The power of one

Hire the smallest organization that can effectively deliver the product or service you require.

To safely and cost-effectively fly across the country, a commercial airline is required.

You need a pilot, some mechanics, baggage handlers, and flight attendants to pull it off.

To create and implement an investment and financial plan, you need one person (chosen carefully).

As an organization adds people, it adds complexity, communication challenges, scheduling issues, differences of opinion, layers of bureaucracy and overhead,

and lack of accountability.  You "institutionalize" the organization (a fancy term for "de-personalizing;" good for the organization, bad for the client).

"I don't go to meetings.  I don't write memos.  I don't have staff.  I don't commute.
The goal is to strip away anything that looks productive but doesn't involve shipping [delivering the service to the client]"

"How many handshakes do you need to introduce three people?  Three.  Four people need twice as many, six.  And five people?  Ten.
Coordinating teams of people becomes exponentially more difficult as the group gets larger.  And for important projects in an organization
with something to lose, the group pushes to get larger."

– Seth Godin from Linchpin:  Are You Indispensable?

 

Posted via email from Frisco Financial Planning LLC

Small is the new big. Solo is the new small.

Big financial institutions have planted an idea in many people’s heads that bigger is better.

In fact, the word “institution” is defined as “an established organization or corporation,” implying stability and permanence.

Examining history, however, leads us to conclude that large financial institutions are anything but stable or permanent.

So, let’s take a step back and examine exactly what you are paying for when you engage a financial adviser.

Financial products (mutual funds, insurance policies, annuities, stocks, bonds, mortgages) are commodities.

There is no shortage of excellent financial “tools” available to help solve most financial problems.

Many of the best products can be had at very low cost (in some cases, this is exactly what makes them the best).

Technology now exists that allows you to easily, accurately, and cost-effectively execute a sound investment strategy.

So what’s left?  What’s worth paying for?

Intellectual capital.
The worldview, experience, education, and insight of a particular person.  Not people, not company, not institution.

Objectivity.
A business model and fee structure that (to the greatest degree possible) eliminates partiality and conflict of interest.

Efficiency.
A low overhead, low bureaucracy environment that strips away as much wasted time, energy, effort, and cost as possible while delivering simple, effective strategies.

So are big companies bad?  Not necessarily.  But small and especially solo financial advisers (who are also independent and fee-only) offer investors a unique opportunity to leave behind a bureaucratic, cumbersome, and short-term, profit-fixated business model in favor of a nimble, independent, long-term focus.  

Posted via email from Frisco Financial Planning LLC

Performance reporting: another reason to love Folio Investing

Investment performance is something that is over-emphasized by many investment advisers, both by how much time they spend talking about it with clients as well as how much time, effort, energy, and money is spent producing performance reports (performance reporting software can cost into the five figures on an annual basis and many firms employ full-time staff to download and reconcile transactions and report performance).

It is necessary, though, to have a quick and accurate way to measure how your investment accounts have performed over historical periods, and to have a reasonable basis of comparison to know how you are doing.

Another reason to love Folio Investing.

Folio provides its accountholders an easy way to track performance.  It is based on an accurate, time-weighted, measure of performance which is very important.  Many brokerage firms, investment advisers, and personal finance software programs use a dollar-weighted measure.

The difference between the two methods is that a dollar-weighted measure includes the effects of cash flows in and out of the portfolio.  If, for example, you make a large deposit into your account right before the market enjoys a steep run-up, your performance, under a dollar-weighted measure, will be high relative to a time-weighted measure of return.

The time-weighted measure allows you to objectively evaluate the performance of the underlying securities while removing the effect of any inflows or outflows.  It’s a more difficult calculation but Folio’s system does the heavy lifting for you.

You can also easily change the start and end dates and compare your account’s performance to one of many benchmark indices, mutual funds, or individual securities.

The performance shown above is hypothetical and does not represent a real investment portfolio.

John Gay and Frisco Financial Planning LLC receive no compensation or “soft dollars” from Folio Investing or any other brokerage firm.

