Behavioral Biases in the Investment World

Merriam-Webster Definition of Bias: “An inclination of temperament or outlook”

Synonyms: “Prejudice, bent, tendency”

Effective investors know how to develop a strategy, analyze securities, and make consistent decisions

while keeping a critical eye. However, investing is much more than buying and selling securities

based on business and performance analysis. As humans, we are each subject to a unique array of

mental and emotional biases. Whether it is from parents, friends, or our own deductions, everybody

develops bias in some way during their life. As an investor, identifying and understanding your own

biases can be mentally freeing and preventative of unnecessary loss. While it is impossible to

eliminate bias entirely, it is possible to diminish its influence. The following biases are common

behavioral traits seen in investors. By understanding each, we hope to empower you, the investor, to

identify your own bias(es) and provide you with ways to approach mitigation.

1. Representativeness

Bias: Categorizing the quality of an investment based on recent performance.

Example: “Researchers on behavioral finance found that 39% of all new money committed to mutual funds went into the 10% of funds with the best performance the prior year” [Parker, 2021].

Balance: Having a clearly defined & evidence-driven process for evaluating investments may help reinforce long view investing vs. chasing near-term results.

2. Regret (Loss) Aversion

Bias: Many investors go to great lengths to avoid the feeling of regret.

Example: Conducting a trade for an equity with (misplaced) certainty. Even if it slowly declines and shows consistent negatives, many will refuse to sell to avoid regret of being wrong and/or missing an upswing in price.

Balance: Identifying your “growth needs” provides a benchmark on the amount of risk you need to take to reach your goals. Losing investments are inevitable and attempts to avoid them at all costs will most likely lead to inferior long run returns.

3. Disposition Effect

Bias: Sell winning stocks too soon and hold losing stocks for too long.

Example: When selling a stock that has depreciated in value, that money is not entirely gone. Tax-loss harvesting allows an investor to “write off” capital gains tax with capital losses from selling a losing security. Falling for the Disposition Effect will likely lead to disproportionately high capital gains tax and thus negatively affect the long run tax efficiency of your portfolio.

Balance: Following the balance to Representativeness, having a defined process allows for structure on how long to hold securities and when to sell.

4. Familiarity Bias

Bias: Preference for familiar investments, often local or domestic companies. Also evident with individuals who concentrate on investments solely in their occupational space.

Example: The Texas oil man who buys nothing but energy stocks or the millennial tech investor whose stocks consist exclusively of technology names.

Balance: Investing in what you know can be a powerful tool but can be detrimental to your portfolio if it leads to too much concentration and lack of attention paid to valuations. Expand your knowledge of foreign securities and cast a wide net of diversification by industry to avoid this trap. Consider a “core & explore” strategy where the bulk of your funds are in diversified vehicles, and you limit your targeted investments to only a small fraction of your overall portfolio’s size (usually 5-15% of total).

5. Worry

Bias: This mental state of an investor can cause many complications in the success of their investments. Worry and anxiety often increase the perceived risk of investments and cause investors to steer toward more conservative portfolios than necessary particularly in light of their risk capacity.

Example: The investor who is pre-occupied with stocks being at new all-time highs who talks him/herself out of investing for years if not decades at a time. This individual may not realize that stocks are frequently hitting new highs and this form of market timing has never been a reliable way of investing in the stock market for superior returns.

Balance: There are many tests available that can identify your risk tolerance. Unlike risk capacity, which targets how much risk you can afford to take, the purpose of this test is to identify your emotional comfort with risk. A trusted third party investment advisor can help you explore counterarguments to your objections to participating in the stock market. They can also help you balance the importance of your risk tolerance with measures of your cash-flow based risk capacity and growth levels needed to achieve your financial goals.

6. Anchoring (Experience based)

Bias: The tendency to hold onto a belief and using it as a reference to influence future decisions.

Example (#1) : To illustrate negative anchoring, many baby boomer investors emphasize the ’07-‘09 financial crises as their main point of reference, causing them to make excessively risk-averse decisions with their investments.

Example (#2): For an example of positive anchoring, we need only look to the recent recovery from a 35% drop ending in March’20 which has resulted in many peoples’ overconfidence in the stock market’s tendency to “rapidly bounce back”.

Balance: A study of the length of S&P 500 recoveries and a review of a 60-year chart of the Japanese Nikkei 225 may generate a healthy concern for insufficient liquidity and over-indulgence to stock market risk. The Nikkei 225 has yet to recover its 1989 highs. Very few investors find success based on a single point of reference (since insider trading was made illegal). If there have been negative experiences that affect your investor psyche, work to expand your understanding on diversification instead of falling trap to Regret Aversion. Conversely, if you have found great success in your portfolio in this current cycle, you may be vulnerable to Self-Attribution Bias (see below).

