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12 Books Every Investor Should Own

Larry Swedroe, Director of Research for the BAM ALLIANCE 1/7/2016

Does reading more books appear on your list of New Year’s resolutions? If so, check out this excellent guide to 12 great books that every investor should own and pick up Larry Swedroe’s “The Incredible Shrinking Alpha” in 2016.

Find it on USNewsandWorldReport.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of Hoffman & Associates, Inc. or the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

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The Most Valuable Asset is Yourself

Carl RichardsYears ago, my colleagues and I conducted a fairly large-scale research project. We interviewed a bunch of high-income professionals who provided professional services. This group included doctors, dentists and lawyers, and like most of us, they earned money only when they were working. In essence, they traded their time for dollars.

Our finding was this: Homes and retirements accounts aside, the most valuable asset they owned was the person staring back at them in the mirror each morning. Chances are, the most valuable investment you own is the investment called you.

A more technical way to think about it is that the most valuable asset you own is the present value of your future earnings. But here’s the problem: Despite what your spouse may tell you, the investment called you is getting less valuable with every year that passes.

It’s nothing personal. I’m sure you’re great. But this is simple math. Every year that goes by means you have one fewer year to earn money. If I were to sketch this for you, it would look like this.

Traditional financial planning spends almost no time on this issue. Instead, the traditional financial services industry focuses on getting you to take as much money as you can and put it into other investments, like mutual funds, stocks and hedge funds. That’s all fine and, to be clear, a very important part of your overall plan. But far more needs to be said about the investment called you.

One person doing some fascinating work on this topic is Joshua Sheats at his site, Radical Personal Finance. If you’re interested in this subject (hint: you should be), you might want to check out his more technical treatment.

But for this column, I want to focus three ways you can think about this.

The Beginning

Make your starting salary as high as possible. Remember that friend from high school who had a great summer job? At the time, he made what seemed like a lot of money. Everyone was jealous. Then when you headed to college in the fall, your friend’s summer job turned into a full-time job. Why would he quit making money to go to college? But you put in the time and graduated a few years later.

Now your friend is a supervisor, but you’re a doctor. By investing in education and training, you increased your starting point and initial value. Obviously, not all us of really want to become doctors, but you get the idea. In the beginning, don’t let short-term rewards get in the way of increasing your long-term value.

The Middle

Make more money each year. Yes, I know this advice is obvious. But rather than being satisfied with just the annual cost-of-living adjustment, look for ways to increase your value where you work. Pick up new skills. Take extra classes and projects that no one wants. Don’t settle for doing just enough. To borrow a phrase from the author Cal Newport, make yourself so valuable they can’t ignore you.

Outside of your 9-to-5 job, find a side gig if you can make time. What could you do to earn an extra $1,000 each month? What happens if you start earning enough to cover your mortgage? What happens if you build a business that earns more than your regular job? This phase reminds me of Aesop’s fable about the ant and the grasshopper. Do a little more today and avoid being the grasshopper.

The End

Make your working window longer. Look, I know most of us really like the idea of retiring, but it’s a myth. Most people don’t simply work their guts out until 60, then suddenly pull that plug and put on the golf shoes. People are living longer, and you might be facing a very boring 20 or 25 years without work.

You can only golf so much.

Instead, most people find they still want to be doing something. Contributing value to the world. Working. So plan on it (and invest in your health too, so you’ll still be physically capable of working).

But think of this side hustle as an opportunity to do something you love to do. Maybe it looks a bit more like this: You work at your day job until 55 and then slow down a bit. You do more of the work you love. Maybe you’ve always wanted to be a teacher, or perhaps you’d really love to become a guide at your local botanical garden. Whatever the work, it lengthens your overall line.

You may love the job you’re doing now, but your employer might have a set retirement age. Could your value be so great that they might consider working with you as a consultant for a few more years? Adding a little time at the end will give your line another upward bump.

These are just a few of the ways we can invest in ourselves. And by now, you’ve probably thought of a dozen things you can do that are unique to your own life. If you’re willing to share, I’d love to hear your ideas. You can find me on Twitter @behaviorgap or send me an email, carl@behaviorgap.com. Just don’t ever forget that more we invest in ourselves today, the more valuable we become over time and the less we need to worry about that line on the chart.

This commentary originally appeared December 14 on NYTimes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2015, The BAM ALLIANCE

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The 10 Most Important Things to Help Ensure Your Family’s Wealth and Well-Being

By Ross F. Hoffman

10-ThingsSeveral lifetimes ago, when I was a newly minted wealth advisor, I would often begin planning conversations by listing all the many ways that comprehensive money management could help families find personal excellence in their busy lives. Fortunately for all concerned, I soon realized that, in my enthusiasm to impart everything there was to know, I was sharing too much information in too short a time for it to have lasting value. As I gained experience, I learned to replace this information overload with a commitment to listening more, speaking less and reserving what I did have to say for the most important subjects. In that spirit, here are my 10 most important planning steps to help ensure you make meaningful financial choices for yourself and your family.

Important Thing #1: Make sure your will, living trusts, durable powers of attorney and durable powers regarding health care (also known as health-care directives) are in place AND recently reviewed.

A few years ago, a husband and wife met with me to sign some investment documents. I came to find out that the wife had lost much of her vision, and could not see where she was supposed to sign. The need for her husband to sign the document on her behalf became very apparent. I asked if they had durable powers of attorney for one another, and they affirmed that they did.

So far so good. Until we called their attorney’s office to secure the paperwork. The attorney’s assistant looked up the document and told us it had expired, and the couple would have to come in to update it. In short, the husband could not act on behalf of his wife without this document being current. Luckily, we were able to easily correct the situation, but in other circumstances, this detail could have caused serious problems. A little regular maintenance to your legal documents can make a big difference.

Important Thing #2: Develop a written master plan for your business and personal wealth designed to maximize value during your lifetime, prepare for your desired legacy and minimize income and estate taxes.

Imagine what would happen if you owned a business and you suddenly died or became totally disabled. Well, this actually happened to one family I knew. They owned a business and rented out most of their farmland. “Mom” and “Dad” had numerous pieces of property and nine adult children when Dad died in the late 90s, leaving Mom to run the ranch and make decisions that the two of them should have reached together when he was alive.

Not all nine children wanted to work the ranch, nor could it have supported nine families. You can see the dilemma. How do you divide the land so some family members could continue farming and the others could sell their share and get on with their lives?

To further complicate matters, Mom died suddenly last year, at age 84, of a major heart attack. She had standard estate planning documents in place, such as a living trust, pour-over will, durable powers of attorney and health-care directives. Unfortunately, they did not address other problems, specifically the payment of a $5 million dollar estate tax, valuation of the property and the division of the ranch. One of Mom’s goals had been to create harmony among her children. Instead, having never completed a written master plan, the surviving family was left doing the best it could under far less-than-ideal conditions, all while mourning the loss of both parents. It is well worth taking the time, particularly when complex inheritance issues exist, to prepare for the future with a comprehensive, integrated written plan.

Important Thing #3: An Investment Policy Statement (IPS) should be your guiding document. It should also help keep you and your investment advisor on the same page and mutually accountable.

I believe a comprehensive written plan that both connects you to your fiduciary wealth advisor and guides your strategy helps ensure positive investment decisions. An IPS helps you focus on what you can control, such as how you plan to: (1) Capture expected market returns according to your goals and risk tolerance, (2) Stay on course with your personalized financial plan, and (3) Minimize fees and taxes. When appropriate, it can also help build a roadmap for managing your income and spending with traded CD and bond laddering strategies.

Important Thing #4: Don’t try to play the market by picking individual stocks. Instead, use the science of evidence-based investing to participate in the market.

Nearly everyone I have ever met has wanted to make smart decisions with their money. For many investors, a “smart decision” means finding a way to dodge the stock market dogs and presciently pick the darlings. Unfortunately, it is impossible for you, your broker, some stock market “guru” or anyone else to consistently forecast or predict future returns, then overcome the trading costs involved when it’s tried.

Truly smart decisions come from becoming an informed investor and heeding the evidence on how to build personal wealth tax-efficiently in volatile markets. Focus on your asset allocation, your progress toward your long-term goals, the costs you’ve incurred and where gaps or overlaps may exist in your exposure to expected market returns. Build, and stick with, an efficient, low-cost portfolio customized for your personal willingness, ability and need to balance market risks and rewards. Leave the stock picking to those who want to gamble rather than prudently invest their wealth.

Important Thing #5: Review all your insurance coverage to make sure it is providing the appropriate benefits and protection.

Insurance is intended to be there when you need it the most, which is why I am surprised by how often I find families whose coverage is a patchwork of policies accumulated over the years. That can easily result in excessive, excessively priced or missing coverage. When it’s effectively implemented, in harmony with a family’s total and distinct exposure to liability, insurance can be a powerful estate-planning tool. It can address liabilities such as survivorship coverage, debt pay-off, disability income, long-term care, buy/sell agreement funding, key man protection, salary continuation, errors and omissions, business succession, automobiles, home ownership and estate taxes. A big-picture review from an objective wealth manager can bring your insurance needs into tighter focus.

Important Thing #6: Talk with your family about your wealth.

How long has it been (if ever) since you and your spouse or partner, and potentially your adult children, have had “that conversation”? You know the one I mean. What assets do you, as a family, own? Where are they? What would be the best thing to do with them should the unexpected occur? I frequently hear parents say they are leaving all of their assets to their children, while the children admit they have no idea how to handle them. Lacking any context or clarity, heirs sometimes just want to liquidate assets to cash as fast as they can. Too often, they are then at the mercy of some stockbroker, insurance agent or large bank (most likely its private wealth management department) and the hefty fees they extract for the disservice of disassembling a legacy that took a lifetime to build. Don’t let years of hard work be lost because of a few key conversations that never took place when the opportunity was at hand.

Important Thing #7: Your retirement planning should go hand-in-hand with your investment planning.

It is critical to establish your goals for retirement, because your investment plan will come out of those objectives. Most people randomly buy investments (such as a stock, a limited partnership, gold, commodities, hedge funds or a rental property) because it looked or sounded like a good idea at the time. I call this the “grocery-cart investment plan.” Have you ever gone to the grocery store without a menu in mind or a list of important ingredients you would need to serve a meal? You tend to walk down the aisles, picking things off the shelf that look or sound good in the moment. There’s no rhyme or reason; it’s all based on emotion and instinct. It does not have to be that way. In fact, emotions and instincts are your enemy when it comes to investing.

Important Thing #8: Do not buy annuities unless they fit, exactly, into what you are trying to accomplish and there is no other choice (such as other guaranteed fixed income or guaranteed interest rate).

What have I got against annuities? Mostly, it relates to their tax inefficiencies and other costs I consider excessive. On the tax front, they don’t get a step-up in basis on death. Rather, they convert otherwise lower-taxed capital gains into higher-taxed ordinary income and they produce (taxable) income in respect of a decedent. They also can have high costs and significant back-end fees that can trap you into the product for years. Yes, you can get up to 10 percent per year without a deferred sales charge from the insurance company, but if you are under age 591⁄2, you could be hit with a 10 percent penalty tax imposed by the federal government plus inclusion of any

growth as taxable ordinary income. In addition, you are required to take out the (taxable) growth first. Need I go on? Before signing on for an annuity, recruit a fiduciary advisor who has no skin in the game. That advisor can offer you an objective assessment of the product.

Important Thing #9: Never surrender or lapse a life insurance policy if you are over 65 without first checking the secondary life settlement market to see if the policy could be sold for greater value.

Here’s a handy tip that’s often overlooked: There is a special market where you can sometimes sell your life insurance for cash, assuming that it’s a policy you no longer need, you are over 70 and your health has changed since the policy was originally issued. Please note there are also some special tax rules, so it is important to work with someone who can give you all the information you require to make sure this strategy is in your best interest.

Important Thing #10: If you are a business owner and you offer any type of a retirement plan, consider delegating your investment selection liability to a professional advisor (in writing).

As a retirement plan sponsor, you are a trustee and fiduciary under the plan. You can be held personally liable for a breach of fiduciary responsibility. While you cannot delegate away all of your fiduciary obligations, the laws governing retirement plans do allow you, as the plan sponsor, to delegate investment selection liability to a professional advisor who is willing to accept the duty in writing. If you are paying someone to manage your plan for you, it only seems reasonable to ensure that the firm with whom you are working is taking on that obligation as part of the services it is providing.

Consider following-up on each of these 10 important planning recommendations, because if you knock off this handful — perhaps with the help of a fiduciary advisor — you’ll have already made an excellent start to safeguarding your family’s wealth and financial well-being.

About Ross Hoffman, President, Hoffman & Associates Financial and Estate Advisors, Inc., Ventura, CA

Ross F. Hoffman is President and Chief Executive Officer of Hoffman & Associates, Financial & Estate Advisors, Inc.. Ross helps business owners maximize the value of their businesses upon their exit into retirement or other ventures. Ross helps business owners to sell their company when they want, to whom they want, and for the amount they need to secure their income for the rest of their lives. With over 30 years of professional experience in financial and estate advising, Ross has earned the financial industry’s most respected professional designations, including the Accredited Wealth Management Advisor (AWMA®), Accredited Investment Fiduciary (AIF®), Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP) and Chartered Life Underwriter (CLU) designations. Ross’ outside interests include enjoying time with his eight grandchildren, golf and traveling with his wife, Carolyn.

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True Goals in the Game of Life

True Goals in the Game of Life

life concept hand drawing on tablet pcWarren Buffett recently released his annual letter to shareholders and, as usual, it contains snippets of wisdom almost everyone can appreciate. One quote in particular stood out for us: “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”

What’s not to like about this wisdom from the Oracle of Omaha? And yet, how many families will actually apply his advice to their financial playing field instead of fixating on the attention- grabbing scoreboard of near-term market performance?

From what we’ve seen, precious few. Which brings us to the value that a good coach can add to your field of dreams. To form and stick to a personalized plan for your family wealth, it helps to have an advisor who is committed to not just talking the talk, but making sure that, together, you walk the walk toward your financial goals.

What the Scoreboard Won’t Tell You

In the financial industry, the scoreboard, or near-term market returns, is the primary tool used by brokers to sell more “stuff” to investors. There’s little that stokes the imagination and releases rewarding dopamine in the brain like the hopes of buying into the next best thing. Think tech stocks, real estate, and gold, to name a few. Financial intermediaries who earn their keep from trading commissions know that keeping you focused on the score board keeps you on the edge of your seat, forever uncertain about whether you should keep what you have or move on to the next promising stuff, with its new trading commissions.

Of course, returns are important, but as Mr. Buffett also points out in this year’s shareholder letter, “I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.” If Mr. Buffett cannot win the scoreboard game, why would others think they can?

The Name of the Game: Planning and Discipline

While the scoreboard is about instant gratification, the playing field is about planning to reach your long-term goals while taking on the least risk along the way. Once a family goes through a thoughtful discovery process and understands how much return they need to accomplish their lifestyle, gifting and legacy goals, then their portfolio – their game plan – can be constructed toward achieving those goals with the least amount of risk required.

What does this level of plan-based management look like in action? Vanguard recently published a white paper, “Advisor’s alpha,” identifying a host of techniques that can be expected to meaningfully improve your investment experience … if you stick to the plan:

  •   Suitable asset allocation
  •   Cost-effective implementation (low expense ratios)
  •   Portfolio rebalancing
  •   Behavioral coaching
  •   Asset location (tax management)
  •   Spending strategy (withdrawal sequence)
  •   Total return versus income investingMeasuring Advisor ValueVanguard’s white paper demonstrates investors can achieve approximately 3% additional returns compared to the returns earned by investors who are not utilizing these best practices.

They define this premium as an advisor’s “Alpha,” or value-added beyond what do-it-yourself investors are expected to accomplish on their own.

The term “Alpha” can be a little confusing, because the traditional definition is how much value an advisor adds beyond market returns. We echo Mr. Buffett’s sentiments in calling for a more meaningful measurement. Citing Vanguard’s white paper, we believe an advisor adds the best value “through relationship-oriented services, such as providing cogent wealth management and financial planning strategies, discipline, and guidance, rather than by trying to outperform the market.” We think of that as the true “Alpha” by which a family’s wealth is best served.