Charlotte Financial Planning & Advice

Not Googling a New Investment Advisor, Seriously?

It’s hard to believe, but there are people who sign on with a new financial advisor without bothering to do even the bare minimum due diligence. Consider the sad story of fraudster Janamjot Singh Sodhi who ran a Ponzi scheme promising high rates of return in a relatively short period of time.

Sodhi solicited and received funds from investors starting in 2005 and through the fall of 2011 despite the fact that

The New York Stock Exchange permanently debarred him in January 2006, and
The California Department of Corporation ordered Sodhi to cease and desist from dispensing investment advice in California.

Potential investors and soon-to-be victims could have easily learned about these serious redflags had they bothered to simply google “Janamjot Singh Sodhi”. Sodhi did not use an alias so the information and fraud was in plain sight.

“Forget about hiring an attorney or paying for a background check. If you just typed his name into Google you could find out that before he solicited you he was barred by the NYSE and threatened by the state of California. … People spend more time buying a used car for $2,000 than giving $10,000 or $1 million to someone they never met or checked out to invest.” This from Bill Singer, a lawyer who specializes in investor fraud.

Sodhi will spend the next four years and nine months in jail and required to pay back the $2.4 million he stole from investors.

Source: CNBC

What’s Wrong with the Financial Services Industry?

According to Barry Ritholtz, the big problems that plague the financial service industry are the following:

• Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute. And, it is difficult to charge excessive fees for these services.

• Confusion is not a bug, its a feature: Thus, the massive choice, the nonstop noise, confusing claims, contradictory experts all work to make this much a more complex exercise than it need be. This is by design.

• Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons. There is a difference between normal greed (human nature) and outright criminality. This is why strong regulators and enforcement cops are required.

• Incentives are misaligned: Too many people lack the patience to get rich slowly. Hence, not only do the wrong people work in finance, and some of the right people exercise bad judgment.

• Too many people have a hand in your pocket: The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have done an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.

Source: The Big Picture

Planting a Tree

Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” It’s planting season and your deadline to act is coming up very soon!

If you have an individual retirement account (IRA) or are considering opening an IRA, 2018 contributions to IRAs can still be made up through April 15, 2019.

Make it a double? If you really want to make the most of the growth potential that retirement accounts offer, you should consider making a double contribution this year: a last-minute one for the 2018 tax year and an additional one for 2019, which you’ll claim on the tax return you file next year. That strategy can add much more to your retirement nest egg than you’d think.

2018 / 2019 Annual IRA Contribution Limits*

Traditional IRA:
$5,500 + $1,000 if you are 50+ years (2018)
$6,000 + $1,000 if you are 50+ years (2019)
Roth IRA:
$5,500 + $1,000 if you are 50+ years (2018)
$6,000 + $1,000 if you are 50+ years (2019)

*Note: Your specific maximum contribution limit can be affected by your taxable compensation for the year and the availability of an employer-sponsored retirement plan.

The savings, tax deferral, and earnings opportunities of an IRA make good financial sense. The sooner you make your contributions, the more your money can grow, and the more “shade” you’ll have to enjoy in the future.

If you have any questions about how to make the most of your IRA savings opportunity, please give us a call at 704-350-5028.

Six ways our brains make bad financial decisions

Click to zoom

Our brains are hard-wired to choose short-term payoff over long-term gain. Duke University professor of psychology and behavior economics Dr. Dan Ariely has a great article on this subject. Here are six common mistakes investors make – and how to avoid them.

SAVING: What’s more important: buying a new iPad nowor saving that moneyfor the future?
RETIREMENT PLANNING: How much money do you think you need for your retirement, assuming you plan on maintaining your current lifestyle?
INSURANCE: Why do we make such bad decisions when it comes to insurance?
SHOPPING: Why do we invest in extended warranties?
MORTGAGES: Why do we buy mortgages from the same old suspects?

Read Dr. Ariely’s article here and learn how to avoid these bad decisions.

Thirty Years Ago Today…

Thirty years ago to this day, the following words were written:

“We do not have, never have had, and never will have an opinion about where the stock market, interest rates or business activity will be a year from now.”

–Warren E. Buffett, the world’s most admired, least imitated investor, in his annual letter to shareholders 30 years, dated February 28, 1989.

Note:

On February 28, 1989, the Standard & Poor’s 500-Stock Index closed at 288.26. Yesterday it closed at 2,792, fairly close to ten times where it was on the day of Mr. Buffett’s letter. Of course, this ignores dividends.
The cash dividend of the S&P 500 for the full year 1989 was $11.73. For the full year 2018, it was $53.61, a bit more than four and a half times where it was in 1989.
To get a sense of how these increases compare to inflation, note that the Consumer Price Index stood at 122 in February 1989. In January 2019 it was 253, having slightly more than doubled in the interim.

When will we ever learn?
It was never about “timing the market.”
It is always about TIME IN THE MARKET.

5 Big Retirement Mistakes

#1 Not paying for financial guidance
People who have no problem paying for the services of an accountant or lawyer often balk at the prospect of cutting a check to pay for investment advice. Instead, they rely on “free” help from retirement advisers they meet at banks, brokerage firms and retirement seminars.

#2 Investing in something you don’t understand
If your financial adviser recommends an investment you can’t explain to someone else, just say no. It will likely carry steep fees (to pay steep commissions) and be less wonderful than it is touted to be.

