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Following are three simple formulas that can help you know if you are saving and spending appropriately. These shouldn’t take the place of a comprehensive financial plan as these metrics can be inadequate (or even wrong) in some specific situations. These are based on well-known rules of thumb but I have improved (i.e. complicated) them …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Winter 2020

I wrote this a few years ago with my fellow financial professionals as the intended audience.  I thought it would make a good post here as well. I was thinking about what goes into quality wealth management. The goal, in our view, is to use wealth management to maximize long-run client happiness in the face …

Humans are captivated by stories, but largely oblivious to data. In addition, we really want certainty and conclusions when generally all that is available is uncertainty and probabilities. For example, people frequently want a prediction of what the market will do this year, and I think there are two reasonable answers based on history: Most …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Fall 2019

If you have a good portfolio – i.e. did the “right” things and diversified internationally, tilted to value, etc. it hasn’t worked well recently.  This is where the mettle of quality advisors is tested. Can we keep clients on-board and on-track, continuing to do the right things even when it hasn’t worked for a while? …

Recently Anitha and I were talking about whether someone we knew was “good with money” and we disagreed. We were momentarily confused until we realized our definitions of that phrase were different. When I said “good with money,” I meant behaviorally. For example, we know a couple who are a perfect example of the point …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Summer 2019

ESG investing (avoiding investments with “bad” Environmental, Social, or Governance aspects) is becoming more popular but has been around a long time. The approach was previously known as SRI (Socially Responsible Investing) or colloquially as avoiding “sin stocks”. A quick note on terminology first. If I talk about a “good” or “bad” investment, it isn’t …

I have been thinking for a while about how much umbrella liability coverage someone should have.  The rule of thumb that people should carry an amount equal to their net worth seems too simplistic. To simplify the analysis, assume for the moment that: The insurance is priced at the pure cost of insurance.  In other …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Spring 2019

This will start a little technical (and seemingly off-topic), but should quickly get relevant and may cause you to see some things in a new light. To begin, we need to discuss synthetic securities, and I will use stocks as the easiest one to understand. Suppose you have a non-dividend-paying stock that is trading at …

By default we set up every taxable (i.e. non-retirement) account to have margin but we almost never use it. (You don’t want retirement accounts to have debt at the account level because it gives rise to UBTI – unrelated business taxable income – which is taxed at the high trust rates, but you get no …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Winter 2019

The optimal savings vehicles are client-specific, both in what they may have available to them, and in what would be prudent for their specific situation.  Nonetheless, in general, this is usually the right order (exceptions and other issues at the end) for a typical client who expects to be in a lower tax bracket in …

Fixed income is held for risk reduction, not return enhancement. It is the ballast that allows the ship of your portfolio to withstand the financial storms that periodically roil the markets. It is conventional wisdom that “correlations go to one” in times of stress, but this is incorrect. Correlations between risky investments go up, but …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Fall 2018

No advisor is perfect, but there are a few rough indicators (also see The Quality Advisor’s Alpha/Gamma/Sigma and How to Evaluate an Investment Advisor) that I use to recognize the quality of another advisor.  Below are three examples in each category (this is not an exhaustive list), with my favorite simple indicators in bold: Does …

The reason to diversify internationally is not because expected returns are higher on foreign* investments, but because they will be different. Diversification is about risk reduction, not return enhancement. Hedging currency risk is optional in equities but essential in fixed income. The belief that foreign holdings are unnecessary because domestic companies have large foreign sales, …

My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Summer 2018