Year: 2016

Mental Money Mistakes #5: Pride Goeth Before the Fall

Written by Minich MacGregor Wealth Management on December 30, 2016. Posted in Minich MacGregor Missive, News.

Mental Money Mistakes #5: Pride Goeth Before the Fall

“Too many people spend money they haven’t earned … to buy things they don’t want … to impress people they don’t like.” – Will Rogers

This is the fifth and final article in a series titled “Mental Money Mistakes.” What are mental money mistakes? They’re subtle errors in judgement. Basic oversights and miscalculations. As a rule, they tend to be subtle and easy to miss. We don’t mean big mistakes like taking on a bunch of debt, spending more than you can afford, or being too risky with your investments. No, these are the kinds of mistakes just about anyone can make, even if you’re intelligent and hard-working.

In this article, we will discuss:

It’s been said that men never want to ask for directions. But that’s nothing compared to men (and women) who:

 Never want to admit when they’ve made a mistake
 Never want to admit when they don’t know something
 Never want to admit they may not own—or have the money to buy—something that their peers have
 Never accept advice
And that’s especially true when it comes to your finances.You see, it’s not often that you hear the word pride associated with financial matters—but there’s a connection all the same. That’s because it’s very easy to be too prideful when it comes to our money. That’s a shame, because being too proud can be a dangerous mistake to make where your money is concerned, because it can lead to very poor decisions. For instance:

Holding onto Bad Investments for Too Long

Let’s say there’s a particular investment or company out there that you really feel strongly about. You put a lot of money into it, you’ve pinned many of your hopes and dreams on it, and you’ve even bragged about it to your friends. But what happens if the investment turns out to be a bad one?

Sadly, many investors would rather hold onto a losing investment then admit they made a mistake. What all investors must understand, though, is that no one has a perfect track record when it comes to investing, and that making a mistake isn’t the worst thing in the world. What matters is how you react to that mistake.

Spending Money Just to Keep Up Appearances

We’ve seen this happen more times than we can count. Someone wants to buy a sports car or a sailboat just because their neighbor just got one. Someone wants to go on a long, luxurious vacation just so they can post pictures of all the exotic places they’ve been to. Someone wants to join a prestigious club just so they can be in with the “right” people.

Now, there’s nothing wrong with wanting any of these things. But there is something wrong with spending money on those things if you don’t truly want them … or even worse, if you don’t actually have the money to spend. Before you know it, vanity purchases can turn into a habit. And as we already discussed in Mental Money Mistake #2, this type of habit can seriously impact your long-term goals.
You know—the stuff you really care about.

Preferring to Be Wrong Than Right, Or Ignorant Than Educated

Whether most men truly hate to ask for directions, we don’t know. But it’s not hard to see why they would. Nobody enjoys admitting they don’t know something, and few people want to ask for help when they feel like they should be able to do something on their own.

But here’s the thing: finances are complicated. In this day and age, there’s so much to know, so much to plan for, so much to be wary of. Unless you want to spend the majority of your time conducting financial research, it just doesn’t make sense to think we can do everything on our own. Even financial professionals like us rely on other experts to help with keeping our affairs in order.

That’s why there’s no shame in asking questions whenever you don’t know something. There’s no shame in seeking advice when it comes time to make an important financial decision. This is how the smartest people achieve success. What’s more, it’s how they stay successful.

In the end, the old proverb “Pride goeth before destruction, and a haughty spirit before a fall” applies to more than just our souls. It applies to our finances, too.

We hope you’ve enjoyed this series on “Mental Money Mistakes.” Remember, no matter how smart or hard-working we are, it’s never too difficult to make a mistake. But as you think about the different kinds of mental mistakes we can make, remember too that the mistake itself is not what really matters.

What matters is how you react to it.

Weekly Wire Special Edition: Interest rates

Written by Minich MacGregor Wealth Management on December 19, 2016. Posted in Minich MacGregor Missive, News.

Interest Rates

Just about everyone knows the story of The Tortoise and the Hare and its accompanying lesson:

Slow but steady wins the race.

Judging by their actions over the years, the Federal Reserve knows the story, too.

On December 14th, the Fed raised its key interest rate for the first time in a year. It was a relatively small increase of only 0.25%, taking the rate from 0.5 to 0.75%.1 Like the tortoise, the Fed has been extremely slow to raise interest rates—in fact, this is only the second time they’ve done so in the past decade.1

Interest rates are an important part of our nation’s monetary policy, and they can have a profound effect on the economy. But unless you study this sort of thing for a living, it can be difficult to understand what all the fuss is about. What is the Fed’s “key interest rate” anyway? Why does it matter if the Fed raises rates, and why were they so low to begin with? And why exactly is the Fed taking such a tortoise-like approach to raising rates?

This letter will answer some of those questions.

What is the Fed’s key interest rate?

When the media talks about the Fed raising its key interest rate, they are usually referring to the Federal Funds Rate. This is the interest rate at which banks lend funds to each other on short-term (overnight) loans. The higher the rate, the more expensive it is for banks to borrow money from other banks.

The Federal Funds Rate is important because it can impact many other rates. For instance, if banks have to pay a higher interest rate to borrow money, they will often raise their own rates to compensate, affecting mortgage loans, car loans, business loans, etc. For this reason, economists keep a close eye on the Federal Funds Rate because it has broader implications on the overall economy.

