My Answers to the 19 Questions You Should Ask Every Financial Advisor

In case you missed it, The Wall Street Journal's Jason Zweig recently wrote an article titled "The 19 Questions to Ask Your Financial Advisor". Zweig, who writes a fantastic weekly column titled "The Intelligent Investor", wants consumers to receive good financial advice. To him, that means financial advisors, stockbrokers, and insurance agents should always act as fiduciaries, which means they should act in their clients' best interests.

I wholeheartedly agree. Honestly, I can't believe this is even up for debate.

Some background: Last year, the U.S. Department of Labor released a rule which, once implemented, will require all financial professionals who provide retirement planning advice to act as fiduciaries for their clients. In addition, financial professionals must disclose all conflicts of interest and clearly disclose all fees and commissions paid by the client. Financial professionals who work on commission, primarily brokers and insurance agents, will be impacted the most. In general, these are the professionals unhappy with the rule. Unfortunately, the deadline for compliance has been delayed from January 1, 2018 to July 1, 2019. In the meantime, changes to the rule may severely weaken the rule or kill it entirely.

So how do you determine whether or not a financial planner will act in your best interest? Ask an advisor the right questions and listen for the best answers. Below, you'll find 19 questions to ask an advisor. You'll also find the answers, in parenthesis, Jason Zweig suggests you listen for. I've also included my answers to the questions, which are in bold.

Use these questions when interviewing an advisor - and interview at least three. Good luck with your search!

1. Are you always a fiduciary, and will you state that in writing? (Yes.)

Yes.

2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)

No.

3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)

No.

4. Will you itemize all your fees and expenses in writing? (Yes.)

Yes.

5. Are your fees negotiable? (Yes.)

Yes.

6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)

Yes.

7. Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)

Yes.

8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)

No.

9. Do you pay referral fees to generate new clients? (No.)

No.

10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)

Investment management is important, but I believe true financial planning means looking at all aspects of a client's financial life.

11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)

No.

12. What is your investment philosophy?

I believe it is impossible to consistently beat the market. Therefore, I use passive investments, such as low-cost index funds, in client portfolios.

13. Do you believe in technical analysis or market timing? (No.)

No.

14. Do you believe you can beat the market? (No.)

No.

15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)

As seldom as possible, typically less than twice a year.

16. How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)

After all expenses on a quarterly, 1-year, 3-year, and 5-year basis. I can compare performance to a benchmark, such as the S&P 500 Index, but I prefer not to because it's not an apples-to-apples comparison.

17. Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall.)

I hold the Certified Financial Planner designation (CFP®).

18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)

I cannot guarantee a rate of return. Conservatively, 3% to 4% is realistic, but markets have their ups and downs.

19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)

I do and I use the same investments I recommend to my clients.

Equifax Data Breach - What You Should Do Next

What Happened?

  • Equifax, the credit-tracking and rating company, revealed it suffered a massive data breach on July 29th of this year
  • Approximately 143 million U.S. consumers were affected

Why Should I Be Upset?

  • Having your sensitive personal information leaked is bad enough, but Equifax failed to report the hack until Thursday, September 7th - more than a month after the breach actually occurred
  • To make matters worse, executives at Equifax sold millions of dollars in company shares in early August, which isn't at all shady
  • Equifax's response to the breach was laughable, and not in a good way:
    • Initially, the website www.equifaxsecurity2017.com/, which was created to notify consumers of the hack, had numerous problems, which made it appear as if the site was a phishing threat
    • Immediately following disclosure of the breach, security codes were displayed on the main Equifax site
    • The PIN generated when a consumer initiates a security freeze appeared not to be random but generated in such a way that hackers could still determine the consumer's identity (this has since been fixed)

What Can I Do?

  • Find out if your information was included in the breach by visiting this site created by Equifax and clicking "Potential Impact"
  • Sign up for the free 12-month credit file monitoring and identity theft protection provided by Equifax
    • Note 1: Initially, the terms and conditions of this service required anyone who enrolled to give up the right to sue the company, but Equifax has since stated that specific clause would not apply to the data breach)
    • Note 2: You do not have to sign up for the monitoring service, it's simply an option
  • Check your credit reports from the three main reporting agencies, Equifax, Experian, and TransUnion by visiting www.annualcreditreport.com.
    • You are allowed to obtain one free report annually from each of the three companies
    • There are numerous websites willing to charge you for a credit report, so make sure you use the one authorized by Federal law
  • Place a credit freeze on your files
    • You can find out more about this service by visiting the Federal Trade Commission website
    • Equifax is providing the credit freeze service free of charge, but Experian and TransUnion are charging consumers $10 - $15 for the privilege (I'll give you three guesses how I feel about paying for this service to a company that's managing my sensitive data)
  • If you don't want to lock-down your credit with a credit freeze, you can initiate a fraud alert, which allows creditors to get a copy of your credit report as long as they take steps to verify your identity
  • Review your bank and credit card statements for any transactions you don't recognize
  • Improve your passwords
    • I understand how difficult it is to remember dozens of passwords, so I recommend using a password manager, such as LastPass
    • Even better, enable two-factor authentication for your most important websites
  • When using public wi-fi networks don't visit websites that require sensitive information
    • If you must use a public network, use a virtual private network (VPN), such as VPN Unlimted, which will encrypt the traffic between you and the internet

Listening / Reading / Watching

Here's what has my attention right now:

  • I'm still working on last week's books!

My Takeaways From the 2017 XY Planning Network Conference

What I Learned

  1. The number of advisors working with Gen X and Gen Y clients continues to grow - quickly. The XY Planning Network had 250 members in 2016. Not bad, but the network was just shy of 500 members when the conference started. That's a lot of advisors dedicated to serving as fiduciaries for their clients. Especially when you consider parts of the financial services industry are fighting hard to kill or water down the Department of Labor's Fiduciary Rule. Advisors in the XYPN have embraced working in their clients' best interests.
  2. FinTech (financial technology) for advisors continues to improve. There were some impressive new tools designed to help advisors better serve their clients. I wish I could adopt everything showcased at the conference. Too bad I have a finite budget for tech!
  3. I'm adding a new college planning/pre-approval service to my practice. While at the conference, I took a day long workshop on college planning and learned ways to help clients and their children make better-informed decisions and, hopefully, save money, when it's time to select a school.
  4. It's worth taking time off to go to a conference. The value of continuing education and time spent talking to my fellow planners far outweighs the costs associated with attending a conference.
  5. I need to pack a hoodie for next year's conference. The main ballroom in the hotel was freezing.

Listening / Reading / Watching

Here's what has my attention right now:

  • Where You Go Is Not Who You Will Be: An Antidote to the College Admissions Mania, by Frank Bruni. This book was recommended by one of the presenters at the XYPN conference. "Bruni, a best-selling author and a columnist for the New York Times, shows that the Ivy League has no monopoly on corner offices, governors' mansions, or the most prestigious academic and scientific grants. Through statistics, surveys, and the stories of hugely successful people who didn't attend the most exclusive schools, he demonstrates that many kinds of colleges - large public universities, tiny hideaways in the hinterlands - serve as ideal springboards."
  • The Clockwork Dynasty, by Daniel H. Wilson. Here's another fun book from the author of Robopocalypse and Robogenesis. Instead of having robots take over the world, Wilson "weaves a path through history, following a race of human-like machines that have been hiding among us for untold centuries."