7. Self-Attribution Bias

Bias: When someone thinks that the success they have in choosing investments is because of their own personal talent/intellect and disregards the role of luck in building their newfound wealth.

Example: Tesla is one of the most widely covered stocks on the planet (and thus arguably very efficiently priced). In 2020, some investors have made 300, 400, if not 500% on their money invested in TSLA. The inclination might be that some who have achieved these far above average returns have an outsized appreciation for their own investing prowess vs. market dynamics out of their control or understanding (or just luck). This could result in them being overconfident (and thus too aggressive) on additional investments made in the future.

Balance: Humility in investing is a great protection mechanism against devastating stock market losses. It may be worthwhile to look at years when even the greatest investors of all-time have drastically missed the bullseye with their investment strategies. For instance, Buffet’s BRK/B only returned ~2% in 2020 while Ray Dalio’s flagship hedge fund dealt with sizable negative returns for the same calendar year.

8. Herd Mentality

Bias: Making purchases or strategizing based on where the “herd” is going.

Example: Initiated by a Reddit post, a GameStop Corp. (GME) buying craze sent its price from $17.25 to $347.51 between January 4th-27th, 2021. Less than one month later, the price fell back to $40.59.

Balance: Timing a shift in herd mentality is incredibly difficult. In reviewing active mutual fund manager performance track records, an investor can build an appreciation for this difficulty and hopefully avoid getting wrapped up in the influence of the herd.

9. Great Fool’s Theory (Bias)

Bias: When an investor purchases a security, knowing it is overpriced, but believe others (the greater fools) will continue to buy at even more expensive levels thus justifying the overpriced entry point.

Example: Since 2019, many Large Company Growth stocks, primarily in the technology sector, have had >30% yearly returns. Many of these firms trade at valuation levels (like price-to-book value) from which investors have rarely, if ever, enjoyed attractive forward returns.

Balance: This type of approach ignores most quantitative and qualitative measures in pricing a security. It is one thing to buy speculative stocks with 1% of a portfolio but concentrating the entire equity allocation of a portfolio in positions trading at prices which are historically unprecedented may be a reckless strategy for long-term success.

Why This Matters: For those of you that have an Investment Advisor, you may have taken a “Risk Tolerance Questionnaire” to get a benchmark of your willingness to take risk in the stock market.

Although evaluation of this questionnaire plays an important role, it should be weighed against other factors such as “Risk Capacity”, “Risk Needs”, and “Risk Tolerance Assessment timing” when building a financial plan. Regarding the last point, we have observed that clients’ responses to risk assessments vary significantly depending on the climate of the market in which the investor answers the questionnaire. For instance, during the calm of 2017, investors tended to be more risk tolerant per our assessments while we saw a spike in risk aversion in early 2020 amidst the fastest 30% drop in the S&P 500’s history. Taking a multi-faceted approach in determining the appropriate level of risk taking in your portfolio is the best way to build an investment mix that aligns your risk tolerance, risk capacity, & need for growth to meet financial goals. A thorough discussion on potential investment biases (like those above) may further support sound investor behavior during this process.

A key role of any coach is to keep you sane and in check as you practice – be it in a sport

or while investing. The best advisors should help you avoid letting your own mental

biases take over otherwise rational and calculated investment decisions.

There are many other biases that exist including by not limited to those below. Have a healthy level

of appreciation for our susceptibility to fall victim to any one of them!



• Confirmation Bias

• Availability Bias

• Disposition Effect

• Overconfidence Bias

• Dunning-Kruger Effect

• Prospect Theory

• Hindsight Bias

Sources:

https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp

https://www.investopedia.com/terms/g/greaterfooltheory.asp

https://www.researchgate.net/publication/280087380_How_Biases_Affect_Investor_Behaviour

https://www.morningstar.com/search?query=nikkei

Term or Perm?

The Age Old Debate – Should You Buy Term or Permanent Life Insurance. An educated opinion from someone who doesn’t sell it but used to have an insurance license.

During single life you were probably financially dependent on yourself. Now, as a married couple, you and your spouse are financially INTERDEPENDENT. Usually where someone is financially dependent on you, you have a life insurance need. That’s even more true when your dependents are kids, or other minors who really cannot take care of themselves.

In this article we are going to review two types of insurance that are often solicited by agents working with new parents: (1) term life insurance and (2) whole life insurance.