Why have interest rates been so low for so long?

The reason the Federal Reserve kept rates so low for so long was to stimulate our post-recession economy. Lower rates make it easier for people to buy homes. It means more businesses can borrow money, and by extension, add more jobs. In short, lower rates allowed people to pump more money into the economy. This, of course, equals growth.

Why has the Fed been so slow to raise interest rates … and why are they doing it now?

Let’s go back to The Tortoise and the Hare.

In Aesop’s classic fable, the Hare gets off to a lightning-quick start. But soon he tires and decides to take a nap, reasoning that his opponent will never catch up. The Tortoise, meanwhile, keeps plodding along and eventually wins due to sheer doggedness.

The Fed has done its best Tortoise impression because the economy has moved like the Tortoise. While lower interest rates have helped stimulate growth, that growth has been slow. From the Fed’s perspective, they did not want to raise rates too quickly and run the risk of killing said growth before it even had a chance to take off. “The more haste, the worse speed,” as the proverb goes.

To date, the economy has never really “taken off.” But it has enjoyed the same sort of progress as the Tortoise: plodding, but consistent. Slow, but dogged. The United States has added jobs for 74 consecutive months, and the unemployment rate is now down to 4.6%, the lowest since 2007.2 Inflation, meanwhile, has finally started to rise, albeit tepidly, up from 1.3% in September to 1.5% now.1 These are the key statistics the Fed looks at when deciding to whether to raise interest rates, and right now, those

stats are saying that the US economy is steady enough to take the training wheels off … but slowly, slowly. Because slow but steady wins the race.

What will the Fed do next?

It’s impossible to answer that question, because so much of it depends on what Congress—and to a lesser extent, President-elect Trump—decides to do.

Here’s a basic rule of thumb: if the Fed believes the economy needs to “speed up” (grow at a faster rate) then it will keep interest rates low. If it believes the economy needs to “slow down” (because it’s growing too fast, at a pace both unstable and unsustainable) it will likely raise interest rates. Right now, many analysts believe that Republican-dominated Washington will seek to cut taxes and spend more on infrastructure in 2017. If that happens, the economy may well grow more quickly, elevating inflation along with it. As a result, the Fed may feel the need to raise interest rates at a faster clip so that neither expands too quickly.

If growth remains slow, however, or if something happens to “shock” the economy, the Fed may decide to keep interest rates low.

What does this news mean for us?

To restate: the recent rise in interest rates is very small. Its direct impact will mainly be felt by people looking to buy a home, take out new student or car loans, or who are accumulating credit card debt. That’s why at Minich MacGregor, we feel you should look at the news from a slightly different angle:

For years now, pundits and politicians have argued over the Federal Reserve. Some people feel the Fed has raised interest rates too slowly. Others feel that it’s still too soon to raise interest rates at all. Some want the economy to grow at a much faster pace. Others feel that too much growth too soon could have negative consequences.

It’s a complex topic, because interest rates themselves are complex. It’s an issue with a lot of nuance, and for the most part, it’s completely out of our control.

So here’s how we would look at this news: by remembering the lesson of The Tortoise and the Hare.

When it comes to investing, it’s better to focus on what we can control than on what we can’t. We can’t control what the Federal Reserve does. We can’t control what the economy does. But here’s what we can control:

As investors, do we want to be the Tortoise … or the Hare?

In Aesop’s fable, the Hare is swift, but also lazy. Confident, but to the point of arrogance. The Tortoise, meanwhile, is deliberate and focused.

Less disciplined investors tend to react to news like this by emulating the Hare: dashing around, trying to react to short-term events, buying or selling based off headlines, thinking the race can be won right out of the gate. My recommendation? Act more like the tortoise. We have an investment strategy. Let’s stick to it. We have investment goals. Let’s focus on those, not on Washington or New York. We should always be aware of what’s happening in the world, but we shouldn’t stress too much about it—because the world will likely look very different tomorrow.

So while interest rates may change and the economy evolve, and the markets move up or down, we’ll continue to act like the Tortoise.

Because slow but steady wins the race!

P.S. If you have any questions about interest rates, the markets, or anything else, please feel free to contact us. We are always thrilled to speak with you! Also, if you have any friends or family members who seem confused about interest rates or concerned about what this news means to them, please feel free to share this article!

Sources:

1 Jim Tankersley, “Federal Reserve raises interest rates for second time in a decade,” The Washington Post, December 14, 2016. https://www.washingtonpost.com/news/wonk/wp/2016/12/14/federal-reserve-expected-to-announce-higher-interest-rates- today/?utm_term=.8b150892ef2d

2 Patrick Gillespie, “Finally: Fed raises rates for first time in 2016,” CNN Money, December 15, 2016. http://money.cnn.com/2016/12/14/news/economy/federal-reserve-rate-hike-december/index.html

Mental Money Mistake #4: Following the Crowd

Written by Minich MacGregor Wealth Management on November 11, 2016. Posted in Minich MacGregor Missive, News.

Mental Money Mistake #4: Following the Crowd

“Men, it has been well said, think in herds; it will be seen that they go mad in herds,

while they only recover their senses slowly, and one by one.”

– Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

You’ve probably heard of the phrase “buy low and sell high.” In a nutshell, it means buying a stock when the price is low and likely to rise in value, and then sell when it’s reached it’s peak but before it starts to fall.

Unfortunately, many investors do the opposite—they “buy high and sell low.” They don’t do it on purpose, of course. They do it because they follow the crowd.

Let’s take a fictional company as an example. Imagine that the ACME Corporation (of Looney Tunes^™ fame) has just announced a new product to help wily coyotes catch incalcitrant road runners. This excites investors and analysts both, who promptly decide to buy the stock. The stock price rises. More investors jump in. The stock price rises faster. Suddenly you start hearing news stories about how ACME is a “must buy!” or that it’s “the hottest stock in decades!” Even your friends all talk about how many shares they’ve purchased. And since the stock just keeps going up, you decide it’s too great an opportunity to miss.

In reality, though, the opportunity is likely to have already passed. Suddenly, you’re buying stock at an absurdly high price. So much for buying low. Worse, you’re buying the stock not because you or your advisor did any research on the subject. You’re buying it because that’s what everyone else was doing, and you didn’t want to get left behind.

A few weeks go by. Maybe a few months. Then one day you turn on the TV and learn that ACME’s new roadrunner catcher doesn’t work nearly as well as people thought. In fact, at least one coyote has died—blown himself up, in fact.

Sell, sell, sell.

Since most investors now want nothing to do with the stock, you’ll likely have to sell your shares at a much lower price than you bought them for. And before you know it, you’ve lost money.

That’s what following the crowd can get you.

Now, most savvy investors know this already, and they do a good job of avoiding simple “hot stocks.” But that doesn’t mean they’re immune to making this mental mistake. Let’s take the above example and apply it to something bigger. For example:

During times of market volatility, following the crowd and getting spooked by the markets altogether … and then missing out on the inevitable rally that comes later.
Buying/investing in a commodity because that’s what the crowd is doing—like gold or real estate (this has happened on many occasions over the past decade).
Taking out a second mortgage or enaging in some other type of fancy financial tactics because that’s what everyone else in the neighborhood, church, club, or company is doing.

The point is, that following the crowd is easy, even if you are an otherwise smart, savvy individual. It’s so easy to be caught up in emotion. So easy to let yourself be influenced by “the madness of crowds.”

To avoid making this mental mistake, follow these easy steps:

Remember that if something sounds too good to be true, it always is.
Whenever an exciting investment idea comes to you, give yourself a few days before taking any action (if possible). Then, when you return to the idea, you can examine whether it still seems as promising as it did before.
Write out a list of investing/financial rules for yourself, like a “Ten Commandments” list for your personal use. An example: I will never discuss my investments with my friends, nor listen to them discuss theirs.
Always get a second opinion from an independent, unbiased financial professional before making a major financial decision.

Keep an eye out for next month’s article, where we’ll discuss Mental Money Mistake #5: Pride Goeth Before the Fall.

Veterans Day

Written by Minich MacGregor Wealth Management on October 31, 2016. Posted in Minich MacGregor Missive, News.

Veterans Day

Last month, in a small town called Taylor, Pennsylvania, George Fricovsky received his high school diploma.

You probably didn’t hear about it. Very few did, unless they lived locally. After all, what’s so remarkable about receiving a diploma?

For starters, George is 90 years old.

Now that’s a bit more unusual. Why is a 90-year old receiving a diploma? And why did it take him so long?

For that, you have to go back to 1944, when World War II was raging.

“Youth is the first victim of war.” – Baudoin of Belgium

George was only 18 years old at the time, and he had not yet graduated from high school. Nevertheless, when his country called, he answered.

Before he could receive his diploma, George was whisked away to the Army and basic training. By December, he was in Marseille, France, with the 276^th US Infantry. The war in Europe would end only six months later, but George saw more, experienced more, and achieved more in those six months than most men do in a lifetime. By the time he returned home, he had earned a Bronze Star, an American Theater Service Medal, a European-African-Middle Eastern Service Medal, and a Good Conduct Medal.

He also received a Purple Heart after surviving an explosion that severely damaged his leg.

Upon returning home, George enjoyed a productive and happy life, working in the Army Depot and raising a family. But he never got that high school diploma.

Now fast forward 72 years to October 11, 2016. George had been invited to visit Riverside High School to lead a local board meeting in the Pledge of Allegiance. Or so he thought. Instead, he was surprised when the Vice Principal presented him with a reward unlike any other:

His high school diploma.

Perhaps most gratifying to George was that the Vice Principal was none other than his own grandson. “He always talked about the one thing he wishes he was able to do was to graduate high school,” his grandson said.

So why are we telling you all this?

First of all, it’s a sweet story. But that’s not all. As you know, Veterans Day is coming up. And when we came across the tale of George Fricovsky, it made us stop for a moment to think about what Veterans Day means to us.

It’s nothing new to say that veterans sacrifice so much in service to our country. Their time, their talents … and sometimes their lives.

But as George Fricovsky proves, they also sacrifice more than that. They sacrifice many of the life experiences we take for granted. High school graduations and first dates and Saturday nights spent with friends. Opportunities to be best men or bride’s maids. Watching their favorite sports team win the championship or taking that trip to the Grand Canyon. Birthday parties and funerals. Their child’s birth. Their child’s first steps.

