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Category Archives: Financial Planning

In the Starting Block

Over the years, I’ve talked with many young people about their desire to invest.  Almost to a person, they are interested in investing because there is a popular, new product or service that excites them.  This excitement helps them want to invest in that company, even if they are neophytes to the investment world. This does not bother me, as I love seeing people be motivated to become active in our economic system.  The issue arises, however, that what is a cool product may be an investment that is about to mature in its attractiveness.

My friend’s son has me manage some investments for him. When we began our relationship, he wanted to talk about investing in Tesla motors.  This was in the fall of 2014 and Tesla (TSLA) was selling in the neighborhood of $240 per share. Yes, in four years TSLA had become a ten-bagger, having risen to $241 from an October 2010 price of $21. To him, this looked like a great investment and, it would be, if that rate of appreciation had continued.  Instead, in the fall of 2015, TSLA was selling for $207 (a loss of 13.7%) and the good news is that, today, it is selling for $262 per share (a gain of 8.7% from the 2014 price). One does not know if the “investor” would have still been in the stock or would “the emotional trader” have sold when the price was low.

Have you ever eaten at a Chipotle (CMG)? They do have good food and, in the fall of 2014, their stock was selling at price of $638, having risen from a first month’s (January 2007) price of $45.60, or 1,299%!! Of course, we all want on that bandwagon but, had you purchased CMG in the fall of 2014 with the hopes of winning the race, you would now own shares worth 28.2% less than at purchase. You did not imagine that there would be an e coli outbreak at the fast-food chain.  As a result, it looks like you’re a little behind in the race – not winning.

Similar stories can be told about other stocks and, of course, there are real success stories where fortunes are made on the current, coolest thing to hit the market in years. Yet, for a beginning investor, looking for a way to invest in the market, I always recommend a couple of things.  One, I ask, “How long are you able to invest the money without needing the principal?”  Before you invest in the stock market, this time period should be no shorter than five years and, preferably, longer.  In the above examples, had you gambled your house-down payment-to-be on either of these single stocks, instead of the return you had hoped to receive you may receive less and, perhaps, lost some of your down payment if a house purchase is relatively soon. If the beginning investor believes that they can invest for over five years and they want to get started, I recommend that they consider an index mutual fund or exchange traded fund. What would have happened to this investment over the eighteen months from October 2014 to today?

In October of 2014, the Standard & Poor’s 500 Index ETF (SPY) was selling for $195.49 per share. Currently SPY is selling for $204.19 and sports a 2.1% dividend yield. This is approximately an annual yield of 4.96%, although in January of this year SPY had a price a little less than $193 per share for a 1.4% loss to be recouped by April.  Moreover, this return came with a lot less volatility than in either of the “cool” stocks above. Why? Diversification.

Purchasing a single investment is risky.  Being risky, you may make a lot of money, if it turns out to be a great company. Being risky, you may lose everything, if it is a poor investment. You do not know. On the other hand, by investing in an index mutual fund with a focus on the United States, you will have purchased a little of every company in the index and will have taken a position that represents the largest companies in the United States.  This reduction in risks, lowers your expected return, while reducing your risk.  Moreover, an investment in The Market of the United States, provides you with an investment for the long-run. (You will not have to worry about little things like food poisoning getting in your way.)

Never forget that financial success follows from your discipline to save money over a long period of time in a diversified portfolio. If you do this, while not as exciting as watching a rabbit zig-zag across the yard, you will be successful. For, just as the fable of the turtle and hare attests, slow and steady will win the race. Swinging for a home run with your investments may seem attractive. It is, however how most batters strike out.

Use Spring Cleaning to Air Out Your Finances

Many people engage in spring cleaning to clean out the clutter that has accumulated during the winter months. This is a good time to air out your finances as well. If you have had some major life events since the last time you examined your financial life, you might discover some dusty financial accounts that you had forgotten about.

As people age, checking and savings accounts may accumulate. One of the first tasks involved with moving to a new location is to set up accounts with local financial institutions; however, people often forget to close down the accounts at the place they moved away from. Similarly, married couples often open new joint checking and savings accounts, but they may leave old accounts from their single years open. Savers interested in the highest interest rates move their money around as they chase after the highest yielding accounts. They may also leave their old accounts open either due to neglect or on the chance that the account may again be an interest rate leader.