I used to sell life insurance but finally realized it wasn’t my passion and I really didn’t want anything to do with commissioned products. I preferred just getting paid for my advice whether a sale happened or not so that the conflict of interest with my advice was removed.

Still, the bigger problem I have with the life insurance industry is that professional agents really can’t make a decent living selling term life insurance – the product I believe is most suitable for the lion’s share of people who have a life insurance need. They have to sell permanent life insurance (whole or universal)  to make any notable money.

Let’s start with the difference between the two.

Term life insurance is coverage which lasts for a specific term of years, usually 10, 20, or 30 years in total. There is no cash value and you get nothing in return (in terms of benefits) if you outlive your term period of coverage.

Whole life insurance is permanent. In other words, if you make your scheduled premiums in a timely manner, you have insurance for life. Plus, you tend to get cash value growth such that you will have some money you can walk away with if you cancel the policy in the future.

Just reading this, you might say, why on earth would anyone buy term life insurance!? Well, the reason is, it’s usually only about 10% as expensive as a whole life policy.

What’s our common recommendation? Buy term insurance and invest the premium savings vs whole life in the stock, bond, and real estate markets. Usually we recommend a 30 year term policy for anyone under 45 years old. This will cover them through their traditional working a years, at the end of which, you probably won’t have employment income to replace with life insurance anyway. Further, after 30 years, those premium savings, if invested, will be substantial.

We espouse this plan precisely because of its flexibility. Whole life insurance, being 8-10X more expensive, works well as a savings vehicle, but usually you need to keep the policy in force for 10-15 years before you start to see appealing results in terms of cash value growth/return. The questions I always ask:

·         While you can afford those premiums now, would you still be able to if get laid off or take a pay-cut?

·         What if you want to start your own business? Will making massive life insurance premium payments (as opposed to far more affordable term life payments) be justified if the alternative is investing in yourself and your business instead? Probably not.

·         What if want to re-direct your savings to a different vehicle? For instance, investing in a rental real estate property or exercising stock options from your employer. Would you still be able to do this if you are dumping all that money in the whole policy?

·         How many people do you know who got wealthy buying whole life insurance as their primary savings vehicle? I’ve met with hundreds of clients over my 10 year finance career and I’ll give you my answer to that question… none, zip, nada. As an alternative, how many people do you know who built immense wealth investing in real estate and the stock market?

In conclusion, the answer to the question, “Should I buy whole life or term life insurance?” is, like so many other things in finance, “it depends”. My issue is that if we are being honest about the pros and cons from an objective point of view, many people who are sold expensive permanent life insurance products by an insurance agent would elect term life for its flexibility and cost effectiveness if they had all the information.

Before you make the purchase decision, talk to someone other than the individual selling you the product.  Second opinions are valuable and much cheaper to get vs buying a permanent life insurance policy and regretting it a year or two later if your financial circumstances change.

Relocating At 30 Years Old With Two Kids - My Story

Living in an expensive coastal metro area and feeling like giving your kids the classic middle-class American lifestyle will always be out of reach? This post might be for you. It’s my personal story.

The introduction of kids to a marriage really brings the financial issues to the forefront. For us, it was really baby number 2 (Olivia) that forced us to take a deeper look at our life, our long-term financial plan, our values, and come to terms with what we were and were not willing to compromise on when she arrived.

At 30 years old, my wife and I lived in Marin County, an expensive suburb on the north side of the Golden Gate Bridge in the San Francisco Bay Area.

We both had pretty good jobs, definitely not minting money, but by any normal metric (besides the bay area maybe) we were doing incredibly well financially. Two 6 figure incomes, benefits, and some semblance of work-life balance. Our first daughter (Isla) was in a great daycare and we lived in a small 1,000 sq ft condo. It was literally the cheapest place on the market in our zip code when we bought it.

Then, we got news of Olivia. We were super excited as we always wanted two kids, and the thought of our first daughter having a sister to be her best friend for life really made us feel like we were about to have a complete family.  We were on cloud 9.

Then, reality sunk in.

- Two kids in daycare… $4,200/mo after tax. That just ate up around $75,000 of pre-tax salary.

- Two kids and two adults in a 1,000 sq foot condo, not ideal.

- How would we buy or rent a bigger place on either (A) two incomes but with $4,200/mo in childcare, or (B) one income, with no childcare costs?

If we were to stay in the Bay Area, the answer was to move farther away from the city.  This would entail at least an hour commute to San Francisco in traffic each way. Then we got thinking… do we really want to do that? Commit ourselves to a $750k mortgage, HUGE property taxes, and both of us working 40+ hour/week jobs just to net a grand or so more per month and barely see our kids?