The Frugal Traveler or: How to Get Lodging in Europe for Less Than $10/Day

Travel On the Cheap

This week, I returned from a European vacation with my family. I recognize a trip like this isn't a typical family vacation because of the costs associated with airfare, lodging, food, and museums/entertainment. We are fortunate that we were able to make the trip.

Being the Frugal Family that we are, we always do our best to minimize expenses.

When it comes to airfare, my wife has a knack for finding low-cost airfare using websites that track prices. I still don't know how she has the patience to scour all of the travel sites, but she consistently finds great deals.

As for food, it's relatively easy to keep your costs in check. For example, rather than eating out at every meal, you can eat breakfast in your hotel/apartment or pack a picnic lunch/dinner. This was especially easy while in France where you can make a delicious, inexpensive meal out of a baguette, cheese, salami, fruit, and of course, wine. 

In true Frugal Planner fashion, my wife and I found a way to significantly decrease the cost of lodging - while making new friends. There is some work involved, but it's not too much of a hassle.

The Home Exchange

Services such as Airbnb have made it easy to find alternatives to traditional hotels. Allow me to add another service you should consider: GuestToGuest.

GuestToGuest facilitates reciprocal and non-reciprocal exchanges:

  • In a reciprocal exchange, you stay at the home of a person who comes to yours. What's nice is that the exchanges don't have to be at the same time or for the same duration. It's up to the users to negotiate the terms.
  • In a non-reciprocal exchange, you use GuestPoints to stay in another person's home. You can earn GuestPoints by hosting other members. The only downside of hosting guests is that you need to clean before and after the guests visit. I don't think this is a dealbreaker.

We've hosted guests from the United States, France, Argentina, and Spain. In some cases, we've stayed in our house while guests stayed in a spare bedroom. These types of exchanges enable us to make new friends and give the girls opportunities to learn about other countries. At other times, guests have stayed in our home while we were out of town. I like this because it means there's someone watching over the house for us - and watering our garden. Fortunately, we've never had any problems. In addition, GuestToGuest requires a security deposit and insurance during the stay.

An Example

Here's an example of how GuestToGuest worked during our recent trip to Paris. Please note that while I list the GuestPoints we paid, I don't factor the points into the overall out-of-pocket cost of lodging because we earned the GuestPoints by hosting people at our house.

Paris:

  • We stayed in Paris from 8/8 until 8/16.
  • GuestPoints paid = 824
  • Our security deposit was €400 ($477), of which we paid a 3.5% commission to GuestToGuest = €14 ($17).
  • Insurance was €4/night = €32 ($38)
  • Total out of pocket in Paris = €46 ($55)

Lyon:

  • We stayed in Lyon from 8/16 until 8/20.
  • GuestPoints paid = 896
  • Our security deposit was €1000 ($1,193), of which we paid a 3.5% commission to GuestToGuest = €35 ($42).
  • Insurance was €4/night = €16 ($19)
  • Total out of pocket in Lyon = €51 ($61)

Our total out-of-pocket cost for lodging in France was $116, or $9.67 per day.

Listening / Reading / Watching

Here's what has my attention right now:

  • The XY Planning Network's 2017 Conference. I'm currently in Dallas, TX for the XY Planning Network's annual conference. I look forward to learning a lot while catching up with my fellow financial planners.
  • The Punch Escrow, by Tal M. Klein. Looking for a smart, funny summer beach read? Check out this sci-fi book about nanotechnology, teleportation, and a future where corporations control everything.
  • Game of Thrones, season seven finale. Yes, there have been some serious lapses in logic this season. For example, how quickly can ravens and dragons fly across Westeros? Have the White Walkers been wandering aimlessly beyond the wall throughout the entire series? Setting aside those and many other issues, this season has been great. Now if only George R.R. Martin would hurry up and finish writing The Winds of Winter.

Second Quarter 2017 In Review

Past the Halfway Point

It's another hot and humid summer in D.C. If you're in the D.C. region I hope you have plans to get away to a cooler climate (or just somewhere fun).

Here's a four-point summary of what happened during the second quarter:

  1. U.S. stocks continued to perform well, with health and biotech stocks leading the way.
  2. Bond funds were also in positive during the second quarter.
  3. Investors in foreign stocks were rewarded for their patience as international investments performed even better than domestic stocks.
  4. In June, the Federal Reserve raised the target Federal funds rate by 0.25%.

Q2 2017 Numbers

The benchmark S&P 500 gained 2.6% during the second quarter, which puts it up 8.2% for the first half of the year.

The average diversified U.S. stock fund, which is a better measure of how we actually invest, gained 2.7%, just slightly higher than the market. This puts domestic stock funds up 7.7% through the first half of 2017. Investors, perhaps wary of high valuations in U.S. stocks, are exercising caution, with $23 billion flowing out of stock funds.

The average diversified international stock fund gained 6.5% in the first quarter. This gain puts international stock funds up 15% for the year. In a sign of investors' confidence in foreign markets, $78 billion flowed into international stock funds during the quarter.

The average intermediate-term bond fund returned 1.4% during the second quarter and 2.4% for the first half. $93 billion flowed into bond funds during the quarter, likely because investors are worried about the valuations of U.S. stocks.

Expectations for the Third Quarter

Legislation coming out of D.C. may affect markets during the third and fourth quarters of 2017. This includes, but is not limited to, health care overhaul, infrastructure spending, and tax reform. Or our elected officials will continue to behave like children and nothing will be accomplished. My money is on the latter option.

Listening / Reading / Watching

Here's what has my attention right now:

  • Game of Thrones on HBO. Because winter is coming, of course.
  • I need recommendations for fun summer books! Have any good mindless page-turners? Let me know.

Practicing What I Preach

This week, while having lunch with a friend and mentor, I questioned whether or not I really need to join a gym (and thus pay a monthly membership fee). Could I not continue my DIY approach? After all, I trained for and competed in triathlons for 10 years, so I'm pretty sure I know what I'm doing.

Thanks to an astute observation from my mentor, I had an epiphany: Although I consistently encourage people to invest in themselves, I wasn't following my own advice.

I believe it's almost always worth the expense to invest in, among other things, education, fitness, and of course financial planning. Okay, I'm definitely biased when it comes to financial planning because that's how I make a living. But it's worth it, I swear!

Sure, You Can Do It Yourself. But Will You?

With few exceptions, there's very little we can't do ourselves. For example, I had no idea how to perform maintenance on the commercial-grade plumbing hardware in our house, but after watching a few videos on YouTube I was ready to tackle the job. Unfortunately, I don't think I should try that if I need surgery.

I certainly could continue to workout on my own and save the cost of the monthly gym membership, but I know I'll work harder and have better results if I actually go to a gym. I believe the same thing applies to financial planning. Sure, you can do it yourself. But will you?

My point is that sometimes we can't do it ourselves. Sometimes the outcome is better when we have help. Clint Eastwood (as Dirty Harry) once said, "A man's got to know his limitations." Know your limitations and don't be afraid to invest in help when you need it.

Listening / Reading / Watching

Here's what has my attention right now:

  • Alien: Covenant. As a major sci-fi nerd and superfan of most installments in the Alien series, I can't wait to see this tonight.
  • Quiet: The Power of Introverts in a World That Can't Stop Talking, by Susan Cain. As an introvert, I think it's fitting that I listen to this with earbuds firmly planted in my ears. That way I can keep to myself and not risk having someone try to talk to me.
  • Master of None, season two on Netflix. If you haven't watched season one, do it now. Comedian Aziz Ansari's series is excellent.