The accumulation of dusty accounts happens with retirement accounts as well. Employees will change jobs and often leave their 401(k) or 403(b) with their former employer. Employees that are quickly climbing the corporate ladders between companies may find themselves with several retirement accounts, each having different rules and investment options. Keeping tabs on each of these accounts and maintaining an overall picture can be daunting.

What are some of the problems with leaving accounts open? First, it makes recordkeeping much more complicated. Receiving multiple statements in the mail at the end of each quarter or month can strain simple recordkeeping systems, especially if the accounts hold negligible amounts of money. Furthermore, multiple accounts can cause headaches at tax time. If you receive an interest statement showing that you earned $25 in interest after you’ve filed your tax return, you will have to amend your return with the complicated and costly 1040X. The $25 interest may cost you upwards of $150 in additional tax preparation fees. Second, you may be charged inactivity fees if your account shows no activity. These fees, ranging from $5 to $10 per month, may slowly eat away at your account balance, until your account turns negative. Thirdly, it may cause headaches for your heirs. If you have a hard time keeping track of your accounts, imagine what your heirs will feel as they try to untangle your financial situation.

So, what to do: As the earth renews itself this spring, take some time to shake out the dust and breathe new life into your financial plans. Step back and examine your entire financial situation. Are you meeting the goals you’ve set for yourself financially? If you haven’t set any goals, now might be a good time to set some after you’ve organized your financial life. If you have multiple old checking and saving accounts, decide if you really need them and close the unneeded accounts. Consolidate your accounts so that your financial situation becomes less stressful and easier to manage. If you have multiple retirement accounts, you might want to consider rolling them into your current employer’s retirement plan or into your own retirement account at an independent financial institution. Take some time to review your will and other end-of-life documents. If situations have changed since the last time you updated the documents, draft and sign new documents reflecting your current situation.

Taking care of these details now will likely make the financial aspect of your life less stressful for you throughout the year.

Investments 101 (a review)

The stock market has shown itself to be very volatile in 2015. So volatile, that many have left the market, some see it as a time to look for buying opportunities, others worry about a return to the great recession, and we long-term investors are doing our best to tune the noise out and to keep our faith in the future of the world’s economies.
We’ve all heard reasons for the markets retreat in 2016.  If not, here is a sampling, along with my commentary.

  1. The Chinese economy is tanking – Yes, the Shanghai index peaked last June 12 and the index is down 48% since that date.  Yet, the index remains up 31% over the past two years.  As for the Chinese economy, they do have some problems and the largest is a rate of growth that has decreased to 6.9% – a rate that most countries would love to have!
  2. The Federal Reserve Bank is raising interest rates – Really?  Who did this surprise?  Most people have asked, “Why did it take so long to happen?”  Even so, the economy is showing some weaknesses, particularly given world dynamics.
  3. The price of oil crashed – All commodities have fallen since 2011, although several have shown robust growth in 2016.  Gold, for example, has led other investments for this calendar year, with a 15.7% return.  It remains, however, about 26% below its most recent peak in 2010. Just yesterday, I noticed that gasoline is about 14% more expensive than a week ago and today’s price is still relatively inexpensive.  We have to go back to 2004 to see prices like we see today. This should be good for the consumer which is good for the economy – except if you are a producer of oil.
  4. The strong dollar – I don’t think a strong dollar can decrease the value of the stock market. In fact, we know that citizens of other countries, when they perceive weaknesses in their economies, move money to the United States and they purchase our securities.  This one is hard to judge.
  5. Trump and Sanders – This might have some veracity. I don’t think that most of the investing public, either domestic or international, predicted that these two candidates would be doing as well as they are.  With ideas ranging from protectionist trade and forced deportation to free medical care and university education, these ideas have the heads of members of the status quo spinning.  Markets don’t like uncertainty.
  6. The Cubs might actually make it to the World Series – No one has actually said this has caused the market to be down. I just thought I’d throw it in the mix of wild ideas.

