Friday, July 8, 2011

Are You There Yet?

For U.S. investors, 2010 came in well above the long-term historical averages, with the broad-based Wilshire 5000 Composite Index up 17.7% on a total return (dividends and appreciation) basis. As usual, some categories did better than others, with diversified international stocks returning 7.8% and intermediate domestic bonds delivering 6.5%.

But how did your portfolio do? And more importantly, what progress did you make toward your long-term financial goals? While investment performance is important, long-term financial success depends on a lot more than what "the market" does from year to year. Below, I will walk through four key steps to help you get a handle on just how you're doing vis-à-vis the market and your financial goals.

Step 1: Benchmark your portfolio's performance
To get an idea of how your portfolio performed relative to the market, compare the benchmark return to your portfolio's actual return (if you use an investment advisor, hopefully this is all done for you). Chances are some areas of your portfolio did better than others, which is fine. It's not likely every area will do well at the same time—that's why it's critical to be well diversified across (and within) asset classes.  For instance, if in 2010 your domestic large-cap stocks did worse than your small-cap holdings, that doesn't mean you should give up on domestic large-cap. The important thing is that each part of your portfolio did well relative to its appropriate market benchmark. If that is not the case, step two will help address the performance problem.

This is also a good time to rebalance your asset allocation back to your long-term target if you didn't get around to it at year end. With the tax-law changes we've seen over the past few years, you may be able to give yourself an additional edge by being tax-smart about how you implement your asset allocation between taxable vs. tax-advantaged accounts.

Step 2: Measure the performance of individual investments
Of course, you'll want to see how each of your stocks, bonds and mutual funds performed in 2010 relative to their appropriate peer group and index.  But no matter what led you to purchase a particular stock, bond or mutual fund in the first place, you need to answer one key question: If you didn't already own it, would you purchase it today?

Step 3: Assess your personal net worth
Now let's take a look at the bigger—and more important—picture by updating your personal net worth statement. This is similar to what a business does with its balance sheet at the end of the year. Start calculating your personal net worth by totaling up all your assets (what you own, including your taxable and tax-advantaged investment accounts, your home, other property, equity in your business, etc.) and all your liabilities (what you owe).  If you did all this for 2009, you can compare how your finances performed since last year. Did your bottom-line net worth increase in 2010?  With financial statements in hand, you can see what portion came from the return on your portfolio vs. other factors, such as changes in the value of your home or other real estate, paying off debt, and so on.

Step 4: Make or update your plan
Measuring progress toward your goals is difficult, if not impossible, when you don't have a plan. Putting one in place involves assessing your current situation, identifying your goals—retirement, college, and so on—then formulating a savings and investment plan to help you reach them, as well as a distribution plan to fulfill your goals. Of course, no matter how good your plan is, it won't be of much help unless you take action.  A sound plan, properly implemented and monitored along the way, can help you achieve the ultimate goal—peace of mind—as you find the right balance between working toward your future goals, including a secure retirement, and enjoying the here and now.

Remember, measuring progress toward your goals involves much more than simply focusing on the performance of your investments.  It's a comprehensive look at your spending and saving habits, debt management, tax and estate planning, gifting and more—all within the context of the economic, financial and market environment. Remember, too, planning is not a one-time event, but an ongoing, lifelong discipline. 

Thursday, May 5, 2011

Teach Your Children Well

Proverbs 22:6 instructs us “Train a child in the way he should go, and when he is old he will not depart from it”.  This holds true for all aspects of life’s lessons – including how to effectively manage personal finances. 

The Problem
The National Endowment for Financial Education (NEFE) administers personal financial literacy tests nationwide every few years.  The tests cover all areas of personal finance, including investments, debt, credit, and saving.  The most recent test was performed in 2008 and the results were quite surprising.  Of the 6,856 high school seniors given the test, the mean score was a dismal 47.5%.  The same test was given to 1,030 full-time college students and the results were somewhat higher, with a mean score of 62.2%.  Additionally, numerous studies and surveys are conducted every year by various financial institutions and consumer advocate groups.   Some of the results are startling: 
·         More college students withdraw from college due to personal debt problems than they do for academic problems.
·         31% of college students polled do not worry about debt, believing that they can pay it back once they are out of school and earning a regular paycheck.
·         More than 25% of students think it is reasonable to run up a debt to splurge on a special celebration with friends at a restaurant or to use a credit card as a way to “raise cash”
·         Less than half (46%) of students always keep records of their spending and receipts.
·         23% of students choose to ignore overdraft penalties and the prospect of months or years of paying off a debt incurred for a moment of fun.