Many of these may seem like small, trivial events … but they are also fulfilling, enriching experiences. They are the very flavors of life. And our veterans forego them, all because their country called. So it was with George Fricovsky. So it is with the veterans in our towns and neighborhoods.

That’s why it’s so heartwarming for us to see a veteran like George rewarded … not with a medal, or a statue, or a commendation, important as those things are. But with the gift of an experience—an experience he had given up so that others wouldn’t have to.

So this Veterans Day, let’s all strive to remember the veterans in our communities. Let’s all strive to make their futures as rich as the future they have given us.

From everyone here at Minich MacGregor Wealth Management, we wish you and the veterans in your life a happy Veterans Day!

Board Members – You might be on the hook for more than you thought.

Written by Minich MacGregor Wealth Management on October 31, 2016. Posted in News, The Fiduciary File.

Board Members – You might be on the hook for more than you thought.

Investment Committees and Boards of Directors as Fiduciaries of Retirement Plans.

Recently, we met with the executive director of a non-profit organization to review the benchmark and fiduciary process analysis we performed on their 403(b) plan. During our conversation, he paused, took a breath and said, “This is really powerful information, and clearly we have significant improvements that need to be made.” Although we completely agreed, there sounded like there was a “but” in there somewhere…and we were correct. He continued to say “But, how am I going to get the members of the board on the same page so we can make the necessary changes and what will keep us from ending up in this position again in three years?”.

He is right to be concerned. Being a member of a board or investment policy committee is a big responsibility. Members commonly are considered fiduciaries with respect to the organization’s retirement plan, meaning they have a legal obligation to ensure the plan level decisions are in the best interest of the participants.

For participant-directed plans, like 401(k) and 403(b) plans, the investment fiduciaries have the responsibility to prudently:

Select the investment options
Monitor those options
Remove a fund when it is deemed necessary, and replace the fund if needed

In addition:

Together, the options must constitute a “broad range”
The options and the plan’s services must be suitable and appropriate for the participants
The costs of all services for the plan, including the investment expenses, must be reasonable

The standard to which their decisions are held is the Prudent Expert Rule – which requires that investments be selected:

“. . . with the care, skill, prudence, and diligence . . . that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. . . .”

It’s all about the process

Many of the issues we see could be fixed if there was a written policy in place for the board or committee to reference. In many instances, we find the boards and committees are comprised of highly intelligent, committed individuals, however, they are not investment or qualified plan experts.

An effective written policy should: 1) Be written in language that can be understood and followed by a non-investment professional. 2) Be well defined, but not so restrictive that it can’t be reasonably adhered to 3) Include a monitoring schedule that compares results against established benchmarks. By having that process in place and following it, the group removes the guesswork, limits liability and increases efficiency. The document that details the process is called an Investment Policy Statement or IPS.

According to the Center for Fiduciary Studies:

An Investment Policy Statement (IPS) is a written document with the purpose of providing meaningful direction and guidance for trustees and investment professionals regarding the selection and management of investment assets based on established and documented investment goals and objectives. When used properly, this document can limit liability, provide consistency, and set expectations for investment performance.

By preparing a written IPS, the fiduciary can: 1) avoid unnecessary differences of opinion and the resulting conflicts; 2) minimize the possibility of missteps due to lack of clear guidelines; 3) establish a reasoned basis for measuring their compliance; and 4) establish and communicate reasonable and clear expectations with participants, beneficiaries, and investors.

Once an IPS is implemented, the role of the committee or board is no longer one based on opinion or guesswork. A well crafted IPS document is written in plain language so that an average person, who is not an investment expert, can follow it as a guide. From a practical standpoint the group now knows exactly what they should be receiving and reviewing from vendors on a quarterly and annual basis and they should have an easy to follow procedure to see if any changes are warranted. The IPS itself is a living document and should be periodically reviewed to see if it is working as intended and adjusted accordingly.

If your organization is board-centric or utilizes an investment committee for your qualified retirement plan and you do not have a written, clear process for plan monitoring and evaluating; it’s a good time to begin that discussion.

There has been more focus on fiduciary responsibility with respect to 401k and 403b plans in the past year than ever before with the passing of a new Fiduciary Rule by the Department of Labor this past April. The good news for your board or committee is, although it takes some work to establish a well written and documented prudent process, it makes the job of those in the group easier, helps limit their liability, increases the effectiveness of the plan and often reduces costs. All well worth the effort in our opinion.

Mental Money Mistake #3: Being Too Afraid of Risk

Written by Minich MacGregor Wealth Management on October 15, 2016. Posted in Minich MacGregor Missive, News.

Mental Money Mistake #3: Being Too Afraid of Risk

This is the third article in a series titled “Mental Money Mistakes.” What are mental money mistakes? They’re subtle errors in judgement; basic oversights and miscalculations. As a rule, they tend to be subtle and easy to miss. We don’t mean big mistakes like taking on a bunch of debt, spending more than you can afford, or being too risky with your investments. No, these are the kinds of mistakes just about anyone can make, even if you’re intelligent and hard-working.