One thing is certain.  The market will survive and it never hurts to review what we know, in order to help us reach financial success.

Below is a graph of returns for stocks as measured by the S&P 500 (blue), 10-year Treasury bonds (green), and Treasury Bills (red) from 1994 through 2015.  During this time period, the S&P500 had an average annual return of 10.7% with a standard deviation of 18.7%, 10-year Treasury bonds saw a 5.9% average annual return and a 9.7% standard deviation, and T-Bills a 2.6% annual return and a 2.2% standard deviation.  It is clear that if we wanted to reduce the risk in our portfolio, we would simply buy T-bills and be content with the relatively flat line for the twenty years.  While that may make one sleep better in the near term, it is likely that one may not eat well in the long term, for taxes and inflation will greatly reduce the return.  So, what can we do to reduce the volatility?  The answer, as always, is diversification.

Investment returns 1994-2014

When we invest 60% of our portfolio in the S&P500 and 40% in ten-year Treasury bonds, it reduces our return by 17.8% (from 10.7% to 8.8%) , while the riskiness of the portfolio is reduced by 43.9% (from 18.7% to 10.6%).  Over these twenty years, by replacing 25% of 10-year Treasury bonds with Treasury-bills, the return is driven down to 8.4% with very little, if any reduction in risk. This can be seen in the following chart where the blue line is 100% invested in the S&P 500, the red line is for the 60%/40% portfolio, and the green line the portfolio of 60%/30%/10% which includes 10% Treasury-bills.  As can be seen both of the latter two lines are very similar but they do remove variation in the annual returns of the S&P 500.

Portfolio returns 1994-2014

What does this do to us over the longer-term?  The answer can be seen in the table below, where we assume that $5,000 is deposited to an account at the beginning of the year for both 30 and 40 years.  As can be seen had one been invested in 100% of the S&P500 for every year, instead of the 60%/40%/10% portfolio, their wealth at the end of 20 years would have been 22% greater ($737,708 compared to $603,039).  Due to compounding, this increases over 40 years to 33% greater future value ($1,823,347 compared to $1,370,886).  Clearly, discipline is good if one can handle the inevitable ups and downs.  Most of us cannot.

Interest/Year 8.964% 8.274% 7.925%
Payment/Year $5,000 $5,000 $5,000
Number of Years 30 30 30
Future Value $737,708 $644,997 $603,039
Number of Years 40 40 40
Future Value $1,823,347 $1,507,715 $1,370,886

Another reason to support being well diversified is the following “periodic table” of investment returns.  For each year the category with the greatest return is listed at the top, while the one with the lowest return is at the bottom.  One glance will tell you that there is not one category that is at the top, or the bottom, each and every year. Moreover at the beginning of the year we never know which category will be at the top at the end of the year. You will see that it is rare that any category of investment has the same placement in two consecutive years. In fact, it occurs only 12 times in the 100 year-pairs below.

periodic table of investment returns

So, what do we do?  One needs to have a plan to remain well diversified with a riskier mix of investments the further in the future the money is needed.  Short-term goals will be funded with cash type investments, intermediate term goals with a balanced approach, and long-run goals with a more aggressive approach. At least once per year, the investor should rebalance their portfolio to assure that the mix they wish to have is truly the mix they have.  This will naturally force one to sell those categories that have performed well and to buy those which have not.  To repeat a recent Financial Tip, this assures that you will sell high and buy low – as opposed to the other way around.

The End to Beginning

I can’t believe how fast time flies.  Here we are at the end of another year, which coincides for a brief moment with the beginning of the New Year.  As such it is time to take stock of where we are financially.