As grim as these statistics are, it is by no means a reflection of parents not attempting to provide guidance for their children.  Nearly all parents (97%) surveyed in a recent study by Charles Schwab believe it is important to teach their teens to budget and save and invest for retirement.  A similar survey in 2008 by The Hartford Group found that 72% of parents acknowledged that they are their children’s primary source of personal finance education, although  44% admit to needing more guidance on how to best teach their children the skills necessary to become financially responsible and successful adults.  However, 16% report never talking to their children about using money wisely.  So what is a parent to do?

The Solution
One option is a program being offered this summer by Lone Star College–Kingwood called Discovery College.  Discovery College is a summer youth program that was started over 26 years ago and offers over 50 one-week courses for kids aging from 8-17 years old, including two courses in financial literacy.  “Relating With Money – Financial Literacy For Youth” is a program designed for children between the ages of 12-14.  In this class the students will learn the importance of developing personal financial skills.  This includes: identifying wants vs. needs; writing checks and balancing checkbooks; building a personal budget; and introducing investments, credit, and debt.  A class for 15-17 year olds, “Money, College, and Me”, will also be offered.  In addition to covering some of the topics discussed in “Relating With Money”, this course will expand into other areas of personal finance including insurance, taxes, estate planning, and the different types of retirement plans typical for those entering the work force.  Both courses will prepare the students for financial independence, whether going off to college, joining the military, or getting a job after graduation.

The Results
For the most part, students taking financial literacy programs produce more appealing statistics.  A 2008 study by the Charles Schwab Foundation of teens participating in any type of financial education program revealed that:
·         Those who reported learning about saving money were more likely to save regularly (72% vs. 57%), participate more often in retirement programs, make larger contributions to the program and have a much higher savings rate than others.
·         Youth who reported learning how to create and maintain a budget were more likely to report actually developing one (50% vs. 30%),
·         Teens who learned to track spending were more likely to having developed a budget (50%) vs. those who learned little or nothing (29%) and also more likely to save money to purchase something (80% vs. 60%).

Discovery College begins June 6th and ends August 4th.  For more information on Discovery College, including costs and dates for all courses being offered, visit their website at  

Thursday, February 24, 2011

Benefits of Long-Term Investing

Imagine a cross-country car race that starts in downtown Houston during rush hour. One racer sees bicycle messengers speeding by in the stop-and-go traffic. Becoming impatient, he jumps out of his car, trading it for a bicycle. Once out of Houston, as other racers still in their cars pass him, he quickly realizes his short-term decision was unwise in light of his long-term goal of winning the race.

It may seem rather silly for this racer to trade in his car for a bike, yet investors do the same thing every day. They lose sight of the strategy that it will take to get their prize. Although many investors claim to understand the benefits of long-term investing, their actions often show a short-term focus.

So, what is long-term investing? And why is it a tenet of MTR Financial's investing philosophy?  Long-term investing is being committed to a sound investment plan—one that starts with a proper asset allocation appropriate to your risk tolerance—over a length of time, such as five to 20 years.  More importantly, though, long-term investing is a mindset that gives you perspective and discipline as you work toward your financial goals—and can keep you from making costly mistakes based on short-term perceptions.

Benefit 1: Maximize your wealth
The wealth you can accumulate over your lifetime is determined by three factors: (1) the amount you save and invest, (2) the return you earn on your investments, and (3) how long your money compounds, generating earnings from previous earnings. The long-term mindset is key to this last point: how long your money compounds from reinvesting your investment earnings. This is something most investors have direct control over. The earlier you start and maintain the long-term outlook, the more time compounding has to work its magic.

