Tuesday, April 25, 2017

Use Your Imagination!

“Imagination is more important than knowledge.”
-        Albert Einstein

Consider a few of the great conundrums of life:

How long will I live?
How long will my spouse live?
What will it look like to retire?
How much money will it take to be comfortable?
What will I do all day?
How can I stop procrastinating and do something about it?

Let’s imagine…

Consider that the answers to most of these questions are not knowable with any degree of certainty.  No one knows how long you or your spouse will live, no one knows what your life will look like after you quit working, no one knows how much money you will need, you probably don’t know yet what you will “do all day”, and of course the very essence of procrastination is to put off doing anything about any of it.

Financial planners are well known for the perfection of their analyses – you’ve seen the charts, calculated to the nearest dollar.  Many people employed in our business feel that the more precision they bring to their analyses, the more likely the client is to accept the results.  Unfortunately, financial planning software doesn’t help much in dispelling such reliance on precision, and in fact actively encourages it – “Look, color pie charts!”.   A few years ago, a bank ran a series of ads which showed people walking down the street holding a large number sign, trying to make the point that “everyone’s number is different, but you better get cracking by engaging our services”.  Of course, those “numbers” came out of nowhere.  It’s probably not much comfort to know that a financial planner can show you how they arrived at your “number”.

The “number” is derived with inputs that are decidedly, subjectively assumptive – i.e., “guessing”.  How long will you live?  What rate of return will you earn on investments?  What will the inflation rate be?  A newer assumption gaining popularity – what will the rate of inflation in medical costs be?  What will the capital markets “do”?  This last assumption often takes the form of “what if” the capital markets do “this” or do “that”.

How can I bring certainty into the mix?

Newsflash: to a large degree, you can’t.
Apply Your Imagination

Consider making a list of “Things I can control” and “Things I can’t control”.

Here are some starters; notice that we’ve provided several blanks for homework.

Things I can control
Things I can’t control
How I live – work, health, relationships
How long I will live
How much I save/invest
Returns on savings/investments
My actions today AND tomorrow
Other people’s actions
My spending lifestyle

How I will live when I quit working

Where I live, where I will live

What will I…

How will I…

How much is enough?

Arguably the number one narrative used in retirement planning is some variation on “You don’t want to be eating cat food, do you?”  We are aware of anecdotal stories of people doing just that, so while this approach sounds like fear-mongering, there is some truth there.  Canned cat food is cheaper than canned tuna.  Eating fresh food is universally desired, but it does cost “more”.  Act accordingly.

Stop Procrastinating – Use Your Imagination

Consider your “future self” 10, 15 or 20 years from now.  What action or series of actions can you take today that will make a difference to that person you will become?

© 2017 Kim Miller, Certified Financial Planner

Nobody Knows Anything ver. 2.0

Q3 2016 Commentary

“Nobody knows anything...... Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one.”
-      William Goldman, novelist, screenwriter

Here we are post-election, with many Americans and much of the rest of the world wondering what just happened.  “You mean to tell me that Donald Trump – DONALD TRUMP! – is our next president?  Whoo – I’m getting the vapors!”

How did this happen?  I’m here to tell ya – the “how” really doesn’t matter much, like “facts” and “issues” didn’t seem to matter to many voters.  If one can construct one’s own version of reality and defend it against any nay-sayer with a simple “I don’t care what you think about my opinion”, then any position taken can be defended with a clear conscience.  Like beauty, reality is found in the eye of the beholder.

“But what about the polls?” you might ask.  Simple: they were wrong.  When someone is looking (wishing?) for a specific outcome, confirmation bias creeps in and people – polls are run by people – sometimes find what they are looking for.  It’s clear they didn’t find the voters who made the difference!
Let’s leave the politics behind and see if we gain some insight into the economic ramifications.

As some people I follow have said: “Mr. Trump is very comfortable with debt.”

Expect to see a massive expansion of the federal budget deficit with much of the new spending targeted to infrastructure spending – even the infamous Wall across our southern border could be labelled as “infrastructure”.  This will be stimulative – but as Mr. Obama learned, don’t call it “stimulus”!

The increased deficit will contribute to corporate profits which will tend to drive stock prices up.

Income tax rates are likely to go down.

President Trump will be corporate friendly and cut income taxes for corporations as well as individuals.  There will likely be some kind of tax holiday for overseas corporate money – this could be a source of funds for infrastructure spending – give corporations a tax break in return for buying infrastructure-related bonds, for example.

Mr. Trump’s stated trade policies are anti-free trade and protectionist.

A lot of people were convinced that he would bring back jobs via trade. Unfortunately, those jobs we lost in manufacturing are largely gone and for those that do return, most of the work will be automated e.g., performed by robots and will require far fewer people than in the past.

If imported goods are taxed at higher rates than now in an attempt to reduce imports, prices for imported goods will rise and prices for American-made goods are likely to rise too as corporations raise prices on goods they increasingly make (with higher-wage labor) here in the U.S.  As a result, a possible increase in jobs would likely be offset by higher prices for a net effect of near zero.

The Federal Reserve rate hike rumored for December likely won’t happen.

The Fed will want to wait for more clarity on the policy direction before they take any action.  Markets have suffered whiplash this year in part due to the Fed’s waffling for much of 2016 so this will be viewed positively.  Keep in mind – a large-scale increase in the federal deficit will – more than likely - drive interest rates up.   Rates are already rising in the bond market.

Bottom line:

Increased federal spending likely means we see higher profits, higher interest rates and higher growth.  It will be good for the overall economy.

Since we’re travelling into unknown territory (uncertainty), it will take time for the markets to digest any new policies assuming they become reality.  Capital markets tend to overreact to uncertainty in the short-term because markets don’t like uncertainty and Mr. Trump – as we have seen - provides plenty of uncertainty.

So the next time you are presented with a “can’t happen here scenario” remember: nobody knows anything.

Credit to Cullen Roche of Pragmatic Capitalism for some of the analysis used here.

© 2016 Kim Miller, Certified Financial Planner™

If I Could Go Back, Would I Do Anything Differently?

Q2 2016 Commentary
“Nobody knows anything...... Not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one.”
-      William Goldman, novelist, screenwriter

Here we are post-Brexit, wondering which end is up and what does “leaving the European Community” mean anyway (if anything)?  All the betting was on the “Bremain” side of the ledger and when “Brexit” won out, everyone long the status quo got caught with their shorts (short pants, not short positions) down.  A recent client conversation went something like this: “You guys are walking a tight rope which someone has set on fire, while someone else is throwing rocks at you and yet another someone is heading towards the tight rope with a large set of sharp garden shears.”  To which we added: “You forgot the live grenades we’re juggling.”

Fortunately – and most importantly - we avoided making mistakes while global markets went through a two-day hissy fit.  For the time being, we’ve come out on the other side in rally mode with market averages nearly back to their closing prices pre-vote.  Of course, we’re heading into a long holiday weekend and Lord knows what will happen then – because – nobody knows anything.

My Inbox is now filled to overflowing with post-Brexit analyses – “What You Need to Do Now” stories that always come out after a big move.  I haven’t read even one of these “cool-headed analyses” – because – nobody knows anything – and I know that adding to the minutiae in my head isn’t going to help me decide what to do “next time”.

To be successful in the capital markets, you have to buy when you don’t want to buy and sell when you don’t want to sell.  And when conditions dictate doing one or the other but it’s too gut wrenching, the best action to take is to re-balance your accounts based on your carefully-considered risk tolerance.  If even that is too scary, the best action is no action.  Take comfort in knowing that you aren’t the only anxious, clueless wanderer in the desert – because - nobody knows anything.

© 2016 Kim Miller, Certified Financial Planner™