  • If you’ve some capital gains in your portfolio, look for some capital losses to offset those gains and remove them from income taxation. You may deduct an additional $3,000 in losses (above your capital gains) from your ordinary income.
  • Americans are addicted to income tax refunds. Like other addictions, you need to control your impulse to loan Uncle Sam money for the year while not charging him interest.  Seriously, if you have a substantial refund coming each year, reduce your withholdings by filing a revised W-4 with your employer.  If you’ve changed your family structure; divorce, marriage, or children, a tax estimator like this one from the IRS: may help.
  • On the other hand, if you’ve underpaid your taxes and think you’ll owe taxes, prepay additional taxes to avoid being charged a penalty. The final date for prepayment is January 15, 2016.
  • If your income is dropping next year, move as many deductions as you can legally move to this year. On the other hand, if you expect next year’s income to exceed this years, you will benefit from moving deductions to next year.
  • If you have a flexible spending plan for child care and/or medical care expenses and have over $500 in these plans that is not carried forward by your employer, spend the balance on qualified expenses. For a list of allowable expenses read
  • If a favorite charity accepts gifts of appreciated securities, such as stocks, donate some from those which have appreciated. You receive the entire deduction for the full market value on the day of the gift and you do not have to pay taxes on the gains.  If your favorite charity does not accept the gift of securities, set up a donor advised fund which allows you to deduct the gift and you can decide on the beneficiary later.  Charitable gifts from an IRA of those 70-1/2, in lieu of taking distributions from the IRA, is no longer allowed under most cases.


  • Be cautions when buying mutual funds in December. Many funds make their annual distributions to shareholders in December and this flow of money is taxable in the year they are paid.  Thus, some of the money you’ve already been taxed on will be taxed again and the value of the mutual fund will fall by the amount of the distribution.
  • Rebalance your portfolio to assure that it reflects the diversification you want. You may have to sell some securities that have appreciated (taxable event) while others may have gone down in value.  This forces you, in a small way, to sell high and buy low.  Proper diversification is important for long-run investment success, but rebalancing too often can lead to greater costs of investing which removes some of the benefits of rebalancing.
  • Calculate your net worth to see if the difference between you assets and debts is greater than it was the year before. If you did not do this last year, you will not know.  Yet doing this year after year is a great way to keep score in your financial life, as we want to see your net worth grow by at least the rate of inflation each year.
  • Review your savings. Are you saving enough money for your goals; retirement, education, second home, vacation, and etc.?  This year the market has been relatively flat for the year with the SP500 standing at 2058 in January and 2052 at the time of this writing. If this indicates that you need to add to savings to reach your goals, add to your savings.


  • Which of your debts have the greatest interest rate (APR)? Add to your monthly payment to the one with the greatest APR until it is paid off. Then, pay more to the next highest APR loan.  Keep doing this until all your loans are repaid with the exception of, possibly, your mortgage.  Yet even a modest mortgage interest rate represents money that you’re paying out instead of taking in.   In the process do NOT skip payments on any loan for it will reduce your credit rating.
  • If you’ve many debts with some at high rates, it may pay to consolidate them into a home equity loan since rates are relatively low. You must have home equity to do this. (That is, you must be a home owner with a home worth substantially more than the mortgage.)  In this way, the interest you pay may be reduced and is tax deductible, in most cases.


Much of the above is common sense and has been repeated in other weekly Tips.  It is good, however, to ask ourselves the question of what we can do differently to improve our lives, beginning with our finances. That said, we might find that we are successful in our financial lives but lacking in our personal lives.  Money is not everything, yet it is a long way ahead of what comes after it.  Be a good shepherd of your money and remember to be grateful for the gifts you’ve been given. The writer William Arthur Ward once said, “Feeling gratitude and not expressing it is like wrapping a present and not giving it.”  So, wrap your presents to give to others.  As a gift to yourself, freely give your thanks for those you love and believe that they love you.  Be grateful for your financial success and celebrate the diversity of our great nation.

– Rob Weagley

Race and Wealth: Results from the Great Recession

By now, most readers are aware of what has transpired on the MIZZOU campus this week.  We have been deeply involved in issues related to race.  Many people have been effected by the events and, as is often the case, some people have achieved their goals, some are tired, some are angry, and others have lost their job.  One thing you may have forgotten is that we had our Personal Finance Symposium last Wednesday and one of the papers presented was entitled Why Didn’t Higher Education Protect Hispanic and Black Wealth, by William Emmons, PhD, of the Federal Reserve Bank of St. Louis.  It seems timely to provide you, our readers, with some bullets from his presentation.  It will be clear that both human and financial capital could do much to lessen the divide separating us from one another.