Benefit 2: Prevent costly mistakes
Losing sight of the long term and thinking you can time the market by exiting at the peak and re-entering the market at the trough over the short term is a big mistake. Timing market shifts correctly is nearly impossible, although making modest adjustments to your strategic allocation based on current market analysis can add value. However, we continue to see investors making wholesale market timing bets.

Why can market timing be so costly? Because returns are often concentrated in short periods. For example, in March 2009, US stocks were up 9%. Nearly 90% of the month's recovery came in just eight trading days following the low point of the stock market.

Portfolio studies have been performed to see what happens when you miss the top days in the market. The research, looking at returns from 1990-2009 shows that missing the market's top 10 days cut the return by nearly half on a portfolio of stocks, represented by the S&P 500 index.  Missing the top 20 days dropped the return below even Treasury bills (T-bills). And missing the top 40 days—that's 40 days out of 20 years, fewer than 1% of the trading days—produced a negative return. You can see how a small number of trading days can equate to large differences in return.

Benefit 3: Lower your risk
Having a long-term mindset and lengthening the time you hold investments can often reduce the probability of experiencing negative returns.  Studies have been done on the highest return, lowest return and average annual return of the S&P 500 over various holding periods from 1926. The findings show that as you move from a one-year holding period to a three-year, 10-year, and finally to a 20-year holding period, the number of negative returns experienced goes down. In fact, there's never been a 20-year period with a negative return.

Stay focused
How can you keep your long-term state of mind the next time you're tempted by a short-term decision?  Remember that keeping a long-term state of mind doesn't mean ignoring your portfolio. It means developing a plan based on long-term expectations, not short-term trends. Along the way there will undoubtedly be some fine-tuning. Investing for the long-term can help maximize wealth, prevent costly mistakes and lower the downside risk in your portfolio.

Or, to quote legendary investor Warren Buffet: "Someone is sitting in the shade today because someone planted a tree a long time ago."

Tuesday, January 18, 2011

Use The New Year To Establish Strong Financial Habits

“We are what we repeatedly do. Excellence, then, is not an act but a habit.” Aristotle. This quote has profound meaning for your financial life.  Even if your savings are up not to scratch or if your debt level is extremely high you can change the course of your financial future by changing your financial habits.
The secret is to start implementing small changes into your life and work them into your routine. Repetition will help to make them your new habits and you can then start reaping the rewards of healthy financial practices. Take a look at these 4 financial habits you should strive to adopt.

1. Start Budgeting Now
Creating a budget is not difficult. All you need to do is to identify your sources of income on one side and then list your fixed and variable expenses on the other. It is recommended to keep your fixed and variable expenses separate so it is easier to highlight possible areas for cutbacks. If you are not sure of where your money is spent you may need to do a little ground work to draw up your first budget. Start by making an effort to write down every time you spend money and start keeping your receipts. At the end of the month you can categorize your spending and then fill in your budget.

2. Use Goal Setting to Improve Your Financial Scorecard
Goal setting is important for improving your finances because this act gives saving direction and purpose and thereby makes it easier to part with your money now, for some reward in the future. For instance, it may feel like punishment to tuck away $1,000 a month just because it is important to save; but if you were to attach a goal to this figure it would become logical. So you might rationalize that you need to put $500 towards an emergency fund while $500 should go towards your next vacation. All of a sudden, putting away $1,000 is easier.

3. Save for Retirement
Everyone needs to plan for their golden years. If you haven’t yet started up some form of retirement savings, there is no time like the present. You should also note that it is never too early to start. You can check how much you are allowed to save tax-free and at least make sure you are maximizing this amount. If your employer gives a match for retirement savings, always take advantage of this.  If you don’t, you are basically throwing away free money.

4. Keep Your Debt Under Control
If you have a problem with keeping your debt under control you should make this a priority. Start implementing measures to pay down outstanding debt, especially if that debt comes with extremely high interest rates. Allowing interest to accumulate even more interest is a sure-fire way to end up moving in the opposite direction of financial prosperity. To get a handle on your debt situation, make sure you have a strategic plan for pumping your available funds into making debt payments.

Bad habits form in good economies; and good habits form in bad economies. If you are wise, you will form good habits and keep them!  It is never too late to implement some good financial habits. All it takes is the desire to change and the dedication to stay the course.