Take Our Daughters (and Sons) to Work Day Yields Interesting Ideas About What I Do

We started the day with what I believed was going to be an exciting discussion about financial planning, budgeting, stock ownership, and dividends.


My youngest burst my bubble by asking, "When's lunch?".


This year's National Take Our Daughters and Sons to Work Day fell on Thursday, April 27th. I was pleasantly surprised when both of my daughters (and my youngest's BFF!) wanted to spend the day at work with me.


The girls enjoyed the budgeting exercise. I was amused when they wanted to earmark only $100/month for groceries.


The girls quickly took to creating a budget, even if some of their estimates were unrealistic. I think they enjoyed showing off their math skills.


Apparently, the girls think my job would be a lot more interesting if I traded socks rather than stocks.


What Does a Financial Planner Do?

I posed this question to the girls and had some surprising responses. Apparently, my job entails:

  • Counting people's money

  • Using a calculator to count people's money

  • Working on a computer

  • Buying stocks (not socks!)

  • Earning money

  • Going to bank accounts to see how much money people have (this is my favorite because I envision myself actually going up to people and asking to look at their bank accounts)

  • Teaching people how to spend wisely

These are all true statements. Especially the one about not buying socks.


I think lunchtime was the highlight of their day.


Listening / Reading / Watching

Here's what has my attention right now:

  • The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell. I have yet to find a book written by Malcolm Gladwell that I didn't like.

  • Catastrophe, Season three on Amazon Prime. Amazon just dropped all six episodes of season three onto Prime. Seasons one and two were hilarious, so I hope the trend continues.

First Quarter 2017 In Review

Wait, it's April already??

It's difficult to believe it's already April. As my Grandmother used to say, the Fourth of July is just around the corner.

Here's a three-point summary of the first quarter:

  1. Markets are up in the U.S. thanks to expectations of lower taxes and less regulation. A strong technology sector helped, too.
  2. The Federal Reserve continued on its path to rate normalization by raising the target Federal funds rate by 0.25%.
  3. The broader economy is strong and showing signs of increased stability as job growth continues at a faster pace than in 2016, consumer sentiment strengthens, and home prices continue to rise.

Q1 2017 Numbers

The benchmark S&P 500 gained 5.5%, which isn't too shabby. This was bolstered by strong performance in the tech sector, but offset slightly by weak performance in the energy sector.

The average diversified U.S. stock fund, which is a more holistic measure of how we actually invest, gained 4.8%, slightly lagging the market. It's interesting to note investors are exercising caution and are more likely to invest in bonds rather than stocks. For comparison purposes, $112 billion flowed to bond investments versus #34 billion to stocks. This is in stark contrast to the last quarter of 2016 when investors flocked to stocks following the results of the U.S. election.

The average diversified international stock fund gained 8% in the first quarter. This is likely due in large part to a strong dollar, which incentivizes foreign companies to export goods to the U.S.

The average intermediate-term bond fund returned 1% during the first quarter, down from 3% in the previous quarter.

Expectations for the Second Quarter

Corporate earnings growth is forecasted by many analysts to rise about 9%. Many companies will report their first quarter earnings in the coming weeks, so we'll see if the forecasts match reality. If earnings match expectations, the market could continue to break records. Of course, there will always be unforeseen events that will shape investor behavior.

During the first quarter, the financial sector lagged all others except for energy and telecom. That could change in the second quarter as rising interest rates and decreased regulation should lead a rebound in the financial sector. 

Listening / Reading / Watching

Here's what has my attention right now:

  • Anything related to Tesla because the company has a lot going on right now. Tesla's stock price is up 40% year-to-date, the Model 3 is entering the release candidate phase of development, and a new line of electric trucks will be unveiled in September. In addition, Tesla Energy is ramping up its Powerwall 2, Solar Roof, Powerpack, and a newly announced conventional solar array. As a company, Tesla recently became more valuable than Ford and GM, making Tesla the most valuable automaker in the U.S. That's crazy considering, among other things, Tesla's limited production capacity.
  • Fortitude on Amazon Prime Video. Long-time readers probably know I'm a sucker for sci-fi. I recently stumbled across this series and I'm really enjoying it. Bonus: It was filmed in Iceland, so the scenery is gorgeous.

Review of the Overhauled D.C. College Savings Plan

Finally, a Much-Needed Overhaul of D.C.'s College Savings Plan

Last month, I rejoiced after receiving a brochure in the mail touting "new enhancements" to the D.C. College Savings Plan (529 Plan). My wife seemed to think I was the only resident of D.C. excited by this news. Who wouldn't be excited??

Some background: For the last couple years, I've been on a mission to get a new program manager for the D.C. 529 Plan. The old program manager, Calvert Investments, provided expensive and mediocre investment options, which made D.C.'s offering difficult to recommend over superior plans from other states.

During my quest to change the plan's program manager, I exchanged several emails with Jeffrey Barnette, the D.C. Treasurer and Deputy CFO, and John Henry, D.C. Associate Treasurer. They told me:

  1. Due to the small population of D.C., Calvert Investments was the only company interested in managing D.C.'s plan.
  2. Because Calvert was managing the plan, D.C. residents would have access to socially responsible actively managed mutual funds "which naturally come with higher expense ratios than funds that are not actively managed, such as passively managed index funds".
  3. Due to demand from participants, D.C. added a passively managed fund, the State Street Equity 500 Index fund. Oh, and by the way, it just happens to have an expense ratio of 0.50%. Not good. For comparison purposes, the Vanguard 500 Index has an expense ratio of 0.04%. That's a difference of 0.46%! While expenses aren't the only factor to consider when choosing an investment, they are extremely important. Here's what you need to remember: High expenses bad, low expenses good.
  4. D.C. recently issued a Request for Proposal (RFP) for a new service provider. Naturally, this news made me happy.

Even NBC's News 4 I-Team, which surprisingly is not at all like The A-Team, ran a story questioning the costs associated with the Calvert-managed D.C. plan.

I was able to get a copy of the RFP and review it for myself. After that, I heard nothing from D.C. until I received the brochure in the mail. And the news was good: Calvert would be replaced by Ascensus as the program manager and, more importantly, participants would have access to investments from Vanguard, Dimensional Fund Advisors, and iShares.

Here's a breakdown of The Good and The Bad of the new plan.

The Good

  1. Easier online enrollment: The process of opening an account online has been streamlined and should take just a few minutes.
  2. A lower initial contribution: Under the old plan, the minimum initial contribution was $100. The new minimum is $25.
  3. Better investment options: Like the old plan, the new plan offers both individual investments and age-based portfolios (now called Year of College Enrollment Portfolios). The big difference between the plans is the investment options. Participants now have access to low-cost mutual funds and Exchange Traded Funds (ETFs) from Vanguard, Dimensional Fund Advisors, iShares, Schwab, and JP Morgan.
  4. Less expensive investments: Under the old plan managed by Calvert, investment expenses were as high as 1.66%. There's no excuse for that. Under the new plan, investment expenses are far more reasonable, ranging from 0.15% to 0.80%.