Luckily, as a Certified Financial Planner™ professional, I didn’t have the impulse a lot of people probably have… to feel alone and sorry for myself in this struggle. I was fortunate to not feel like there was something wrong with me because I would talk to new parents all the time who were in EXACTLY the same boat.  The only difference? Most of them decided or felt forced to go with option A above. Keep two jobs, two kids in daycare, get a bigger mortgage, and scrape buy putting every spare dollar into housing costs and childcare.

Let’s go back. Was I willing to compromise on all this? Was my wife? Nope.  This was not a life we were willing to live just to stay in the bay area. Numerous couples I work with in big coastal cities (SF, LA, New York, Boston, etc.) seem to default to, “I couldn’t possibly leave” or  “but this is where my friends are” or “this is where my job is.” In other words, where they live is the center of the universe.

We moved to Boise, Idaho 18 months ago. At first, the responses we got from most people were typically the same: “Idaho… really? What’s in Idaho?”  “What do people do there?” “Isn’t the weather like Siberia?”. Classic examples of the above mentality. That these insanely expensive coastal metro cities are the only place we can live. They are the center of the universe.

Here’s the case study… The wake-up call for those folks.

·         We live in a real family house a mile from the center of downtown Boise. It was about half as much as a shoe-box in the bay area anywhere close to the city.

·         We are able to live on one income AND save money.

·         Our childcare is about 60% of what it was.

·         Our food and dining out costs, the same kind of reduction.

·         Utilities were cheaper despite the warmer summers and colder winters.

·         Property taxes? The rates were lower and were assessed on much lower values. HUGE savings.

·         State Income taxes? About 3% lower on every dollar we make.

·         Home repair services like plumbers, electricians, etc? At least 30% less/hr.

·         Car registration was about half.  

The best part about it? We didn’t feel like we sacrificed on our quality of life. Really, it’s insanely better than it was because we dropped all of the financial pressures.

·         We feel healthier

·         I feel less guilty about taking time off to spend time with my kids because I know I’ll be okay if I don’t make $300k this year. Something that seemed like the bare minimum to feel “okay” in Marin County.

·         We are meeting loads of new parents – many who are also recently relocated and are in search of new friends.

·         My office is a 5 minute bike ride away instead of a 45 minute gas guzzling commute.

I’m not saying relocating is a silver bullet, but if you haven’t considered it, start.

Your impulse might otherwise be to have a pity party for yourself. It’s not fair, I deserve to be happy where I am. I deserve vacations, cars, a nice house, a short commute, etc. I don’t want to have to make new friends in a new place.  The truth is, throughout history, families have had to relocate to afford raising a family or to live a better life. I mean, we are “THE OREGON TRAIL” video game playing generation. You’d think we would get that relocating is a normal part of life for many people, but somehow most people don’t.

Relocating won’t always work for your circumstances and eventually it’s important for most families to put down roots.. Dependent parents, siblings, niche type jobs, etc. might chain you to a specific city. But, if you are worried, here’s my pep talk:

·         Think you won’t ever make friends again? You will.

·         Will your kids be emotionally damaged by the move? No. Kids are super adaptable and if they aren’t,  that’s probably something to work on with them.

·         Will you like your new location as much as before? Sure, there will be pros and cons, but financial freedom is worth its weight in gold and can make up for a lot of other perceived sacrifices. I didn’t appreciate this enough, even as someone who could run the #s and see ahead how much more secure we would be financially when we moved.

·         Have some faith in yourself and realize that you are not alone. Employers are aware of these struggles too. Consider remote work options, occasionally traveling back and forth, or looking at new jobs in other cities… life will go on, and probably, it will get better.

3 Ways To Shrink Your Monthly Student Loan Payment

If you become nauseous when you start thinking about your student loan debt, you’re not alone.

About 44 million Americans have student loan debt[1]

Although student loans are sometimes necessary for many of us to become college students, student loan debt can sometimes feel like a mortgage, especially once the payments become due. The fact is that student loans can be very expensive and can take years to pay off. Many student loan providers make more money if it takes you longer to pay off your loan. With that in mind, there are three different (but not well-known) tactics you can use to reduce your monthly payments if you’re in a money crunch.

For newlyweds, the monthly payment owed that once seemed manageable might start to look like an overwhelming and impossible hurdle, especially if both spouses are bringing student debt to the table.

Trying to pay off student loan debt?

Here are three ways most likely to reduce your monthly stress caused by student loan debt.

1. Refinance for a lower interest rate. This is one option for couples with private loans, which typically have the highest rates. If you have a government loan however, be cautious if you go down this route. You may lose some of the benefits provided by a government-backed student loan.
   