Most investors know how important it is to avoid taking on more risk than they can afford. That’s why advisors like us spend a lot of time going over concepts like “risk tolerance” with our clients. After all, no one wants to get burned by a bad investment and end up losing a hefty chunk of their nest egg.

But did you know that it’s possible to be overly risk-averse? Some investors are so afraid of losses that they end up missing out on opportunity after opportunity, and in the end, simply don’t have the funds they need to accomplish their financial goals. When that happens, they’re really no better off than the investor who risked too much, are they?

Take this example.

Imagine two relatively young investors, both in their mid-thirties. Let’s call one Jim and the other Alice. Both Jim and Alice know they need to save for retirement, and decide to invest $5,000 per year for the next 30 years. Unfortunately, Jim is extremely cautious (to the point of timidity). He’s so anxious to avoid risk that he decides to put most of his money into Certificates of Deposit, or CDs. CDs are traditionally seen as fairly safe, so Jim feels good.

Alice, meanwhile, is also cautious but decides to invest more heavily in stocks. Over the next thirty years, she sweats the ups and downs of the markets like most of us do.

Now fast forward thirty years. Both Jim and Alice are in their mid-sixties and getting ready to retire. For simplicity’s sake, let’s say that Jim earned about 2% interest a year on his retirement savings. When you factor in compound returns, Jim ends up with about $211,000.

Alice, on the other hand, ended up earning about a 7% annual return. Some years were higher, some were lower, but the average is 7%. (This is a fairly conservative average, but it makes things easy to calculate.) She ends up with almost $510,000. That’s over twice as much as Jim. That means she has a lot more money saved up for retirement … and lot more to apply to her financial goals.

All because she was willing to take on a little more risk.

This same principle applies to retirees, too. Of course, retirees should invest more conservatively than younger investors. But again, that doesn’t mean they should sacrifice all potential for growth. You see, many retirees often discover that the money they saved can dry up pretty quickly, especially on things like medical care. Retirees need income, and allocating at least a portion of your portfolio for growth is a good way to generate that income. That means accepting at least some risk, even when you’re retired.

The fact of the matter is that all investing involves some risk. While it’s crucial that you avoid taking on too much, it’s also important to not take on too little. So as you save and invest for the future, take time to determine not only how much risk you can afford … but also how little.

Keep an eye out for next month’s article, where we’ll discuss Mental Money Mistake #4: Following the Crowd.

Check out other articles

Mental Money Mistake #1: Forgetting to Plan for Unexpected Expenses	March Madness
Mental Money Mistake #4: Following the Crowd	Market leadership change and momentum investing
Mental Money Mistakes #5: Pride Goeth Before the Fall	Market Seasonality – Seasons’ They are-a Changin’
Mental Money Mistakes Part 2	Medicare – Insurance for Retirement #3
Minich MacGregor Wealth Management Expands Advisory Team in Saratoga Springs, NY	Memorial Day: Hero

Why You Shouldn’t Worry about the Election

Written by Minich MacGregor Wealth Management on October 7, 2016. Posted in Minich MacGregor Missive, News.

Why You Shouldn’t Worry about the Election

On November 8, we will vote to decide the future leader of our country. We will choose our commander in chief. Our head of government. Our most visible icon.

We will vote for the next President of the United States.

One thing we won’t be doing, however, is deciding what the markets do. We won’t be voting whether the markets go up or down. We won’t be voting on your investment portfolio. The markets, thankfully, are far too sophisticated to be determined by one person or one event.

Recently we’ve seen a lot of hand-wringing from investors worried about the upcoming election. Many people have told us, “I’m afraid to make any financial decisions until after November.” The thinking goes that once we know the name of our next president, we’ll be able to predict what the markets will do. Only then should we make any decisions.

However, this reasoning is flawed. Here’s why:

No one actually knows what will happen to the markets after the election.

Whether the winner is Hillary Clinton or Donald Trump, we can try to predict what the effect will be, but no one actually knows. That’s because …

We Don’t Know What Each Candidate Will Do in Office

Guesswork is a risky business. While we can guess what Trump or Clinton will do, no one knows for sure. Frankly, most politicians have become infamous for being vague about their plans.

Then too, presidents have a habit of saying one thing on the campaign trail, then doing something different while in office. That’s because ideology often gives way to practicality once politicians actually have to get things done. Compromises have to be made and unforeseen circumstances responded to.

In other words, campaign promises often take a backseat to political necessity.

The Markets Respond to More than Just Who Occupies the White House

Let’s pretend for a moment that we do know exactly what each candidate will do. Sounds great, right? We can make all the right decisions based on that knowledge.

But here’s the truth: the markets move for no man or woman. No one principle governs them; no single event determines their destiny. The markets are complex, because so many things can affect them. The President is just one person. Similarly, the election is just one event. An important one, true, but the markets react to thousands of events throughout the year. One event does not control them … just as we shouldn’t let that one event control us.

There’s another reason why some people refuse to act until after the election. It’s called …

Emotion

Making financial decisions based on emotion is never a good thing. Too often, we let emotions get in the way. Emotions can prevent clear thinking and make us react impulsively.

Therefore, when people say, “I’ll wait till after the election,” or “I want to do X because I’m afraid President Y will be elected,” they are making an emotional decision instead of a rational one. We think the main emotion is fear. Fear that their preferred candidate will lose and the other will win. Fear that everything is going to be doom and gloom.