#3 Supporting your adult children
You might be tempted to help them with a down payment or living expenses, but unless you are certain that you have enough to ensure your own survival, don’t do it.

#4 Low-balling elder-care costs
When planning for retirement, few people think about how much they might end up spending to support elderly parents. Inflation and longevity could erase the purchasing power of the children’s pension and savings, leaving them with too little to live on, let alone cover medical expenses.

#5 Underestimating how much you will need
It is easy to underestimate the impact of inflation and longevity, or the cost of health care, supporting family members or caring for a spouse with Alzheimer’s disease or cancer.

Source: Wall Street Journal

10 Most Common Behavior Biases of Investors

Robert Seawright with Madison Avenue Securities assembled this list of the ten most common behavioral biases that hinder investors:

Confirmation bias – we gather facts and see those facts in a way that supports our pre-conceived conclusions
Optimism bias – our confidence in our judgement is usually greater than our objective accuracy
Loss aversion – the pain of losing $100 is at least twice as impactful as the pleasure of gaining $100 (causes investors to hold onto their losing stocks too long)
Self-serving bias – the good stuff that happens is my doing while the bad stuff is somebody else’s fault
Planning fallacy – overrate our own capacities and exaggerate our abilities to shape the future
Choice paralysis – we are readily paralyzed when there are too many choices
Herding – we run in herds, latching onto the group think and moving in lock step
We Prefer Stories to Analysis – people love a good narrative and prefer to be swept up by the story rather than work through the definitive numbers
Recency bias – we tend to extrapolate recent events into the future indefinitely
Bias blind-spot – the inability to recognize that we suffer from the aforementioned cognitive distortions!

Guessing at Retirement?

Here are some startling facts when it comes to retirement planning:

75% of middle-class Americans say their estimates of their retirement needs are based on “some sort of guess”.
Middle-class American believe the median cost of their out-of-pocket health care in retirement will be $47,000 when the actual number according to the Center for Retirement Research is $260,000.
On average, middle-class American expect to withdraw 10% of their nest egg annually in retirement. Most experts recommend annual withdrawal rates of only 3% to 4%.
34% of middle-class Americans expect to live off of 50% or less of their pre-retirement income. Since the median household income is ~$50,000, these folks are planning on living off of less than $25,000 per year.

Are you playing the guessing game or have you done detailed calculations of your retirement needs?

Source: New York Times

Rich Dad, Poor Dad, Bankrupt Dad?

You’ve probably heard of Robert Kiyosaki through his best-selling book series, Rich Dad, Poor Dad. Kiyosaki holds himself out as a self-made wealth guru who is happy to share the secret money-making strategies of the wealthy.

The tactics that he has advocated range from silly to illegal and include things like insider trading, buying multiple real estate properties for no money down, and buying stocks on margin via unfunded brokerage accounts.

And you can add bankruptcy to Kiyosaki’s highly questionable list of strategies. One of Kiyosaki’s businesses, Rich Global LLC, filed for bankruptcy protection in 2012 after it was ordered to pay a $24 million settlement. Kiyosaki will not be putting any of his personal fortune toward the settlement.

There is no evidence that Rich Dad, the man who allegedly imparted all these money-making secrets to Kiyosaki, ever existed. Nor is there any evidence that Kiyosaki amassed any significant wealth before the publication of Rich Dad, Poor Dad in 1997. Nonetheless, Kiyosaki is now reportedly worth $80 million!

In all likelihood, Kiyosaki did not get wealthy using the schemes he pushes in his books, but through proceeds of his book sales and personal appearances. He got wealthy selling the dream and illusion of get-rich-quick schemes.

source: Forbes

Quick Check: Are Your Retirement Savings On Track?

The two greatest impacts on your retirement savings over time are starting early and saving consistently. Beyond that, how do you know if you’re on track to have enough set aside to retire comfortably? Fidelity Investments recently published convenient “rule of thumb” that provides convenient, age-based targets to help you gauge your progress.

What’s the end game look like?
If you’ve saved eight times your annual salary by your last year of work before retiring, you should have enough money to replace 85% of your annual income for a 25-year period, including social security.

Age-based targets for retirement savings. For example, at age 35 you should have saved one times your annual salary. By age 55 you should have 5 times your salary. Ultimately retire at age 67 with eight times your annual salary set aside in retirement savings.

Here are the key milestones for getting to 8x and beyond:

age 25: start saving for retirement beginning at 6% of annual salary and increasing this by 1% per year until it reaches 12%; employer provides a 3% matching contribution
ages 31-67: setting aside 12% of annual income for retirement savings with an additional 3% matching contribution from the employer
age 35: you should have saved one times your annual salary
age 45: you should have saved three times your annual salary
age 55: you should have saved five times your annual salary
age 67: retire with eight times your annual salary in retirement saves
age 67-92: live off your retirement savings

Recognize that this is a broad guide and each person’s requirements will vary by the specifics of their situation. Nonetheless, this provides a quick and easy reality check.

What if you check your actual retirement savings and you’re coming up short against these targets? Try to increase your retirement contributions to close the gap. Sit down with a financial planner to review your plans and your portfolios to make sure they are optimized for success.

Age-based retirement savings targets for an individual making $100,000 per year.

Source:
Fidelity Outlines Age-Based Savings Guidelines to Help Workers Stay on Track for Retirement

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