2. Consolidate your student loan debt into one place. This may equate to a lower monthly payment. However, keep in mind that this may extend your payments farther out which could result in you paying more money in the long run. Couples who have a serious cash flow problem may want to think about this option.
   

3. Ask your spouse to help you pay off your student debt. If you share finances with your spouse, explain that you wouldn’t have the job you do without your education. Now that the wedding has passed, the financial burden of one now has become the burden of both. Since your job is contributing to your financial well-being as a couple, asking your spouse to help share the payment for an investment, you made in yourself, is perfectly reasonable.

It truly is a case by case scenario to determine what the best option is for your specific situation.  That said, we collected some helpful articles about student loan debt. After reading these, hopefully, you will learn where to go for up-to-date research on student loan debt and have the confidence to make a more informed decision. 

These articles helps you decide whether you should consolidate or refinance:

https://lendedu.com/blog/refinance-student-loans/#refi-info

https://studentloanhero.com/student-loan-refinancing-cheat-sheet/?utm_source=automationemail&utm_medium=email&utm_campaign=refi-refiautomation&utm_content=ba-email1

10 questions to ask yourself before you refinance:

https://studentloanhero.com/featured/10-questions-to-ask-before-refinancing-your-student-loans/

To play devil’s advocate, 5 reasons why you SHOULDN’T refinance: https://studentloanhero.com/featured/refinance-student-loans-bad-idea/

5 ways marriage could alter your student loan debt, “for better or for worse”:

https://www.nerdwallet.com/blog/loans/student-loans/5-ways-marriage-affects-student-loans/

[1] “U.S. Student Loan Debt Statistics for 2018.” Student Loan Hero, Student Loan Hero, studentloanhero.com/student-loan-debt-statistics/.

8 Tricks To Avoid/Prevent Financial Scams

1.       Look for skeletons in the closet: Before making any major financial commitment to a professional asking you for your hard-earned money, consider running a background check on them to identify any pattern of civil lawsuits, criminal issues, lost licenses, bankruptcies, foreclosures, etc. While it’s personal and you may be worried about offending them, remember that they asked you for your money, and that’s about as personal as it gets. Don’t be afraid to remind them of that! If they have nothing to hide, they should gladly participate in your due diligence. Here are a couple providers you might want to use that we have used in the past for hiring decisions and due diligence on vendors.

a.       Info Cubic
b.       Hire Right

2.       If they say they are “licensed”, confirm it – most professional designation and licensing programs subject a professional to a rigorous process to keep current. 1 – they have to stay out of trouble and 2 – they have to do continuing education. Most of the organizations that sponsor these licenses have a database, so the public can quickly look-up if someone is in fact licensed and in good standing.

 3.       Frequently check your credit report – the oldest trick in the book used by identity theft scammers involves taking out a loan in your name and running away with the money. This is difficult to avoid if a crook gets their hands on your personal information, but it’s easiest to flag if you make a habit of monitoring your credit report. When a loan is taken, most creditors submit an inquiry on your credit report. There are several services out there that will notify you when an inquiry has been made on your credit, or, if your credit history has a major change (like a new loan). Using one of these services can help you spot the issue early.

4.       Don’t provide your personal information over the phone. For starters, the IRS WILL NOT contact you by phone. They do things by mail. If the IRS is “calling you” hang up… it’s not actually them. If you get a call from your bank or insurance company and they ask to “authenticate” you before proceeding, ask for a call back #, then look up the call back # to make sure it’s actually your bank. A lot of scammers will call posing as your bank to obtain your online username, date of birth, social security # etc, to use on your various financial websites.

5.       Check your bank statements and credit card statements for unknown charges. This one is fairly obvious, but from working with clients, it’s amazing how many people don’t do this. Not only is a periodic review of your statements important for fraud prevention, it’s also important to avoid unknowingly wasting money. With todays’ most popular business structure being the “subscription revenue model” it’s incredibly easy to forget you are paying for certain services (many apps, websites, etc.) that you don’t use anymore… Services that are still dinging your credit card bill every month. Make a habit of doing this review at least every couple weeks.

6.       Be suspicious of guarantees. As the great Benjamin Franklin once said, “Nothing is certain except for death and taxes”. That absolutely applies to investments. Only FDIC insured bank accounts, CD’s and US treasury bonds are backed by the full faith and credit of the United states. Everything else has some element of risk of loss.  Even government guaranteed products, one could argue, aren’t guaranteed. If you meet a charlatan peddling guaranteed anything (particularly rates of return), tuck tail and head the other way.