The Bad

  1. Actual investment options are difficult to find: As a financial nerd, I want to know what exactly I'm investing my hard-earned money in. The problem is that I really had to dig into the site to find out what the underlying investments were. For example, the U.S. Total Stock Market Index Portfolio is actually the iShares Core S&P Total U.S. Stock Market ETF (ticker symbol ITOT).
  2. Individual investments feature inflated expenses: I looked at each of the individual investments and found they were inflated by 0.30% - to 0.44%. For example, the U.S. Total Stock Market Index Portfolio, which is actually the iShares Core S&P Total U.S. Stock Market ETF (ticker ITOT), currently has expenses of 0.03%. However, the D.C. plan charges 0.33%. Why the difference? I don't know, but I'm going to find out.

The Verdict

The D.C. College Savings Plan, now managed by Ascensus, is a huge improvement over the plan as managed by Calvert Investments. I feel much better about recommending the D.C. plan to clients and friends.

Maybe now I can get Morningstar to include the D.C. plan in their annual rankings of best (and worst) 529 plans. For the past four years, I've asked Morningstar to include the plan and every year the answer is the same: "the D.C. plan is too small to include in our rankings". 

Listening / Reading / Watching

Here's what has my attention right now:

  • The backlog of Wired magazine issues sitting on my nightstand: It's time I read through these so I can make room for more books and periodicals.
  • I need some recommendations for TV: Now that Legion and The Walking Dead have wrapped up their seasons, I'm searching for new sources of entertainment.

Iceland, Bank Bailouts, and Alternative History

Revisiting Iceland

In November of last year, my wife and I spent a long weekend in Iceland. In case you missed it, you can read my blog post about the trip.

Iceland was beautiful and anyone that likes to travel should definitely add it to their bucket list. Anyway, I'm revisiting my blog post not to pitch you on a trip to Iceland (just go), but to provide you with an update on the country's economy and to play a fun game of Alternative History. Exciting, no?

Eight Years Later: Recovery

While reading this week's edition of The Economist, a headline caught my attention: The End of a Saga: Iceland Lifts Capital Controls. What does lifting "capital controls" mean and why is it important? It means that pension and investment funds are once again allowed to invest their money abroad. This is important because eight years after the financial crisis, Iceland's economy appears to have recovered, thanks to strict financial controls and a big boost in tourism.

Why, you ask, should we celebrate Iceland's economic recovery? Well, aside from the fact that the country produces the best yogurt ever, Iceland's recovery presents us with an interesting case study of how to manage an economic crisis. Iceland's leaders took a different approach to handling the crisis than did their counterparts in the United States. I wonder if perhaps our leaders chose...poorly.

Now for a brief summary of how we got here.

Hop Into My Wayback Machine And Let's Travel Back To 2008

Remember when that little thing called The Global Financial System had a complete meltdown? If not, I highly recommend reading or watching The Big Short, which provides a great (and often funny) overview of what caused the financial crisis. 

Iceland was one of the countries hardest hit during the economic meltdown of 2008. Three of the country's largest privately-owned banks defaulted on $62 billion of foreign debt and eventually collapsed. But wait, there's more! Iceland's currency, the krona, fell 50% in one week. The stock market fell 95%. Nearly every business in Iceland went bankrupt.

Here's the major difference with how the crisis was handled: Unlike the too-big-to-fail banks in the United States, Iceland's three largest banks were allowed to fail.

Alternative History (Not Facts)

Would the United States be better off today if our banks, like those in Iceland, had been allowed to fail?

This question started an ongoing debate between my wife and me. She has always argued the United States would be better off today if our banks had been allowed to fail. I've argued that bailing out banks was the correct course of action because it was the only way to avoid widespread economic hardship.

After reading about Iceland's recovery, I've been questioning my opinion on the bank bailout. That's right, I'm admitting my wife might be right.

News of Iceland's recovery isn't the only reason I'm questioning the wisdom of bailing out banks; the aftermath of the 2016 presidential election also plays an important role in my thinking. It's clear there's a sharp - and growing - divide between rich and poor in the United States. Much of that divide can be attributed to rapid changes in technology, which is going to be exacerbated by advances in A.I. and autonomous vehicles. Very little seems to have changed for the better for a large segment of the population. I wonder if letting the banks fail - a reboot - could have benefitted a greater number of people.

The downside of letting banks fail is that we would have seen mass bankruptcies, an inability to borrow money, even greater losses in the U.S. financial markets, and mass unemployment. And probably worse: Riots and civil unrest. But maybe the country as a whole would have come out stronger on the other side. 

I guess it comes down to this: Which option is less terrible? Your answer will most certainly depend on what you stand to gain (or lose).

Not An Apples-To-Apples Comparison

Iceland, while an interesting case study, is obviously far different from the United States. For example, Iceland has a population of ~325,000, compared to ~310,000,000 in the U.S. That difference makes it difficult to imagine the scale of problems the U.S. would have faced if banks had been allowed to fail.

Ultimately, there's no way to determine what would have happened if the United States had followed the same course of action as Iceland. But it's a fun question to consider! *

* It's possible my idea of fun differs from yours.

Listening / Reading / Watching

Here's what has my attention right now:

Basic Income: A Radical Proposal for a Free Society and a Sane Economy by Philippe Van Parjis and Yannick Vanderborght. The idea of Universal Basic Income (UBI) has been around for a long time but has resurfaced as people such as Elon Musk have suggested it as a solution to a world facing radical change due to advances in A.I. and autonomous vehicles. Would it work? I don't know, but it's a fascinating subject.

The books in the sci-fi series The Expanse offer a template for UBI:

Don't want to work? No problem. You'll receive Basic, which is enough money to live off of. It will be a no-frills, not-especially-comfortable life, but you won't have to work.

Want to have a more comfortable life? Great. You have to work for a year to ensure you really want to work. Succeed and you're allowed to go to a university where you'll learn a trade or profession that will enable you to earn more than just Basic.

Highlights from Warren Buffett's Annual Letter, February 2017

I Read Warren Buffett's Annual Letter To Shareholders So You Don't Have To

On February 25th, Warren Buffett released his annual letter to shareholders of Berkshire Hathaway stock. As usual, his letter contains pearls of wisdom regarding investing and the financial services industry. In case you missed the letter, I've compiled the best quotes below with commentary from yours truly.

Berkshire Hathaway's Performance

Buffett: "Berkshire’s gain in net worth during 2016 was $27.5 billion, which increased the per-share book value of both our Class A and Class B stock by 10.7%. Over the last 52 years (that is, since present management took over), per-share book value has grown from $19 to $172,108, a rate of 19% compounded annually." * 

* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of those shown for A.

Me: Impressive. Most impressive.

Beating the Market

Buffett: "There are, of course, some skilled individuals who are highly likely to outperform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat.

There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose abilities would equal those of the people I’ve identified. The job, after all, is not impossible. The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well. Bill Ruane – a truly wonderful human being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the long haul – said it well: “In investment management, the progression is from the innovators to the imitators to the swarming incompetents.”

Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him."

Me: Ouch. Comparing asset managers to monkeys is harsh, but Buffett isn't wrong. Study after study suggests it's nearly impossible for anyone to consistently beat the market. Of course, that hasn't stopped anyone from trying.

The Challenges That Come With Managing Money

Buffett: "Finally, there are three connected realities that cause investing success to breed failure. First, a good record quickly attracts a torrent of money. Second, huge sums invariably act as an anchor on investment performance: What is easy with millions, struggles with billions (sob!). Third, most managers will nevertheless seek new money because of their personal equation – namely, the more funds they have under management, the more their fees.