Don’t believe us? Let’s take a little quiz. Below are the last seven presidents of the United States, with their political party next to their name. Look at each name and guess whether you think the S&P 500 went up or down during the first year of their presidency. Write your guess in the space provided, if you like.

President	Party	Markets Up or Down?
Richard Nixon (1^st term)	Republican
Richard Nixon (2^nd term)	Republican
Jimmy Carter	Democrat
Ronald Reagan (1^st term)	Republican
Ronald Reagan (2^nd term)	Republican
George H.W. Bush	Republican
Bill Clinton (1^st term)	Democrat
Bill Clinton (2^nd term)	Democrat
George W. Bush (1^st term)	Republican
George W. Bush (2^nd term)	Republican
Barack Obama (1^st term)	Democrat
Barack Obama (2^nd term)	Democrat

Now, maybe you will score 100% on this quiz. But we are willing to bet at least a few of the answers will surprise you. Speaking of which, here they are (each number is rounded):¹

President	Party	Markets Up or Down?
Richard Nixon (1^st term)	Republican	-8%
Richard Nixon (2^nd term)	Republican	-14%
Jimmy Carter	Democrat	-7%
Ronald Reagan (1^st term)	Republican	-5%
Ronald Reagan (2^nd term)	Republican	+31%
George H.W. Bush	Republican	+31%
Bill Clinton (1^st term)	Democrat	+10%
Bill Clinton (2^nd term)	Democrat	+33%
George W. Bush (1^st term)	Republican	-12%
George W. Bush (2^nd term)	Republican	+5%
Barack Obama (1^st term)	Democrat	+26%
Barack Obama (2^nd term)	Democrat	+32%

Is there anything you didn’t expect? Maybe Reagan’s first year was worse than you thought, or George H.W. Bush’s first year was much better.

Frankly, if even one of those numbers comes as a surprise, it should be food for thought. After all, if we can’t guess how the markets did in hindsight, how can we accurately predict what’s going to happen in the future? Every president on the list above had their strengths and weaknesses, but the numbers next to their names were the result of far more: they were the result of all the events, big and little, that they could not foresee and could not control.

You might be saying, “This is hardly a traditional election”. That is true—from a likeability standpoint, both candidates are historically flawed. However, the fact remains, the markets are driven by far more than one person and one event. We often say that the president is the leader of the free world … but they still do not determine which way the markets will go.

That is why you shouldn’t get too worked up about the election—at least not with regards to your finances. As always, we should make financial decisions based on planning instead of predictions. That is the way to control your financial future. No one else controls it for you … not even the President of the United States.

If you are still worrying about the upcoming election, please give us a call. We can discuss your portfolio. We can talk about any opportunities that might exist right now. We are constantly monitoring both the markets and Washington, so if anything happens that you need to know about, rest assured that we will be dialing your number. Our job is to give you the best financial advice possible. Right now, that advice is: do not let one person or one event control what you do or how you feel. When it comes to your finances, there is only one person that matters:

You

As always, please let us know if you ever have any questions or concerns about your portfolio. In the meantime, have a happy autumn … and do not sweat the election!

¹ “Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current,” Stern School of Business, NYU, accessed October 3, 2016. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

Mental Money Mistakes Part 2

Written by Minich MacGregor Wealth Management on September 26, 2016. Posted in Minich MacGregor Missive, News.

Mental Money Mistakes Part 2

This is the second article in a series titled “Mental Money Mistakes.”

What are mental money mistakes? They’re subtle errors in judgement—basic oversights and miscalculations. As a rule, they tend to be subtle and easy to miss. We’re not talking about big mistakes like taking on a bunch of debt, spending more than you can afford, or being too risky with your investments. No, these are the kinds of mistakes just about anyone can make, even if you’re intelligent and hard-working.

In this article, we will discuss:

Mental Money Mistake #2: Irrational Accounting

If you’re like most people, you get a paycheck every other Friday. A lot of it probably goes to covering your expenses. Another portion goes into your savings. Whatever’s left over gets used for recreation.

Now imagine that you find a $100 bill under the couch cushions, get a nice Christmas bonus from your employer, or receive a hefty tax refund. What do you do with that money?

Many people tend to look at these unplanned-for windfalls as “free money.” As a result, they spend the money on luxury items, vacations, or even on a quick gambling jaunt to Vegas. To put it simply, they use the money on short-term wants instead of long-term goals.

It’s perfectly understandable why people want to do this, and every once in a while, it’s probably okay. But when you do it too often—when you treat a $100 bill differently depending on where it came from—you are guilty of “irrational accounting.”

Irrational accounting is a mental mistake because it means you are making financial decisions based off emotion and impulse rather than logic and planning. Done too often, it can become a potentially damning habit.

Remember, mental money mistakes are a problem because they can keep you from getting ahead financially. In this case, while it might be fun to spend “free money” on luxuries, it’s also counterproductive to reaching your long-term goals.

Taking that money and either saving it or investing it can dramatically shorten your timetable to retirement (or whatever else is most important to you).

Of course, none of this means you shouldn’t ever buy that new gadget or enjoy a fun trip. What it does mean is that you should pay for those things the same way you do everything else—by saving and budgeting your normal income.