Posted via email from Frisco Financial Planning LLC

Double your gift to Haiti through NCF’s matching renewal fund

Double your gifts to Haiti! You can double your gift to Haiti through the Haiti Renewal Fund at The National Christian Foundation (NCF). Thanks to a generous matching gift from one of NCF’s givers, all donations to the NCF Haiti Renewal Fund will be matched dollar-for-dollar up to $2 million and will go to provide long-term support for rebuilding and renewing the country. Do you need another ‘09 tax deduction? All donations made by check or credit card to the Haiti Renewal Fund can also be included as a ‘09 tax deduction if you give by February 28, 2010. Please help us get the word out about this incredible opportunity to maximize gifts to Haiti. Post this link (www.nationalchristian.com/haitirenewal) to your website, blog, Twitter account, or Facebook page, or email it to your clients, friends, and family. Together, we can make a powerful difference in rebuilding this devastated country. Donate now at NationalChristian.com/haitirenewal   Donate now at NationalChristian.com/haitirenewal share this:

Posted via email from Frisco Financial Planning LLC

Roth IRA conversion myth #1: “same tax bracket now and retirement, it’s a wash”

Many articles on the subject of Roth v. Traditional IRA boil it down to nothing more than an issue of current v. future tax bracket.

The myth goes that if your tax bracket at retirement is expected to be lower than it is now, don’t convert to a Roth, while if your tax bracket is expected to be higher at retirement, do convert to a Roth.

And, if your tax bracket ultimately stays the same, the conversion decision is moot since you’ll end up paying the same in tax either way.

The uncertainty of your future tax situation not withstanding, the “wash” only occurs if you pay the tax due from the IRA you are converting,

in which case, the whole decision is reduced to a bet on future tax rates and on your future tax situation, both of which are highly unpredictable

(not to mention, you will pay a penalty in addition to the tax if your conversion and IRA withdrawal occur before age 59 1/2).

If, however, you pay the tax due on conversion from after-tax money, you are essentially converting the future growth on the amount of tax paid from “taxable every year” to “never taxable again” (assuming you meet the holding requirements of the Roth IRA).

Or to put it another way, the amount of tax paid at conversion is a “bonus allowable Roth contribution.”

Example:

$100,000 traditional IRA, $25,000 after-tax account, 25% tax bracket now and forever, 7.2% annual investment growth.

If you convert, your $100,000 IRA becomes a Roth and your $25,000 after-tax account goes away.  After 30 years, you have a Roth IRA worth $800,000 (in after-tax terms).

If you don’t convert, your $100,000 IRA is worth $600,000 (after-tax), while your taxable account is worth $200,000 assuming a 0% tax rate over 30 years.

It’s only a “wash” if you manage to avoid taxes altogether on the original $25,000 after-tax account.  In this example, at a 25% tax rate, the initial $25,000 grows to only $121,104.

Takeaways:

1)  If you can’t pay the conversion tax from a taxable account (ie, funds you’ve already paid tax on, not from the converted IRA itself), don’t convert.

2)  Even if you can pay the tax from after-tax $, it still may not be in your best financial interest to do so.  There are other factors involved which may outweigh the benefit illustrated above (future blog post).

This post and all others on the blog are for informational purposes only and should not be considered individual investment or financial planning advice.

Consult your financial planner or tax advisor before making the Roth IRA conversion decision.

Posted via email from Frisco Financial Planning LLC

Derek Sivers gives his whole company to charity and he’s still smiling

Talk about generosity:

Derek Sivers, an innovative internet entrepreneur in the music field, gave his whole company to charity.

He used a charitable trust to do it in a way that maximized the gift and provided him an income for life.

The coolest thing about his story is that his generosity was coupled with a genuine contentment and focus on simplicity.

In the words of the apostle, Paul:

"I have learned to be content in whatever circumstances I am.  I know how to get along with humble means and I also know how to live in prosperity.  I can do all things through him who strengthens me."

– Philippians 4:11-13

Posted via email from Frisco Financial Planning LLC

The inmates are running the asylum: eight ideas to permanently break Social Security

When I saw this headline, 8 Possible Social Security Benefit Changes, I was naively hopeful that fiscal responsibilty had stealthily infiltrated its way into D.C.

Sadly, I couldn’t have been more wrong.  The article gives eight possible “improvements” to the program including:

• Guaranteeing a minimum benefit
• Reducing work requirements for eligibility
• Supplementing benefits for low-income single workers
• Increasing survivor benefits and
• Providing longevity insurance

Sorry to be such a wet blanket, but since it’s common knowledge that Social Security is on a certain trajectory towards bankruptcy, shouldn’t we be looking at how to make good on the existing promises rather than promising even more?