These three points are hardly new ground for me: In January 1966, when I was managing $44 million, I wrote my limited partners: “I feel substantially greater size is more likely to harm future results than to help them. This might not be true for my own personal results, but it is likely to be true for your results. Therefore, . . . I intend to admit no additional partners to BPL. I have notified Susie that if we have any more children, it is up to her to find some other partnership for them.”

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds."

Me: Buffett makes two important points here:

First, the more money an asset manager has to work with, the more difficult it is to find worthwhile investments. For example, managers of the American Funds Growth Fund of America mutual fund, which was founded in 1973, saw huge inflows for many years because investors were attracted by its solid track record. Unfortunately, managers had an increasingly difficult time putting all that cash to good use. The fund, which currently has assets of ~$74 billion, has seen net outflows for almost every year since 2008. The consistent outflows can be attributed to better-informed investors, the increasing popularity of index funds, and an extremely long bull market.

The second point Buffett makes is that many asset managers have a heads-I-win, tails-I-win business model. I'm looking at you, hedge fund managers. It's not unusual for them to follow a "2 and 20" model, which means a 2% annual fixed fee, payable even when losses are huge, and 20% of any profits. That's a great deal...if you're a hedge fund manager. Of course, even hedge fund managers are feeling pinched by, once again, better-informed investors and the rising popularity of index funds. See this recent story from the Wall Street Journal about Tudor Investment Corp.

Share Repurchases

Buffett: "As the subject of repurchases has come to a boil, some people have come close to calling them un-American – characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn’t the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent years has died for lack of capital. (Call us if you have a candidate.)"

Me: Companies occasionally buy their own stock. For example, from September 2013 through 2015, Apple repurchased 760 million shares. Fortune magazine states the benefit - and pitfall - of this practice better than I can:

"When a company buys its own stock, it reduces the overall number of shares outstanding. That raises earnings-per-share, and all other things being equal, the stock price, making shareholders richer. Put simply, the folks who own Apple get a bigger share of the Apple pie, courtesy of the constantly shrinking count of shares outstanding. But buybacks fail to enrich investors if management overpays for their shares."

Buffett again: "My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, 'What is smart at one price is stupid at another.'"

Me again: Translation: Share repurchases aren't bad, as long as the price is right.

Listening / Reading / Watching

Here's what has my attention right now:

Mediation and Interest-Based Negotiation Skills Training. Last week I spent four days in training to help couples going through a divorce. My goal is to add the role of financial neutral to the list of services I provide.

Homo Deus: A Brief History of Tomorrow by Yuval Noah Harari. Here's another book that continues my obsession with trying to determine which trends, businesses, and technology will have the biggest impact on humanity.

From the publisher: "Over the past century, humankind has managed to do the impossible and rein in famine, plague, and war. This may seem hard to accept, but as Harari explains in his trademark style - thorough yet riveting - famine, plague, and war have been transformed from incomprehensible and uncontrollable forces of nature into manageable challenges. For the first time ever, more people die from eating too much than from eating too little; more people die from old age than from infectious diseases; and more people commit suicide than are killed by soldiers, terrorists, and criminals put together. The average American is 1,000 times more likely to die from binging at McDonald's than from being blown up by Al Qaeda. 

What then will replace famine, plague, and war at the top of the human agenda? As the self-made gods of planet Earth, what destinies will we set ourselves, and which quests will we undertake? Homo Deus explores the projects, dreams, and nightmares that will shape the 21st century - from overcoming death to creating artificial life. It asks the fundamental questions: Where do we go from here? And how will we protect this fragile world from our own destructive powers? This is the next stage of evolution. This is Homo Deus."

Legion on FX. I'm a sucker for science fiction, especially smart science fiction. Is the main character crazy, or gifted with special abilities? What's the creepy organization trying to track him down? What the heck is that yellow-eyed thing in his visions?? Good stuff. Honorable mention goes to The Expanse on the SyFy Channel.

Update on the Fiduciary Rule (Spoiler: It's Not Dead Yet)

There's a Big Difference Between Mostly Dead and All Dead. Mostly Dead is Slightly Alive.

Remember when I wrote about the Fiduciary Rule? It was only last year, so of course you do. The rule, written by the Department of Labor (DoL), was created to ensure advisors and brokers act in their clients' best interests, at least when it comes to advisors overseeing clients' retirement accounts.

The Fiduciary Rule was in the news again this week after the Trump Administration released a memorandum directing Edward Hugler, the Acting Secretary of Labor, to "examine the Fiduciary Rule" and "prepare an updated economic and legal analysis concerning [its] likely impact."

Since the release of the memorandum, there's been some confusion surrounding the status of the rule. Allow me to clarify: The Fiduciary Rule isn't all dead. It's not even mostly dead (fans of The Princess Bride will get this reference). For now, the Rule is set to take effect on April 10, 2017.

Why Do We Need a Rule Forcing Advisors to Act in Their Clients' Best Interests??

I've asked myself this question many, many times. My conclusion: We need the Rule because there are some terrible humans working in the financial services industry.

Not Everyone is Terrible

Of course, the Rule isn't opposed by everyone in the financial services industry. Senator Elizabeth Warren issued a letter on Tuesday highlighting the importance of the Rule. I was happy to see The XY Planning Network, of which I'm a member, was mentioned as one of the companies that support the Rule.

The bottom line is that we shouldn't need a rule forcing advisors to act in their clients' best interests. The sad reality is that the Rule is necessary to ensure consumers aren't taken advantage of. I hope the Rule isn't delayed or watered down. And that it goes into effect on April 10th.

Listening / Reading / Watching

Here's what has my attention right now:

  • Leviathan Wakes by James S. A. Corey. Have you seen The Expanse on the SyFy Channel? The show is pretty darn good and it's based on a series of books that are definitely worth reading. If you're into science fiction. And a nerd. Don't want to read? You can stream the first season of The Expanse if you have Amazon Prime.

Here's What Happens When You Take a Financial Planner to Las Vegas

Viva Las Vegas

Over the long MLK weekend, I went to Las Vegas with my wife and six of our friends. They all joked that hanging out with a financial planner in Sin City wasn't going to be any fun. There's some truth to that because Vegas really isn't the ideal getaway for an introverted financial planner who doesn't like to gamble and whose idea of a fun evening involves a good book and lights out at 10PM.

I may not have gambled while in Vegas, but that doesn't mean I'm a total stick-in-the-mud: I stayed up well past my bedtime every night. I like living on the edge.

The eight of us did the usual things people do in Vegas: Eat, drink, go to shows, and gamble. Fortunately, everyone took a sensible approach when it came to gambling. Each couple agreed upon an amount of money they could use, and possibly lose, while gambling. No one raided their bank account with the goal of winning back money lost at the blackjack table.

Gambling Versus Investing

While in Vegas one of my friends asked a good question: "Isn't investing in the stock market the same as gambling at a casino?"

The short answer: No, these activities are not the same.

The long answer: I understand why one might think investing and gambling are essentially the same. On the surface, both activities entail putting your hard-earned cash at risk
ofa gain (yay!) or a loss (boo!). Of course, there are some key differences that may not be obvious. Let's look at what differentiates these activities:

Investing

  • Ownership: When you buy shares of an index fund or a company, you own part of a company or companies. Gambling gives you nothing - except maybe some free drinks.
  • Potential long-term income: When you own shares of a company that pays dividends, you'll have an income stream for as long as you own the shares. Gambling might pay off, but it's usually a one-time event.
  • Appreciation: The value of those shares you purchased might become more valuable over time. Even better, you can then sell the shares and enjoy a gain.