7.       Live by the old auditor adage, “trust but verify”. With the internet, it’s SO much easier to do this than it was in the past. If someone says they have a unique offering, a patent, a license, an “in”, a hot tip, etc. do some back-channel research on what they told you via online searches to see if you can find any contradiction. If you are considering something like an investment in a new industry in which you are unfamiliar, asking around, particularly to other people whom you trust that might have some exposure and experience to it that you don’t.

8.       Ask for existing client references. This again is obvious, but make sure you do this with any professional you are relying upon for financial advice. If they can’t quickly get you at least 2-3 people who’d speak kindly of them and their service, that’s a telling sign. Possibly, this is characteristic of someone who has scammed people in the past.

Marriage Money Bootcamp is now Launched!

We’re proud to announce the official launch of our comprehensive Marriage Money Bootcamp course! Starting last year, our team has been working hard putting together the content, producing lectures, worksheets, interviews, etc. Here’s a look back on the impetus for the course.

Why?

Richard first told me about the idea of a course tailored to newlyweds sometime in early 2017. Richard, a CFP® with his own private practice, mentioned that he was noticing a trend of people stepping into his office that were in the “newlywed” stage and had tons of questions and enthusiasm to learn about how to manage their finances with the impending life change. 

While these people had mentioned a clear interest in setting up a good financial foundation for their commitment to their significant other, many of them were not quite in a position or comfortable paying the cost of an engagement with a certified financial planner.

When trying to find some more reasonably priced educational options that couples could use, there was not much to really point them to. Outside of a few obsolete and incomplete books available on amazon, and a ton of noisy and conflicting, if not flat out wrong, info on the general web - there didn’t seem to be anything he could confidently offer.

How?

So, at this point we started having a few conversations and outlining a general idea of what would end up being what the comprehensive course looks like today. Our team (Richard, Trevor and I) drew up a basic outline of what we thought the course should entail, interviewed people in our target market, and purchased about every tangentially related book and materials and became experts in the subject matter.

Just a few of the materials we scoured through...

We had a complimentary mix of different backgrounds (mine in software engineering and other roles at a few startups and Trevor and Richard’s in various financial disciplines), but we were all new to the idea of full-on producing video content. With some helpful encouragement and advisement from Chris Haroun, who’s been quite a success with his Udemy based business courses, we trial and error’d our way to what the course looks like today. 

So… What is it?

So what does the course entail? It’s a mix of educational video lectures, spreadsheet walkthroughs, interviews with experts in related domains (like with a marriage family therapist, and plans to interview a divorce attorney in the near future), and a powerful comprehensive workbook that has professionally built spreadsheet templates with built in formulas so that you can get real answers based on things like your personal income. Optionally, we’re offering a video chat consultation for anyone who is looking to ask direct questions to a certified professional in the field

The comprehensive workbook

Interviewing Victoria Vogel, Marriage and Family Therapist

This comprehensive course is ideal for those in a new relationship starting to plan for their future, or coming across one of those major points in life were some education and planning is merited and can go a long way (purchasing a home, dealing with debt, planning for kids, etc.). You don't have to go at it alone.

We believe this course is the easiest, most expedited and cost effective solution for couples who are committed to building their financial future together.

For anyone who is interested, we offer a 100% money back guarantee. If you have any questions whatsoever, don't hesitate to reach out to us.

Interested in getting a look? Check out the course preview.

Team MMB

Have questions? We’d love to hear from you - e-mail us at info@mmbcourses.com, like our Facebook page, and/or sign up for our blog for more information and related writings.

Education Expense Inflation: Why We Are Hopeful History Won't Repeat Itself.

According to an article published by US News in September 2017, tuition at in-state public universities more than tripled from 1997 to 2017 (300% increase). Private university tuition increased by over 200%. Meanwhile, the US CPI (inflation index) increased only ~53%. 

What does this tell us? College education inflation has significantly outpaced normal/broad-based inflation over the last 20 years by a very wide margin. If this persists, parents' ability to save for their kid's future college expenses will diminish to a point wheres all but the ultra rich will be priced out of the higher education market.

We don't expect college tuition raises to increase at the same rate they have been.

What or who was to blame? More kids going to college? More access to student loans (both federal and private)? An ever-increasing wage gap between college educated vs. high school GE individuals forcing more people to pile on debt to stay competitive?

We think it's a combination of all of the above. However, we are not convinced this significant disparity between broad inflation and education inflation will persist over the next 20 years.

Why?
It's simply not sustainable. At some point, demand should subside (because of unreasonable / unaffordable growth of college expenses relative to the incremental earnings a college degree generates) causing costs to fall. After all, the demand for higher education comes from people seeing the return on the investment in the education and from easy access to student loan credit. As costs go up, the return on education acts inversely... that is, it goes down all else being equal. 