In this day and age, both our government and many private businesses are guilty of irrational accounting. We see the damage this causes every time we turn on the news. It’s important that we as individuals avoid making the same mistake. No matter where our money comes from—whether from our regular paycheck or underneath the couch cushions—it’s critical that we treat it the same. Always make financial decisions based off logic and planning rather than emotion and impulse. Always make long-term goals your highest priority whenever possible. This is the path to “getting ahead” financially.

And of course, once you’re ahead, well … the sky’s the limit!

Keep an eye out for next month’s article, where we’ll discuss Mental Money Mistake #3 … and learn why too little risk can be just as bad as too much.

Am I really going to get sued over my 401k fees?

Written by Minich MacGregor Wealth Management on September 13, 2016. Posted in News, The Fiduciary File.

Am I really going to get sued if my 401k fees are too high?

The financial news is not often “abuzz” with stories about the 401k industry. In fact, The Department of Labor’s (“DOL”) fiduciary rule, one of the biggest pieces of landmark legislation related to qualified retirement plans, was passed in April of this year and the media’s coverage was underwhelming at best. Simply stated, it requires that by January 1, 2018, anyone giving plan advice or selling a product must now act in a fiduciary capacity – implicitly putting the best interest of the plan and the participants before their own. For some more detail on the new ruling click here to read our May 24^th, 2016 Fiduciary File.

The media however, seems to like the news stories that include big names and law suits. Recently, some fairly well-known names including New York Life, Morgan Stanley, Safeway and Duke University have all found an unflattering place in the media spotlight because of lawsuits related to excessive 401k fees.

Can my employee’s really sue me for excessive fees?

We are not attorneys, nor do we provide legal advice, however the short answer is – Yes.

The simple truth is as an employer offering a 401k plan for your employees, you are held to a fiduciary standard of care. That means you must put your participants’ best interests before your own, and operate in a prudent manner exercising proper due diligence. If you fail to meet that fiduciary obligation, you are liable – personally. And that goes for all parties who are fiduciaries to the plan.

There are a myriad of ways you might breach your fiduciary obligations to your plan if you are not careful and prudent. The recent uptick in law suits specifically deal with high fees in the absence of increased performance. According to Bloomberg BNA “Workers have used litigation to challenge 401(k) fees for more than a decade, but the frequency of these lawsuits recently picked up steam. Since September 2015, more than a dozen lawsuits have been filed challenging the fees paid by 401(k) plans of large companies like Intel Corp., Anthem Inc., Verizon Communications Inc. and Chevron Corp.”

However, these suits have not been limited to just mega companies. Plans as low as $9 million in assets have made the news lately for the very same reason. Many legal experts in the field predict that over the next few years, we will see the average size of the plans brought to task on this issue drop dramatically.

How big a deal is this issue in real dollars?

The math is fairly simple on this issue. There are four main sources of fees that must be paid to various providers in a 401k plan: Fund Expenses, Custodial Expenses, Administration Expenses, and Advisor Fee / Brokerage Commissions.

Example:

Let’s use a 35-year-old employee making $40,000 per year. The employee currently pays 2% per year for all of the expenses associated with the 401k plan. However, a similar plan with the same investment choices and services is available for 1% per year. The employee starts with $1,000 in their 401k account and has a 10% salary deferral per year for 30 years earning an average rate of return of 6% before expenses. The employee will end up with about $232,000 in the plan at the 2% expense rate. However, the same employee, deferring the same amount, in the same investments, will end up with about $277,000 in the plan with a 1% expense rate. This is a $45,000 difference.

This example highlights one employee with a modest salary. Multiply this by the number of employees and you’ll see how big the dollar amount can be!

Ok, but am I really likely to get sued?

According to BNA Bloomberg “This universe is anything but small: Nearly 75,000 401(k) plans have $25 million or fewer in assets, and more than 4.2 million workers have their retirement savings in these plans, according to recent data from the Employee Benefit Research Institute. Research shows that these smaller plans typically carry higher fees than larger plans that can use their size as leverage to negotiate better deals, making them vulnerable to lawsuits claiming excessive fees.”

So the answer is, the likelihood of being sued is possibly higher in this climate than in years past; however, we don’t believe that is the big take-away here. What’s not good for the participants, in turn, it is not good for you either.

Complex issue – simple solution

It would be easy if all plans and investments were created equal – just pick one with good service at a good price and be done with it, right? Unfortunately, It’s not that easy.

“Is my plan too expensive?” The answer is … wait for it … “that depends”. The services your plan needs, the investment options, the level of assistance, the success of your participants and a laundry list of other factors come into play when determining whether or not your plan is too expensive.

Consider our example above. If the investment choices, education and advice available in the plan that costs 2% in expenses enabled the employee to earn 8% instead of the 6% in a plan that only cost 1% – so long as it is a similar level of risk, the 2% expense plan is actually a better deal by 1%.

The DOL and the Center for Fiduciary Studies suggest a benchmark analysis on retirement plans every 2 to 3 years is a best practice for plan sponsors. A detailed benchmark analysis will not only quantify all the fees you are paying and who you are paying them to, it will also measure those fees against the current services and performance of the plan. Periodic benchmarking is part of a sound, prudent process – and a clearly defined and executed process is what is defendable.