Gambling

  • Odds: Casino operators won't be in business very long if they allow gamblers to win too often. That's why the house has an edge in all of the games they offer. Some odds are better than others, but they're never in your favor.
  • Luck: Whether it's a roll of the dice or the hand you're dealt, gambling features an element of luck. There's an element of that when it comes to investing, too. The difference is that investors can educate themselves through research prior to buying shares of a company. There's no way to research what will happen with the next pull of the slot machine.

There is one important thing both investors and gamblers need to do: Understand the rules of the game (or investment). I've seen many people take action without understanding what they were getting themselves into. The only thing they accomplished was giving their money away.

Finally, I should add one more thing before being called Debbie Downer: I understand many people enjoy gambling. I don't judge people on the activities they engage in. I love playing video games and I'm sure many people consider that a waste of time and money. To each his (or her) own.

Stray Observations About Las Vegas

  1. Outside of Bourbon Street in New Orleans, I've never seen a place that allowed (and encouraged!) drinking as much as Las Vegas.
  2. I'm amazed that it's 2017 and casinos still employ scantily clad women as dancers around the gambling tables.
  3. Casinos are extremely good at getting people to part with their money. It's kind of awesome to watch how well they do this.
  4. I haven't been around so many smokers in years. I felt like scrubbing my lungs after spending time in the casinos.

Listening / Reading / Watching

Here's what has my attention right now:

  • 1984 by George Orwell. Believe it or not, I never got around to reading this classic book. It seems like a good time to do so.

My Take on the Fourth Quarter of 2016 + Full Year

Year-End Surprises

2016 was filled with surprises (remember Brexit?), but it was the fourth quarter (Q4) which held three important and unexpected events:

  1. The outcome of the U.S. presidential election. The election of Donald Trump shocked many Americans and, similar to Brexit, completely defied nearly all election polls.
  2. Talking heads are wrong again. Commentators and analysts predicted Trump's win would cause financial markets in the U.S. to fall. In fact, a stock market rally occurred, pushing the Dow close to 20,000* by the end of the year.
  3. A year-end rate increase. The Federal Reserve, after a year filled with much teasing, raised its key interest rate by 0.25%.

*I purposely used the Dow 20,000 event because I wanted to point out something I've never quite understood: The fascination with market milestones. Yes, it gives us a way to compare the Dow on, say, January 1, 2008, to the Dow on January 1, 2017 (12,800 versus 19,877, if you're interested). Everybody wants to see the market go up, but I believe it's more important to focus on your goals and your financial position in relation to them rather than an arbitrary number.

Q4 2016 Numbers

Q4 turned out to be good for U.S. stocks, but not so good for international-stock funds and bond funds.

The S&P 500, which is typically used as a benchmark for U.S. stocks, gained 3.82%. The average diversified U.S.-stock fund, which is a more appropriate measure of how investors actually invest, was up 7.1% during Q4.

International stock funds didn't fare as well as their U.S. counterparts. The average diversified international stock fund dropped by 2.6% during Q4.

The average intermediate-term, investment-grade debt declined by 2.7% during Q4.

Full-Year 2016 Numbers

Looking at the full year presents a brighter picture for the investment categories listed above.

The S&P 500 was up 11.96%, while the average diversified U.S. stock fund gained 10.8%. Those numbers are great considering we're 8+ years out from the last recession and we have yet to see a significant correction in the U.S. stock market. That said, I find it troubling that we've gone 8+ years without a significant correction.

If U.S. stocks roared during 2016, then international stocks whimpered. The average diversified international stock fund gained just 0.7% for the year.

Despite a Q4 decline of 2.7%, the average intermediate-term bond ended the year on a positive note with a gain of 3.0%.

The Year Ahead

So what's in store for 2017? I checked with my Magic 8 Ball and it said to ask again later.

I can't successfully predict what will happen to financial markets this year. No one can. It's true that financial markets have performed well since the election, but whether or not that continues depends on, among other things, policies put in place by the Trump administration.

Now that I've gotten that disclaimer out of the way, I believe the following sectors have the most potential for change in 2017:

  1. Energy. Companies related to traditional forms of energy, such as oil and natural gas, will probably perform well under a government dominated by Republicans. Unfortunately, that means renewable forms of energy could be negatively impacted if government subsidies are reduced or eliminated. On the bright side, Elon Musk recently accepted an advisory position in the Trump administration. I trust his input will have a positive impact on energy policy as well as autonomous cars and AI.
  2. Pharma/Health Care. President-elect Trump has already talked about finding ways to cut drug prices, which would be good for consumers but also negatively impact drug companies. On the other hand, regulatory cuts, which Republicans are known to champion, could actually help drug companies if it means they could speed up the time it takes to get drugs to the market.
  3. Infrastructure. Spending on roads, bridges, and maybe even a Great Wall could be a boon to companies related to constructions and infrastructure development.
  4. Defense. Republicans typically increase defense spending, so I expect companies in this sector to perform well.
  5. Blue Chip Stocks. Large established companies could be positively impacted if corporate tax rates are reduced, as promised by President-elect Trump.

In addition to changes in the sectors listed above, I believe it's possible the Federal Reserve will once again raise the target interest rate - as long as the economy continues to improve.

Educated guesses, like the ones listed above, are the best I or anyone can do. What I can say for sure is that I'll stay on top of current events and adapt to whatever changes come our way in 2017. It'll be great.

Listening / Reading / Watching

Here's what has my attention right now:

  • Catching up on a backlog of periodicals such as The Journal of Financial Planning and Bloomberg Businessweek.
  • Finally getting around to finishing The Fireman by Joe Hill. If you like stories about a spore that causes spontaneous combustion in humans, then this story is for you! Hill is the son of Stephen King and he has inherited his father's knack for telling a twisted tale.

Despite My Best Efforts, I Ended Up Writing About New Year's Resolutions

A Topic No One Has Ever Written About

I hope you had a nice Holiday Season! For my first post of 2017, I decided to write about something new, something fascinating.

Then I decided to save that topic for another week.

On to the New Year's resolutions!

Mine

In previous years I've done a reasonably good job of sticking with my New Year's resolutions. I believe it's important to set some goals for yourself. Even better, share your resolutions with family or friends so there's someone that can hold you accountable. Okay, here are my resolutions for 2017:

  1. Hold monthly financial check-ins with my wife. Okay, maybe this isn't the most exciting or romantic goal, but we've done this in previous years and it's been instrumental to our financial success as well as the health of our marriage.
  2. Slowly increase my exercise regimen now that my lower back injury has healed. At this time, I have no desire to resume the punishing routine required to participate in triathlons. Ten years of that was enough. Now I'll settle for keeping off excess weight and remaining healthy.
  3. Ditch my phone/tablet/laptop when the girls get home from school. Recently, my brother-in-law helped set up a charging station in our house. I'd like to drop my tech gear there for the few short hours I have with the girls before they have to go to bed. Out of sight, out of mind. Email and work can wait until after they're asleep.

Yours?

So what are your New Year's resolutions? If you're a client, I'd love it if you shared yours with me. Feel free to share even if you're not a client!

I hope you have a great year. Good luck sticking with your resolutions!