Online Education Is Here to Stay - many reputable higher education institutions are now offering 100% online degree programs that give students the opportunity to obtain an equivalent degree to those students going through the in-person (more expensive) programs. Some large employers are even paying for the cost of these online degree programs to retain employees long-term via work-study programs. That's a direct shout-out to Starbucks btw who has partnered with Arizona State University Online to provide this AWESOME employee benefit.  Kudos to you Starbeez. 

Peer to Peer Education Websites Are Gaining in Popularity - while they don't necessarily carry the "prestige" of a degree from an accredited institution, consumers of education can definitely find quality content at very low prices (we'd like to think Marriage Money Bootcamp will fall in this category). These alternative education sources will put downward pricing pressure on traditional 4 year universities. 

Online "competency" testing tools may shift us to more of a meritocracy vs. a 4-year-degreeocracy.  If technical / competency testing tools become more instrumental to the hiring process, more consumers will have the opportunity to "self-teach" a skill and prove themselves via these tests vs. having to provide evidence of a formal degree. For instance, there's now precedent in the software engineering industry to weigh results of an online skills test, like HackerRank, over what institution a candidate came from.

We love this trend as it should support more equality of opportunity in the future as lower-income people will have a less expensive path to gaining more job skills and access to higher paying jobs via persistence and self-teaching using online programs.

The Social Construct Is Changing, Politicians Are Once Again Urging a Re-Focus On Apprenticeships and Vocational Programs

There still seems to be a negative stigma against people in the workplace who don't have a 4 year degree. But, the idea that one most have a 4 year degree to be worthy of a high-paying job is changing.  Just google "apprenticeships vs. college" and you will see a long list of reputable sources outlining the need and the attractiveness of going the vocational route vs. a 4 year degree.

As Forbes outlined in a March 2017 article, Germany, despite very high wage costs has been successful with their diversified apprenticeship system in building one of the world's strongest "export economies focused on high-value manufacturing". If more of our youth consider non-4 year degree vocational programs, there will be further downward pressure on traditional college costs.

Conclusion
Long-term, we believe that a financial plan that addresses college education funding needs can and should estimate future cost increases closer to broad-based inflation levels (3-4%) vs. the rates of increase seen in the last 20 years (~5-6%). This scaled back assumption should provide for more realistic monthly savings targets which will free up cash flow for other worthy financial planning uses such as increased funding of retirement accounts, debt payment plans, or insurance/protection programs.

References

https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-09-20/see-20-years-of-tuition-growth-at-national-universities

https://www.forbes.com/sites/nicholaswyman/2017/03/21/why-5-million-apprenticeships-will-make-america-great-again/#7eaf4bcb2fce

Financial Documents: How to Organize Your $h!t

Richard Davey

CPA, CFP®

In our intake process with new financial planning clients, most couples express that they need help “organizing” financial documents.  While we had a great tabbed and color-coded binder that we provided to everyone who paid us for a financial plan, we often asked in follow up appointments if they were still using it. 

Shocker! Our ongoing customer usage rate with these binders was near 0% after plan delivery. 

In today's day and age, the consumer doesn't have the patience or discipline to store all their information in a filing cabinet or binder. It just takes too long and it's too messy. By the way, this isn’t a shot at my clients and their “lack of follow through”. My wife and I were guilty of the same thing. Our filing system was a joke. Too disorganized, bills were being missed, statements lost, etc.  Some stuff was stored digitally, while other things were haphazardly saved in paper format (usually mounting as a pile on our kitchen counter).

So, we set out to build a system that couples would actually use.

First, we knew it had to meet some basic criteria: (1) It had to be easy to use, (2) it had to be digital, and (3) it had to be compatible with both iPhone and Android operating systems. Further, consistency was vital.

With some trial and error, we finally came up with a system that has worked well for us over the last few months.  We use two apps. The CamScanner™ PDF converter, and Google Drive. Both work seamlessly with either phone operating system. Also, we had to “schedule” time to store our info - that’s the whole consistency piece. Now we do it weekly; that is, we inventory our mail and digitally delivered documents and scan/upload it all in bulk every Sunday.

Why We Like CamScanner™ and What It Does

• Takes photos and converts them to higher quality PDFs

• Allows the user to easily take pictures of multiple pages and combine them into one PDF

• Once PDFs are generated in the APP, sharing the PDF via email or storing in the cloud is incredibly intuitive.

