financial plan?
  2. Is it because they don’t have a professional?
  3. Because they don’t make enough money?
  4. If you used your capital to fit what you believe and what is important to you from a “values standpoint”, wouldn’t you be more content?
  5. Would it be easier to go to work knowing that the time you are trading for income is funding what you believe?
  6. If you were able to align your use of money with your values, picture how much easier your life would be. Would you have less anxiety more peace?

Helpful links

What experts suggest about debt

Where to Find Us:

Website: http://www.djh-capital.com
LinkedIn: https://www.linkedin.com/in/dhendersonsr #FinancialLiteracyBootCamp
Facebook: http://wwww.facebook.com/djhcapital #FinancialLiteracyBootCamp
Twitter: @PVGrad98 #FinancialLiteracyBootCamp

Bio

Dominique is owner of DJH Capital Management, LLC. a full service, comprehensive financial planning firm helping individuals build roadmaps to reach their financial dreams. Dominique regularly contributes to Investopedia’s Advisor Insights where he provides advice to help individuals better understand financial topics.

© 2016 DJH Capital Management, LLC.

Sound bumps provided by www.bensound.com

Put Your Money Where Your Heart Is

More important than putting your money where your mouth is…put your money where your heart is!

Often I find that the psychology of investing and financial management is more complex than the mechanics of it.  Once a person understands why they behave a particular way about money, they easily accept the changes needed to get them to their financial destination.  But without fail, unless these behavioral patterns are understood, people only find limited success.  Ultimately, their financial goal progress is stifled until the “a-ha” moment arrives.  So, how do most happen upon this so-called nirvana of financial omniscience?  Well, more than being magical, it is a progressive journey and not always intuitive.  Recently I recorded a podcast on “Aligning Your Capital with Your Values” part 1 and part 2 that highlights what I’ve uncovered in nearly two decades of work. Here are some things I’ve noticed that have created success with financial plans.

Create a money creed.

Establish what is important to you and write it down!  Instead of feeling neutral about money and what it can be used to do, many people either feel a sense of abundance or one of scarcity.  Unfortunately, this can produce a mindset of overconfidence or fear.  Instead, individuals should focus on all the things that money cannot replace like relationships, integrity and beliefs.  The end goal should be to use money and value people, not the other way around.  This is why it is important to think about the things you value and let that drive how you will think about and therefore use money to build around those values.

Create an accountability system.

Accountability can often be a scary word, depending on what you are unwilling to be transparent about.  However, I’ll submit that being unaccountable in your financial management plan can be catastrophic. How are most people held accountable?  Budgeting. Yet, in 2013, Gallup found that 2 out of 3 Americans didn’t have a budget.  So what is my advice?  Establish a budget.  At a minimum, quantify your discretionary and non-discretionary expenses.  Having a list of all your non-essential expenses will help you understand what can be reduced or even eliminated from your spending.  This will give you the extra cashflow to pay down debt and save toward your goals.  Accountability may also come in the form of hiring a financial advisor to help you clearly articulate goals and stay accountable to what you want to do.  Whether you choose the DIY route or the coaching route, the bottom line should be achieving results.

Create a realistic plan that includes an investment policy statement.

Most individual investment plans lack an investment policy statement (“IPS”), and the ones that do are usually not thorough enough.  A complete IPS has the following components:

  • Risk tolerance– including an investor’s willingness and ability to accept risk;
  • Return objectives – the rate of return needed to meet current and future cash flow needs;
  • Tax, legal and other constraints– will there be gifting concerns, tax considerations or other important reasons to include;
  • Asset allocation- all assets should be considered not just those that will be invested “in the market”.  The Aspirational Investor by Ashvin Chhabra is a good treatise on the inclusion of total net worth, not just investable assets.
  • Monitoring system – arguably one of the most important parts of the process to gauge whether or not progress is being made towards goals.  I advocate a system that tracks the desired return for a group of assets to an appropriate benchmark.

So there it is, a framework for not just putting your money where you mouth is–but where your heart is!