Listening / Reading / Watching

Here's what has my attention right now:

Everyone Is Irrational

Irrational Behavior

As a father of two young children, I think I know a thing or two about irrational behavior. For example, morning might begin with my youngest daughter requesting cereal for breakfast. But it has to be in the orange bowl because the white bowl, which is a perfectly good bowl, just isn't going to cut it. Oh, and she needs the spoon with the rounded stem. Because it's her lucky spoon. Never mind that it's dirty and currently in the dishwasher.

What I've described above may explain why, upon arriving at my office, I've come close to using the wrong dispenser on several occasions. That's because the fruit-infused water and beer dispensers are right next to one another. I've received some strange looks from my office mates when almost pouring myself a beer before
9AM. I think it's just my brain working against me after a sometimes exasperating, yet hilarious, morning routine.

Okay, back to this week's topic.

But First, A Quote

As I mentioned last week, I'm listening to The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis. The book contains a great quote from psychologist Amos Tversky as he's speaking with an economist:

"All your economic models are premised on people being smart and rational, and yet all the people you know are idiots."

Why I Love That Quote

While in school, I learned about many models and theories that never really made sense to me. This was especially true of the time spent in business school. I'd often listen to a professor's lecture and become frustrated by anything that assumed people or investors were rational.

Here are two examples:

  • Rational Choice Theory assumes individuals always make prudent and logical decisions. I don't know about you, but I don't know anyone that's rational all the time. That includes me!
  • The Efficient Market Hypothesis (EMH) states that it's impossible to beat the market because stock market efficiency causes existing share prices to always reflect all relevant information. The problem I have is the EMH assumes:
    • All information is available to the market and its participants,
    • Stocks follow a random walk, and
    • All investors are rational.

I think we can agree all investors aren't rational.

Why Create Economic Theories or Models?

Despite my frustration with many economic models and theories, I believe there's value in trying to understand how our markets function and why people behave the way they do. It's just important to compare the theoretical models against the real world.

Change Your Password!

In case you missed it, Yahoo! was hacked again this week. Take a few minutes to change your password if you haven't already done so.

Listening / Reading / Watching

Here's the only thing that matters this week:

  • I am going to see Rogue One tonight.

That Time I Got Sick After Visiting Iceland

I'm Healthy!

A few weeks ago, my lovely wife surprised me with a trip to Iceland. She wanted us to get away for a long weekend to belatedly celebrate my 40th birthday.

Unfortunately, I picked up some sort of Mutant Icelandic Super Bug at the tail end of our trip. It knocked me out for three weeks! My weekly posts had to be put on hold while I focused on my health.

Frugal? Yeah, Not Right Now

In case you didn't already know it, I'm a frugal guy. However, while I was sick my frugality was temporarily put on the back burner; I would have paid just about anything to feel like myself again. Special tea that's supposed to shorten the duration of colds and the flu? Sure. Six different kinds of Mucinex? One of them has to work, right? An outrageously expensive inhaler? Done.

I'm sure I'm not the only person to temporarily turn off personal spending limits. In fact, I can think of at least two other events that trigger a similar reaction: Vacations and holidays. Of course, the latter is especially relevant right now.

What's the point of this observation? It's certainly not that spending is bad - especially when it's related to your health. I believe it's important to recognize the things that affect our behavior so we can (hopefully) make fewer financial mistakes in the future.

Back to Iceland

Despite catching the Icelandic Plague, our time in Iceland was incredible. The country is beautiful yet sparsely populated. Most of the 330,000+ residents live in Reykjavik, where we spent much of our time.

Nerd that I am, I frequently regaled Heidi with stories of Iceland's financial struggles. In case you missed it, Iceland was one of the countries hardest hit by the 2008 financial crisis. Three of the country's major privately-owned banks went into default and eventually collapsed.

Here's the interesting thing: The banks were allowed to fail. This makes me wonder what would have happened if the US had responded the same way during the financial crisis.

So how has Iceland fared since the crisis? Surprisingly well. Unemployment is low (~4%), GDP growth is an impressive 4%, and tourism has boomed. We saw signs of development all over Reykjavik. Construction cranes dotted the skyline. Major infrastructure projects have been completed to take advantage of the country's natural thermal and hydro resources. An impressive 99% of Iceland's energy needs are now produced by these renewable sources of energy.

Okay, I'm done geeking out over Iceland's fascinating financial history. Go visit the country if you can. Just watch out for their Super Bugs.

Listening / Reading / Watching

Here are the things that had my attention this week:

  • The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis. I'm a big fan of Michael Lewis's work. If you haven't read The Big Short or Flash Boys, add them to your reading list right now. His latest book focuses on the work of two psychologists whose work created the field of behavioral economics.
  • The Devil in the White City by Erik Larson. It's difficult to believe this is a work of non-fiction. Larson details how a serial killer used the 1893 World's Fair to lure victims to their death. It's a heartwarming tale.

Post-Election Thoughts

What Happens Next?

I know many of my friends and clients were surprised by the results of last night's election. Adding fuel to the fire, it didn't help that markets fell sharply as reactions to a Trump presidency spread across the world. The Dow was off over 800 points, more than a 5% decline, and futures trading on the S&P 500 temporarily halted.

The results of the election and its impact on financial markets will be discussed ad
nauseum in the coming days (well, probably weeks). The topic of incorrect polls is likely to come up, which is understandable because, in addition to the US election, polls for the Colombia-FARC peace deal and Brexit were wrong. Just remember that markets calmed down quickly after the Brexit vote rocked financial markets. In fact, it's now about 11:30AM EST and US markets have already stabilized - and are in positive territory.

I cannot predict what will happen over the next four years. No one can. In addition, it's questionable just how much any president can affect the economy. Markets will go up and down, but there's nothing you can do about it.

Final Thought

I coach my nine-year-old daughter's soccer team. The kids often complain the actions of the opposing team or calls made by the referee aren't fair. My response is always the same.

I ask them the following question: "Who can you control?"

They eventually respond with something along the lines of "No one" or, the answer I'm really looking for, "I can only control myself".

Don't worry about the financial markets because you can't control them. Instead, focus on the things you can control. I know that's easier said than done, especially if you're nearing retirement or already retired. What I do know is that my investment strategy hasn't changed since yesterday.

Lemonade Stands, Autonomous Cars, and the Future of America

The Future

As a planner, financial and otherwise, I spend a lot of time thinking about the future. I have to if I want to help my clients achieve their goals. More importantly, at least to me, I think about the future because I want to ensure my daughters are prepared for the world they are inheriting.

This painful, OMG-will-it-ever-end election has many Americans thinking about the future, too. No matter which candidate you support for President, it's safe to say the winner will have to grapple with some extremely difficult problems, such as technology's impact on work, unemployment and underemployment, and the high cost of education.

The following articles address some of these issues and are definitely worth your time.

"The American Dream is Killing Us"

This article was written by author and blogger Mark Manson. He is by no means an expert on any one subject, but I think he really nails the problems facing America today. It's a long article*, so expect to spend about 23 minutes reading it.

* A client once asked if I ever read anything that's short. I do!

"The Unintended Ways Self-Driving Cars Will Change Our World"

If you're a regular reader, you know that I'm a big fan of Elon Musk. Maybe one day I'll even be able to afford one of his cars. Until then, I'll settle for some shares of Tesla.

This article references Musk, but it isn't about him. Instead, this article focuses on how autonomous cars will change the world. Driverless cars will be here faster than people realize and people don't yet grasp the enormous impact autonomous cars will have on, among other things, jobs, transportation, and the auto industry. Expect to take about 9 minutes to read this article.