• Write-On PDF Capability – once you have created your PDF, you can also write on it with your finger. So, for docs that need signatures, you may be able to use it for this process as well (some people may not accept signatures in this format, but you can try).

An example of the CamScanner app with a signature added.

Why We Like Google Drive and What It Does

• Allows for storage in the cloud with controlled access to other users

• You can share files with people even if they don’t have a “gmail” account.

• It’s one of the more ubiquitous cloud solutions

• It pops up easily as a “shareable location” for pictures taken on your phone and those converted to PDF with an app like CamScanner™.

Now Everyone's File Structure Will Be a Little Different, But Here's Ours:

• Tax Documents

• Home Improvement Receipts

• Estate Planning Documents - will, trust, healthcare directives, powers of attorney, etc.

• Employee Benefits - offer letters, stock comp info, retirement notices, etc.

• Investments - quarterly and annual statements and performance reports

• Insurance - medical, dental, vision, disability, homeowners/renters, umbrella, etc.

• Children >> School, Daycare, Other

• Utilities

• Medical >> one sub-folder for each member of family

• Debts >> mortgage, credit cards, student loans, etc.

While all of this may seem obvious, particularly for tech-savvy individuals, it’s amazing to me how few people have a diligent and organized filing system. And I’ll admit, until about 6 months ago, we were guilty too. Committing to this system has changed our lives for the better. And, more importantly, it’s also been good for our marriage.

So, I encourage you, if you are reading this, take this first (and easiest) step toward a successful financial life. Build a document filing system, stick to it, and periodically refine it as circumstances in your life change to make it better.

Downpayments: Why 20% is the Magic Number for Home Purchases

Richard Davey

CPA, CFP®

Trevor Scotto

CPA, CFP®

®

Remember learning about how much money you should put down when buying your home in high school?  Me neither. Wouldn’t it be nice if someone would just tell us what the right amount is? Here are a few reasons that we recommend having at least 20% as a down payment.

1. You will avoid unnecessary fees

Private Mortgage Insurance (PMI) is insurance that is solely intended to protect the lender in the case you can’t keep up with your mortgage payments, but you are the one required to pay for it. PMI is usually thrown into the total costs of the mortgage when you, as a lendee, put in less than 20% of the down payment.  

This is important for you to know about because PMI could be costing you hundreds of extra dollars each month to buy your home without any tax advantages (or benefit to you). Many Americans pay PMI each month, but that doesn’t mean you have to.

On average, PMI costs around .5% to 1% of the loan amount. This means that for a $400,000 mortgage, you could end up paying up to $400 extra a month, just to protect the mortgage lender. We would prefer this cash go to your retirement/emergency fund or even your leisure fund.

Note that these extra PMI payments typically terminate when the equity in your home reaches 20%, but not always. In some cases you can get your PMI waived, but we would still recommend being cautious about moving forward with that kind of arrangement, as we’ll expand on in point #3.

2. Potentially qualify for a lower interest rate

If you put 20% down, you have a lot to lose in a bank foreclosure if you miss your payments. Because you have put a good chunk of the value down as a payment, the lender will likely offer you a better rate knowing you have a lower risk of missing payments and walking away from the house entirely (foreclosure) vs. someone who is only putting down 5-10%.

Even a small reduction in your interest rate can go a long away. For instance, a $500k 30 year loan with a 4.75% interest rate incurs ~$23,500 in interest expense in the first year of the loan. That same loan with a 4.25% interest rate incurs ~$2,500 LESS interest. That’s $2,500 staying in your pocket vs. going to the bank.

3. Reduce your chances of buying “too much home”

Every dollar you borrow increases your mortgage payment which increases the chance of being overextended in your home budget. Lenders prefer the 20% down payment because it shows the buyer is serious about the home and their intention to stay in it while making timely payments. After all, if you buy a $500,000 home with a $100,000 down payment, you are going to fight tooth and nail to make timely payments to avoid putting your $100k down payment at risk. If you only put 3% down ($15,000) there is less incentive to keep up when times get tough.  

It’s usually a good rule of thumb to avoid acting in a manner that would characterize you as a “high default risk” buyer in the eyes of the bank. If the bank would classify you as “high default risk” for putting down less than 20%, you should probably take that personally. Do YOU want to put yourself in a position of high default risk? After all, foreclosures are horribly damaging to your credit score and ability to borrow in the future.

The bottom line is this, the next time you are looking at your next home, make sure you have enough to afford at least a 20% down payment. 

 

Thinking about buying a home?

"Financial Planning for your First Home" online course is now available!

25% discount available for the first 25 who use it.

Use the 25_FOR_25 coupon code while it lasts!

Let us know if you have any questions or comments!