You probably don’t need the cheapest plan, though the goal should be a reasonably priced plan with great service and great performance. However, you do need clear documentation of the process you use to make plan level decisions about vendors, design changes, investment changes; combined with a paper trail proving that the process is being monitored and executed on a regular basis.

So, should you really be worried about your employees suing you because their 401k fees are too high? Maybe……but probably not. Should you be concerned that the fee’s, performance, design and utilization of your current plan are costing your employees and you a significant amount of money year after year even though your plan might not feel broken? Absolutely. If you don’t know exactly what you are paying and exactly what you are paying for, it’s time to find out. It is no doubt a complex issue, but the first step is simple – get the facts.

Mental Money Mistake #1: Forgetting to Plan for Unexpected Expenses

Written by Minich MacGregor Wealth Management on August 29, 2016. Posted in Minich MacGregor Missive, News.

Mental Money Mistake #1: Forgetting to Plan for Unexpected Expenses

A few years ago, we met with a young man who we’ll call Sam. He asked us a very simple question: “Why can’t I ever seem to get ahead financially?”

We asked Sam to tell us a bit more about himself. He continued: “I’m a college graduate. I have a good job. I pay my bills on time and don’t use credit cards. I don’t spend money on frivolous things. So why can’t I ever get ahead?”

Fortunately, after a deep dive into the state of his finances, we were able to help him find the answer: he made too many of what we like to call, “mental money mistakes.”

What are mental money mistakes? They’re subtle errors in judgement. Basic oversights and miscalculations. As a rule, they tend to be subtle and easy to miss. We’re not talking about big mistakes like taking on a bunch of debt, spending more than you can afford, or being too risky with your investments. No, these are the kinds of mistakes just about anyone can make, even if they’re intelligent, hard-working types like Sam.

To help you identify mental money mistakes, we have decided to write a new series of articles. Each one will discuss a different mistake and how to avoid it. So without further ado, let’s dive into:

Mental Money Mistake #1: Forgetting to Plan for Unexpected Expenses

We all know the line, “Expect the unexpected.” But how often do we actually do it?

The fact of the matter is that many people do a good job planning for expected expenses, like mortgage payments, health insurance, gas, and groceries. But when it comes to saving for the future—whether for your retirement or just that trip you’ve always wanted to go on—we tend to forget about all the unexpected expenses life tends to throw our way. And that’s a mistake, because a plan that assumes nothing will ever go wrong isn’t really a plan at all. It’s more of a prayer.

With that in mind, here are five very common but usually unexpected expenses that many people fail to plan for:

Unemployment. Sure, no one wants to think about losing their job. But what if the economy goes south? What if the company you work for gets bought out? What if you or a family member gets sick and it becomes hard to work your normal hours? You have to admit, none of these events are exactly unheard of. So ask yourself: do you have a plan for what to do if you lose your job? Do you have any fallback options lined up? Do you have enough money saved up to help you stay afloat until you get back on your feet?
Long-term or life-changing illness. If there’s anything unpredictable in life, it’s our health. But even if you have health insurance, an extended illness can drain your savings in a hurry.
Car repairs. You know it will happen one day: the strange clunk-clunk sound you start hearing from your engine ends up being a problem that will cost hundreds, maybe even thousands, to fix. And if it happens more than once …
Your bills keep going up. What goes up does not necessarily go down. Anyone who has ever paid for an internet connection or satellite TV knows that prices tend to rise over the years. Your basic utilities are prone to price fluctuation as well. A really cold winter means your gas bill will go up. If you have children in the house who keep leaving the lights on, your electricity bill will go up. You get the picture.
Household repairs. When the toilet clogs or the faucet leaks; when a window breaks or the roof starts to degrade; when wood-boring beetles infest the tree in the backyard; unless you really like to DIY, that means paying for a professional … who usually aren’t cheap.

The point of all this, is to show that unexpected expenses can come at any time, in many different forms. What’s more, they can really pile up. In Sam’s case, even though he was being prudent with his money, he still had trouble getting ahead because he was always having to allocate more money than he expected to dealing with expenses. And he’s not alone: according to a study by Pew Charitable Trusts, “more than 70% of Americans find it hard to save because of expenses they didn’t plan for.”¹

So what’s the solution? Start a rainy day fund! When most people save, they tend to just throw everything into one savings account and withdraw money whenever they either need or want to. Instead, we suggest creating a separate type of savings account: one that can only be touched whenever the unexpected happens. Every month, devote a set percentage of your income to the rainy day fund in addition to your regular savings. Then, when your car inevitably breaks down, you won’t have to worry about it interfering with that vacation you’ve been saving for, because you’ve already set aside the funds to deal with it.

By making a list of possible expenses in addition to the regular expenses you’ve already planned for, you can make real progress in regards to getting ahead financially.

Stay tuned for next month’s article, where we’ll discuss Mental Money Mistake #2 … and learn why not all $20 bills are created equal.

¹ Ann Carrns, “Unexpected, but Not Unusual Expenses Thwart Efforts to Save,” New York Times, January 8, 2016. http://www.nytimes.com/2016/01/09/your-money/unexpected-but-not-unusual-expenses-thwart-efforts-to-save.html?_r=0

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