Corrections

I'd like to highlight the following problems from my October 31st Dispatch:

  • The subject of the email was incorrect. I initially planned to write an article about how the zombie apocalypse provides a way for us to better understand the concept of diversification. I changed the topic and neglected to update the subject line in MailChimp. Apologies for the confusion.
  • Not all 403(b) plans are terrible. I shared an article about 403(b) retirement plans and wrote a harsh critique of why I think they're terrible. A client reminded me that not all 403(b) plans are terrible. While I still dislike that insurance products are woven into 403(b) plans, she had a good point. The plan offered by TIAA is one of the better ones available to consumers. Thanks, Jean!

Listening / Reading / Watching

Here are the terrifying things that had my attention this week:

  • Back Mechanic by Dr. Stuart McGill. I've developed a problem in my lower back, possibly after years of triathlon training. This book came highly recommended by a trainer that dealt with the same issue. I hope to learn more so I can resume my regular exercise regimen.
  • The Three-Body Problem by Cixin Liu. I'm finally getting around to reading this sci-fi book, which was highly recommended by Facebook CEO Mark Zuckerberg on his reading project "A Year of Books". So far, it's great - especially if you want to learn more about China's Cultural Revolution.

Financial Planners - They're Just Like Us!

Financial Planners Are Human, Too

I know it's difficult to believe, but even planners make financial mistakes. Below, seven of my colleagues, all members of the XY Planning Network, share their biggest financial mistakes.

Katie Brewer, CFP® / Your Richest Life

I dropped about $35,000 on an additional degree. I was already in the field of financial services when I started thinking that I would really benefit from getting an MBA, even though my peers and mentors didn’t think it was going to add a lot of additional value. I researched and applied and was accepted into a Professional MBA program. I learned a lot about business in general during my MBA program, but I didn’t really learn anything additional about my chosen field of financial services. Luckily, I was able to knock out the student loans quickly by living well below my means, but if I had to do it over again, I wouldn’t have pursued an additional degree that most of my friends and clients don’t know that I have.
My husband and I bought a house a few years ago (2012). It was a major fixer-upper so we had talked to the mortgage lender about deferring our mortgage payments for 6 months and he said that was an option. When we got to the closing table, it turned out our lender did not include that clause in our final documents, so we either had to move forward or not close that day and most likely not get the house. We signed the papers, which meant we’d have to start paying the mortgage a month from then, plus both of our rents since the home was completely unlivable.

Instead of buckling down, adjusting our lifestyles, and tightening our budgets, I found myself swiping everything on the credit card. I’m sure I had my excuses in my head, but really, I was just taking the easy way out because I had a high credit limit. It grew to a few thousand dollars in a few months and at some point, I remember thinking, well, it’s already high, so what difference is this $10 sandwich going to make?

In less than a year, I had racked up over $7500 of credit card debt and had no idea what the heck I spent it on. There weren’t any big purchases, just a lot of $10 sandwiches along the way. It almost prevented me from being able to refinance my mortgage because the balance was over half of the limit of my card and they caught that when they ran my credit report. I had a write a letter explaining why the balance got that high. Totally embarrassing and nerve wracking.

I was lucky enough to be able to refinance the credit card debt into the mortgage, a decision I don’t usually recommend, but since we had a tenant and the new mortgage payment was going to be so much less than the previous one, and I had no savings, it was the best decision we could make under the circumstances.

It was a big lesson for me to see how quickly and easily credit card debt can creep up when you throw one wrench into the mix. It’s made me that much more empathetic to clients who have credit card debt and feel ashamed by it. It can happen to any of us!
The biggest mistake we made was thinking our house was the super special house that wasn’t affected by the home value crisis.

In 2010 we found our dream home and purchased it believing we could sell our existing home in no time at a profit from where we had purchased it in 2004. That didn’t happen. 

It took close to two years to sell at a price that was at a loss (a small loss, but a loss nonetheless).

Six years on, we are very happy in our new home and plan to be here for the long haul, but our emotional attachment to our first home clouded our judgment on its value.
I have made plenty of financial mistakes but the one that really stands out to me is believing I could beat the market. After working for an investment bank I was definitely overconfident in my ability to pick winning investments, however, 2008 and 2009 proved to me that even the smartest, most well-respected managers had a very hard time getting it right. Since then, my own investment philosophy has shifted to be based more on controlling what you can control (fees, asset allocation, diversification, and how much risk to take) and I have left the rest to the markets.
My biggest mistake was not saving more when I was younger. Allowing lifestyle inflation to creep into my life to “keep up” with my friends. When I first moved to Chicago I wasn’t doing a good job of targeting 15%-20% of my income going into savings (either IRA, 401(k) or taxable). This meant I didn’t really have an emergency fund until I was older. It also meant that I had to play “catch up” to get my own retirement house in order.
I wish someone would’ve mentioned to me to put some of my wages into a Roth IRA when I was in college and younger. I’ve had jobs since I was 16 and was always saving for something besides just working for spending money.  I wish that I had saved a little for those goals and put a little away for retirement.  When I think about the compound interest that I missed out on, it makes me a little sad. Every dollar you invest in your 20s is worth more than $18 at retirement!
My biggest financial mistake actually came about through multiple decisions spanning over quite a few years. I approached and ultimately made these decisions without objectivity. Failure to inject objectivity into my decision making has been my greatest financial mistake. 

Since at the time I was studying to be a financial planner, I assumed I had all the knowledge required to make sound decisions. That notion simply wasn’t true - I lacked objectivity. 

Three rather significant financial issues arose as a result: 

1) Married at the time, we sold a house at a near $20,000 loss
2) Most of our over $100,000 net worth was in cash
3) Cash positions made it really easy to place generating income on the back burner. I became a stay-at-home dad for a year and lived well over three years earning little to no income - on purpose - but spending down our nest egg in the process.

These decisions weren’t all bad. However, from a financial standpoint alone, I can certainly reflect back and see where professional objectivity would have been quite beneficial. 
I have two financial mistakes I’d like to relate.

The first mistake came during the aftermath of the financial crisis of 2007 - 2009 when the S&P 500 lost approximately 50% of its value. This was the first major recession I had experienced post-college, so I was unprepared for the psychological impact both personally and professionally. I continued to invest throughout the downturn, but I should have put more into the market because history has shown that markets recover. That was difficult to remember when the economy and financial markets were in disarray.

Here’s what I learned from this mistake:
Buffett’s words of wisdom. Be mindful of this quote from Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful”.
Cash is king. Thankfully, a recession of this magnitude doesn’t happen often. When it does, be sure to have some extra cash on hand so you can take advantage of good deals in the markets.
The second mistake occurred after my wife (then girlfriend) and I moved in together. Our income increased, but so did our expenses because we didn’t have a plan to deal with lifestyle creep.

Here’s what I learned:
It’s important to set joint goals. We were much more likely to keep lifestyle creep in check if we wrote down quantifiable goals. 
Regular check-ins keep you on track. Setting quantifiable goals is a great first step, but setting aside time to meet and check progress towards those goals is also important.

The moral of these stories: We all make mistakes. What's important is recognizing the mistakes, learning from them, and finding ways to ensure you don't repeat them.

Listening / Reading / Watching

Here's what had my attention this week:

  • The third presidential debate. Ugh. On the bright side, at least we're done with the debates.
  • The Industries of the Future by Alex Ross. This is one of the books I heard about during the super trends session at the recent NAPFA conference. So far, it's great.