We all know that education can be a great equalizer but is it sufficient for equal outcomes?  To begin, we will focus on median level of income and net-worth, by education and race.  The following table is instructive.
Case Study: Large Racial/Ethnic Income/Wealth Gaps Even Among College Grads.

Case Study: Large Racial/Ethnic Income/Wealth Gaps Even Among College Grads.

Median Family Income in 2013  
Four Year College Graduates Non-College Graduates Median College Income as a Multiple of Median Non-College Income
All Families $87,250 $36,523 2.4
White $94,351 $41,474 2.3
Asian $92,931 $32,668 2.8
Hispanic $68,379 $30,436 2.2
Black $52,147 $26,581 2.0
Median Family Net-Worth in 2013  
Four Year College Graduates Non-College Graduates Median College Wealth as a Multiple of Median Non-College Wealth
All Families $273,586 $43,625 6.3
White $359,928 $80,692 4.5
Asian $259,637 $25,632 9.8
Hispanic $49,606 $12,160 4.1
Black $32,780  $9,006 3.6

The importance of education is clear. Regardless of race, those with four years of college have greater income and net-worth, than do those with only a high school education.  The impact of education appears to be greatest for Asian and White households, when compared to Hispanic and Black households. What is striking is the lower median income and, in particular, net-worth, for Hispanic and Black compared to White and Asian households.  One should note that in 2013, all college graduates (39% of the population) actually owned 75% of all the wealth. This leaves 25% of the wealth for the other 61% of the population.

Moreover, it should be noted that for those with some college or a college degree, between 1989 and 2013, their net worth increased by 7% for those with an associate’s or bachelor’s degree and 23% for those with a graduate or professional degree.  For those with only a high-school education, median net-worth fell by 31%, while it fell by 61% for those with less than a high school education.  Clearly, education matters when it comes to saving and investing.

During the Great Recession, however, the resiliency (or, lack of resiliency) of net-worth by race is striking.  We see in the picture below that for all households, except college educated Asians, net-worth


Change in Median Real Net Worth between 2007 and 2013

fell between 2007 (before the recession) and 2013 (after the recession).  What is striking is for both Asians and Whites, net-worth for the college educated recovered more than it did for the non-college educated.  For Hispanic and Black college educated households the opposite held true.  For these races, the college educated Blacks and Hispanics a 71.9% and 59.7% decrease, respectively, in their median net-worth was found.  Similar results are found over the period 1992 and 2013 (not shown), where Hispanic and Black college educated households saw their median real net-worth decrease, 27.4% and 55.6%, respectively.  Meanwhile, White and Asian households saw their net-worth increase by 86.4% and 89.6%, respectively.  What are some possible explanations?

  • Whites and Asians had more favorable short-term income trends, if college educated.  Black, college-educated had their median income fall by 21.3% during the recession, while it was only 5.9% for White households.
  • Blacks and Hispanics had a larger proportion of their net-worth in owned housing which took a large hit in the recession.
  • College educated Blacks and Hispanics entered the recession with greater debt-to-income ratios (Whites, 102.2%; Asians, 86.5%; Hispanics, 134.5%, and Blacks, 164.7%).  Thus, their greater borrowing may have forced them to spend existing savings and wealth.
  • A larger share of Black and Hispanic college graduates are female and they face greater barriers in the labor market.
  • Hispanic and Black college graduates are less likely to graduate from a highly selective college.
  • A smaller proportion of Hispanic and Black college graduates receive a post-graduate degree.

The above is just a snapshot taken from the Survey of Consumer Finances, perhaps the best data set for these analyses in the world.  It is clear, however, that there are links between Black and Hispanic college graduation and wealth accumulation that we do not understand.  Thus, the implication is that more research needs to be done. This is especially true when there are such large differences in earnings and wealth accumulation between Blacks/Hispanics and Whites/Asians.  These differences will continue to lead to greater and greater gulfs between populations and, while your race does not predetermine your income and wealth, the widening of that gulf makes financial success an ever elusive goal for subpopulations in the United States.

For more information see: