May 23, 2016
Congratulations! You just got a job offer. You're just out of college, so this offer represents more money than you've ever had in your life. Sounds good, but how can you tell if it's enough?
People just starting out on their own are often are blindsided by the costs involved. Those expenses can quickly eat away at that attractive-sounding starting salary. The whole thing is a little like coming back to your apartment with a pizza, only to find a bunch of uninvited guests there - the pie is not going to go as far as you planned.
6 factors to consider for your starting salary
When deciding whether a salary offer is enough, account for the following factors:
1. Student loan payments
Your loan probably has a grace period that gives you some time after graduation before you have to start making payments, but that grace period will be used up before you know it. Take an advance look at what kind of payments you will be on the hook for, so you don't get surprised when the time comes.
2. Payroll taxes
Just about every modern worker who has gotten a first paycheck has done the same disappointed double-take: the take-home pay is never as much as expected. Social Security, unemployment insurance, federal taxes and possibly state and local taxes as well will all take a bite, so be prepared.
3. Cost-of-living differences
This is a huge factor, especially if you are weighing job offers from different parts of the country. A couple key difference-makers to look at: residential rental costs, and the availability of public transportation. Urban areas without good public transportation can cost you a fortune in parking fees unless free parking is a perk of your job.
4. Retirement savings
A generation that is starting out with bank rates near zero and an unreliable stock market is going to have to do an especially good job of setting aside money for retirement out of their paychecks because investment growth is hard to come by these days.
5. Costs no longer covered by parents
Until they are out on their own, young adults are often unaware of just how much of their monthly expenses their parents are subsidizing. Examples might include piggybacking on their mobile data program, car insurance policy and health insurance plan. Parents may continue to carry you for a while, but eventually you are going to have to confront these expenses independently - and that might be necessary right away if you move out of town.
6. Comparable salaries in field
Most recent grads don't have a ton of bargaining power, but even so, you should not accept a job offer without some idea of what the competitive environment is like - how plentiful are local jobs in your field, and what do they pay?
Going through this exercise will not only help you assess your job offers, but it will also give you the beginnings of a budget to help you stay on top of your financial obligations. The truth is, the right starting salary varies depending on your profession and your lifestyle, but building a budget around it is crucial because the common denominator in all cases is that a good starting salary is one that allows you to live within your means.
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May 19, 2016
Among the wide variety of investment strategies available to you, there are some approaches that are not geared primarily toward following a given theory of investing or capturing a specific market sector, but instead are concerned with putting religious or moral principles to work in an investment portfolio. If you believe your investments should reflect your principles, you will want to learn more about socially-responsible investing.
Examples of social directives for investing
Broadly speaking, there are two types of socially-responsible portfolio directives: positive ones that direct money to be invested in certain types of companies, and negative ones that ban specific companies or industries from the portfolio.
Here are six common examples of social portfolio directives:
1. Human rights
Typically, this would be a negative directive, banning investments in companies that do business in countries with poor human rights records, or those that don't treat their employees fairly.
This typically would be expressed as a ban on gun manufacturers and military contractors.
3. Green businesses
This might be a positive directive to invest in renewable energy companies, or a negative one to ban stocks of heavy polluters.
Pro-life views can be expressed as a ban investments on pharmaceutical companies that produce abortion-related products, on hospital groups that perform abortion procedures or even on medical insurance companies that cover such procedures.
5. No "sin" stocks
Alcohol, tobacco and pornography are favorite targets of portfolio bans by investors who believe their use to be sinful.
6. Religious affiliation
Some investment groups offer products geared specifically to the beliefs of a given religious affiliation, such as Catholic investment products that are pro-life and anti-violence, or Muslim products that invest according to sharia law.
Socially-responsible investing and restrictions
Because social investing either directs or restricts specific investments, it is very likely to result in different performance than market indexes and investment styles that are free to invest in anything. Some investment managers specializing in socially-responsible products try to sugar-coat this reality, but the simple fact is that limiting the field of investment opportunities may affect performance.
Whether or not that impact will be positive or negative is a fair question. There is an argument to be made that companies conducting their business responsibly or shying from harmful products will perform better financially in the long run. However, this greatly depends on the types of policies involved. In the short-term, socially-responsible investing may cause you to trail market indexes or other investors.
How to measure performance of socially-responsible investments
To the extent possible then, performance measurement should be handled by comparing to customized indexes, which also exclude or include investments according to your social investing guidelines. Also, when it comes to socially-responsible investing, rate of return is not the only measure. The extent to which the investment manager is rigorous in researching and implementing the desired socially-responsible policies should also be an important component of how that manager is evaluated.
Ways to implement a social investing policy
If you wish to pursue socially-responsible investing, there are a few ways to do it.
Mutual funds based on principles
There are some mutual funds that are constructed around certain religious or social principles, and this can be an efficient way to implement a socially-responsible approach as long as you are comfortable that your principles line up well with the policies being followed by the particular fund you choose.
Separately-managed portfolio with investment guidelines
When you have a separately-managed portfolio, you can customize your portfolio to your specific principles and priorities. If you do this, be sure to put your guidelines in writing, and be as specific as possible. Vague language about "good" or "bad" practices may result in your portfolio missing the mark because such generalizations are widely open to interpretation. Your investment guidelines should also describe performance measurement standards that reflect the policy you are pursuing.
Importance of updating investment guidelines regularly
If you establish socially-responsible investment guidelines, be sure to review and update those guidelines regularly because the issues involved are subject to change over time.
For example, one of the most prominent social investing movements was divestiture from companies doing business in South Africa during that country's apartheid years. Unfortunately, because they were slow to update their policies, some religious and academic groups kept those policies in place long after that country abolished apartheid - at a time when the new government of Nelson Mandela was starved for international investments.
Remember, if the purpose of your policy is to influence change, then don't neglect to adapt your policy when that change occurs.
Socially-responsible investing is a matter of personal choice. There may be some cost involved in restrictive investment policies, but to people who believe in such policies, the real reward is investing in a manner consistent with their values.
Comment: Do you participate in socially-responsible investing? Which causes or beliefs do you support when you're investing?
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April 29, 2016
You might think of it as your final responsibility, but preparing your financial affairs for when you die should happen long before you reach an age where you are likely to pass away. After all, when it comes to the responsibility of preparing for death, the only way to get it done is to be early. If you leave it too late, there won't be anything you can do about it.
When a person dies, close friends and family members may be very upset. Suddenly, there are several details that have to be decided in a compressed period of time - decisions on things like organ donation, who to notify, funeral plans, and burial arrangements, and these demands come when people are not in a good emotional state to make decisions.
To avoid adding to this burden, you should resolve certain key financial issues before you die. In fact, it is wise to take care of those issues while you are still fairly young. For one thing, know one knows if they are going to die unexpectedly, and even if the worst does not happen, you might be in a better position to make rational decisions when death seems a long way off.
Here are five financial arrangements you should make for your death, even if you expect to live for many years to come:
1. Your will
Putting in writing your instructions about how your property should be distributed not only ensures that your wishes will be honored, but it also serves important functions for your survivors. Your will can direct your money and possessions where you think most appropriate, and clear instructions can prevent disputes among those close to you about who is entitled to what.
Keep in mind that a will should be an evolving document. Creating one is such a chore that people tend to think of it as a one-time task they can forget about once its done, but you need to account for the changes that can occur over time.
Issue of guardianship and trusts
For example, when your children are minors, providing for their guardianship is a big priority. When they are young adults, guardianship is no longer an issue. However, you may want to arrange for their inheritance to be distributed to them over time via a trust, rather than all at once.
Number of heirs may change
Also, the number of your heirs might change over time, and there is the possibility that your executor might predecease you. As much as possible, the will should be worded in ways that makes provisions for the possibility of such changes, but even so it is a good idea to revisit your will every ten years or so to make sure it still fits your wishes and situation.
2. Burial trust
A burial trust makes sure that there is money set aside for burial or cremation costs. This is especially important if your resources dwindle down to the point where you have to go on Medicaid. You are only allowed to have a small amount of money left in order to be eligible for Medicaid, but the amount placed in a burial trust is excluded from that eligibility requirement.
3. Life insurance
Oddly enough, life insurance may be most important when you are young, even though it is unlikely that you will die at that stage. One reason is that when you are young, you won't have had a chance to accumulate much savings, so life insurance needs to fill more of the gap to take care of your dependents. Also, the younger your dependents are, the more financial assistance they will need before they get old enough to support themselves.
4. Power of attorney
It is wise to give someone the authorization to make decisions on your behalf should you lose the capacity to do so. Otherwise, those close to you may have to go to court to be able to manage your affairs. That can cause costly delays, and may result in someone other than the person you intended getting this authorization.
5. Brief key people of your finances
You should give your executor and your primary beneficiary a run-down of your financial situation, including an idea of what bank accounts and other property you have. This will help them know what to expect, and could save valuable time in tracking down property that should be included in your estate.
Again, these are decisions that need to be made early because you won't be able to make them if you leave it too late. With any luck, you will turn out to have made these arrangements many years before they come into play.
Comment: Have you made the necessary arrangements for your finances?
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April 29, 2016
A new book called "Multi-Asset Class Investing: A Practitioner's Framework" is not exactly a made-for-Hollywood look at the investment business like "The Big Short." However, it points out an industry practice that probably adversely affects more people than were hurt by derivatives traders during the housing crisis.
Most investment practitioners are highly compartmentalized, managing one, narrowly-defined type of asset. Investors may own multiple asset classes, but their investment policies tend to dictate that the asset mix be held within tightly defined targets. As the book highlights, this pigeonholed approach to investing misses where the real opportunities to add value and manage risk come from. The main point is asset allocation is always important.
Here are five reasons why taking a multi-asset class approach might be more relevant than ever in today's financial markets:
1. Conditions are ripe for multi-asset strategies
One of the book's authors, Pranay Gupta, makes the point that passive asset allocation is ill-suited for an environment in which the correlation between asset class returns has increased. For example, when stocks and bonds behave differently, you can reduce risk by splitting a portfolio between the two. However, if asset classes are going up and down at the same time, passive diversification is not a sufficient method of risk management.
Gupta also points out that customized financial instruments have blurred the lines between traditional asset classes. The availability of such hybrid products calls for something of a hybrid investment approach rather than a narrow, asset-class based perspective.
2. Unconventional asset behavior calls for active allocation
It is not just that stock and bond returns are more correlated than they used to be. The other challenge is that returns are running well below historical norms.
Already, the 21st century has seen two major collapses in stocks: the burst of the dot-com bubble, and the 2008 financial crisis. While stocks have struggled, abnormally low bond yields make them a less attractive alternative. Even the longest-term Treasury bonds are yielding well under 3 percent.
The point here is not just that returns have been disappointing. The other challenge from an asset allocation standpoint is that they have been behaving differently from historical returns. Passive asset allocation models are generally based on assumptions about asset class behavior based on those historical returns. When that history ceases to be indicative of how these assets are performing, it's time for a different approach.
3. The investment industry has allocation upside down
Higher asset class correlations and low returns seem to create an especially urgent need for more focus on asset allocation now, but you could argue that the investment industry has been misguided in its approach all along.
Because the industry is largely organized into asset-class specialist managers or index funds, most of the industry's focus is on managing within an asset class rather than on coordinating among asset classes.
Gupta refers to studies that have shown that roughly 80 percent of a portfolio's risk and return comes from asset allocation, and only about 20 percent comes from individual security selection. In terms of how professional investors spend their time though, the industry has those proportions upside down. He estimates that 80 percent are individual security selectors, and only about 20 percent are engaged in asset allocation.
4. Too much attention is given to stock-picking
Even if you are not an industry insider like Gupta, you can get a sense that the focus is on minutia rather than the big picture. If you watch coverage of the stock market, most of it is focused on hot tips and the day's big individual movers. When was the last time you saw one of those market gurus waving his hands about an asset allocation opportunity?
Think about it. A diversified portfolio might have 2 percent invested in a single stock. If that stock rises by 30 percent - a pretty healthy return - it will make 0.6 percent difference on the overall portfolio. Stock picking should not be ignored, but it does seem overrated.
5. Lack of flexibility takes away alternatives
Suppose you happen to be an ace stock-picker, and all your expertise and research tells you the stock market is overvalued?
An investment manager with a narrow stock mandate has no discretion to switch out of stocks under those circumstances. This is like putting someone at the helm of an ocean liner, but giving them no way of steering away from the icebergs.
Investment managers who take a fully-integrated approach to multi-asset class investing are harder to find, but they may be exactly what investors need to escape the disappointing results of pigeonholed portfolios.
Comment: How do you approach investment and asset class strategies for your portfolio?
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April 28, 2016
A great deal of time and energy goes into trying to find an edge in investing. Sometimes though, the smartest move you can make is just avoiding financial mistakes. For example, not getting ripped off is a good start.
That is easier said than done. Financial fraud is big business. Unfortunately, the profit motive in separating people from their money is strong enough to inspire a tremendous amount of effort and ingenuity. A big part of the problem is that people are most vulnerable when they are seeking help, possibly playing into the hands of unscrupulous financial advisers.
Of course, there is nothing wrong with asking for help. Just don't act helpless when you do it.
6 things to look for to avoid financial fraud
Here are ways to avoid working with a potentially bad financial adviser:
1. Recognize the risks of financial fraud
Most people are aware that financial fraud exists, yet they naively think it won't happen to them. Recognizing just how prevalent this kind of fraud is might help people realize the odds are pretty good that someone in the financial profession will try to take advantage of them at some point.
A recent paper, "The Market for Financial Adviser Misconduct," found 7 percent of registered financial representatives were disciplined for misconduct between 2005 and 2015. Out of a population of 1.2 million advisers, that means that roughly 84,000 were found to have mistreated their clients.
That's a large number of people who are potentially trying to reach into your pockets. When you consider that many wrongdoers commit more than one violation, and that not all violations are caught, this means that any financial services customer faces a pretty good chance of being a victim at some point.
2. Check the record of advisers
Since financial fraud is so prevalent, the worst thing you could do is make it easy for one of those crooked advisers. The Financial Industry Regulatory Authority (FINRA) has a database that can show you the disciplinary history of any registered financial professional.
You would be wise to check out this database before working with any adviser, because those that have done wrong in the past have a tendency to commit further violations in the future. Repeat offenders break the rules five times as often as the average financial adviser.
3. Watch out for firms as a whole
Financial fraud is often not just the action of an individual. It can also be a sign of broader, institutional laxness. There are some firms that have way more than their share of violators. For example, the paper found that Oppenheimer & Company was the worst firm in this regard, with nearly one in every five of its advisers having a negative regulatory history.
The lesson, then, is to look at both the individual and the firm. Even if the individual you are dealing with has a clean record, frequent violations by the firm can be a sign of low hiring standards and poor compliance controls.
4. Steer away from rushed investment choices
A tell-tale sign of a scam is when someone tries to rush you into a decision. Never make investment choices in a hurry. Take the time to think about any decision, and perhaps talk to others about it. The more someone tries to pressure you to hurry up, the more you should slow things down.
5. Don't get greedy about high returns
One reason people fall prey to investment scams is they are trying to get something that is too good to be true. If an investment proposal offers returns that are way out of line with what alternative choices are offering, be careful you don't get greedy. Instead, you should get suspicious.
6. Re-evaluate your current investment program periodically
If you are regularly solicited by financial advisers trying to get your business, use this to your advantage. Periodically let a potential adviser review your current investment program. While you should keep in mind that the person trying to get your business has an incentive to poke holes in that program, it is also possible they will be able to raise some timely red flags about what your current adviser is doing.
The financial industry is highly-regulated, but that should not give you a false sense of security. Even after financial advisers commit a violation, they often remain active in the industry. More than half of violators keep their jobs even after committing a violation, and of those who do get fired, 44 percent find a job with another financial firm within a year.
In short, the regulators are looking out for you to some extent, but not as well as you can look out for yourself.
Comment: How do you protect yourself from fraudulent financial advisers?
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