Related (courtesy of Wikipedia):

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going…  Knowingly entering a Ponzi scheme, even at the last round of the scheme, can be rational economically if government bails out those participating in the Ponzi scheme. If governments use newly created currency to bail out the scheme victims, the newly printed currency will devalue the rest of the currency in circulation, meaning all holders of that currency will suffer inflation to the currency. However, Ponzi schemes cannot last forever.

“He deprives the leaders of the earth of their wisdom, he sends them wandering through a trackless waste.  They grope in darkness with no light.  He makes them stagger like drunkards.”

– Job 12:24-25

Posted via email from Frisco Financial Planning LLC

Respect uncertainty

“It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”
— Mark Twain

As humans, we tend to have a very high opinion of ourselves, particularly when it comes to overestimating our skills and abilities.

This is abundantly apparent in our attempts to predict the future.  It’s a particularly dangerous exercise when it comes to investing because not only are we woefully bad at predicting outcomes, but even when we get it right, it only “counts” if we were right and the market consensus was wrong (if we know something that everybody else knows, it’s not terribly useful).

How much do you think you know about the future?
Cut it in half.  Ten times.  Now you may be close.

“Since no man knows the future, who can tell him what is to come?”
– Ecclesiastes 8:7

“The race is not to the swift or the battle to the strong, nor does food come to the wise, or wealth to the brilliant, or favor to the learned, but time and chance happen to them all.”
– Ecclesiastes 9:11

“Cast but a glance at riches and they are gone, for they will surely sprout wings and fly off to the sky like an eagle.”
– Proverbs 23:5

Build an investment plan based on an unknowable future. 
Have a healthy respect for uncertainty.

Posted via email from Frisco Financial Planning LLC

Annual inflation-adjusted U.S. residential housing price increase from 1890-1990 equals 0.4%

According to Yale economist, Robert Shiller (co-creater of the Case-Shiller home price indices), residential housing prices in the U.S. increased by 0.4% beyond the CPI from 1890-1990.

Factoring in the housing bubble and bust of the last twenty years doesn't change the average much but it does illustrate the great volatility involved.

Most of the people who have gotten wildly rich in residential real estate have done it in one or both of two ways:  They've gotten lucky by being in the "right place at the right time," or they've taken on great risk by using leverage (borrowing other people's money).

Does that mean you can't make money in residential real estate?  No.  But it's the cash flows that usually determine the profitability of such an investment, not the price appreciation.

And what about owning your own home?  Owning a home does have a tremendous benefit, but it's not the future price appreciation (0.4% beyond inflation hardly makes up for the costs involved in being a homeowner).  Nor is it the tax advantage (only one of the ways our screwed-up tax code rewards excessive risk-taking).  The big advantage to owning your own home is the "implicit rent" that accrues.  If you were living somewhere else, you'd be paying rent each month at an ever-increasing rate, whereas by living in your own home, your payments (at least the principal & interest components of a fixed mortgage) never increase and ultimately end.  This, by the way, is true whether you have a big mortgage, small mortgage, or no mortgage.

 

Posted via email from Frisco Financial Planning LLC

Dumb brokerage firm technology must have been designed by a man

My wife has an expression to describe things that are designed poorly.

She says “it must have been designed my a man.”

Take this refrigerator for example:

See the full gallery on posterous

 Freezer on the bottom?  Dumb.  Two handed water dispenser on the inside?  Dumber.

Most brokerage firm technology platforms are just as bad.  They are a throwback to the days when you (meaning someone… I’m not exactly sure who) would walk into your broker’s office and say “Hey, Jim-Bob… Buy me 200 shares of Acme Rocket Boot Company!”

Normal people don’t do that.  Intelligent investment plans are based on percentages.  ”40% to XYZ fund” for example.  Dumb brokerage firms make you convert percentages to dollars, dollars to shares (in the case of stocks or ETFs), and then enter each trade separately.

Even if you are only investing in a handful of funds, and only making occasional changes, this technology wastes time and creates multiple opportunities for you (or your investment adviser) to make potentially costly mistakes.

Here’s a much better alternative: 

Posted via email from Frisco Financial Planning LLC