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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April 28, 2016
Age milestones like age 30 tend to make a person stop and appreciate the changes in their lives. The past decade may have seen you go from student to established worker. Your lifestyle may have gotten a little tamer, and your waistline a little less youthful. Still, there are some compensations that come with getting older, and an improved financial situation might be one of them.
Turning the age odometer onto a new decade is a good cue to take stock of whether your finances have kept up with changes in your life.
Personal finance checklist when you reach 30
Here is a personal finance checklist you should look at as you turn 30:
Save for retirement
Somewhere along the line, you have probably heard the advice about how important it is to start saving for retirement. Unfortunately, most young people ignore that advice. According to the Employee Benefit Research Institute, 60 percent of workers aged 25 to 34 have less than $10,000 in savings and investments. In other words, they have not yet really begun to save. That's a little more understandable when you are in your 20s - paychecks are tighter, and retirement seems a long way off. As you enter your 30s though, both your paychecks and the urgency to save should prompt you to get serious about retirement saving.
Look into long-term investments
The first step towards building savings for many people is to start accumulating money in a savings account. This is partly because a savings account is readily available in an emergency, and partly because it does not require much thought. However, once you've set aside enough of a reserve to cope with emergencies, it is time to shift to investments like stocks and long-term bonds that will provide you with more growth for the future.
Check credit score
When you first graduated college, you probably had little or no credit history. By age 30, you have probably accumulated one - for better or worse. This is a good time to check your credit report to see your score.
Fix credit report errors
After reviewing your score, determine if there are any errors and whether you might need to work on your finances to improve your credit standing. A better credit score will increase your access to credit and lower the cost of it in the future.
Make/revise a budget
Make a budget and include all your monthly expenses, including ones related to loan repayment, in order to keep track of your finances. If you already have a budget, continue to revise it as your income or household expenses change.
Build an emergency savings account
Emergencies like your car breaking down may come up before you know it. Be prepared by growing an emergency savings account to use for sudden expenses.
Revisit your student loan status
If you have been chipping away at your student loan for a few years, check how its interest rate compares with other rates at present. If it still represents a relatively low-cost loan, you may want to keep on schedule to pay it down gradually. However, if your student loan rate seems high relative interest rates now, you may want to look into paying it off faster, either by borrowing from lower-cost sources or by dipping into savings.
Search for lower credit card interest rates
It can be tough to get a credit card when you are young, so you may have had to settle for a high interest rate, which may have resulted in debt accumulation. If you've built up a good credit record since then, you may qualify for a lower rate. See if your current credit card company will give you a lower rate, and shop around to see if there are cheaper alternatives out there. If lower interest rates, you could use that money to build an emergency savings account or pay down other debt, like student loans, faster.
Evaluate whether you need life insurance
If you are a bread-winner with a spouse and/or kids, this is a no-brainer - you need life insurance. Less obviously, if your parents are counting on you for financial support in their later years, you may want to get some insurance to protect them should something happen to you.
Explore potential career moves
With several years in the workplace you may have acquired some valuable skills, yet often employees who start their careers with a company can remain undervalued by that company relative to people from the outside. Age 30 is a good time to try to get on a faster-earning track if that is your desire.
Consider whether to rent or own a home
This is both a financial and a lifestyle question. By age 30, you should know enough about both situations to seriously consider this decision.
Don't expect to have it made financially by the time you turn 30. For many people, their 20s is a time of struggling to make a living and coming to grips with financial decisions for the first time. By 30 though, while you may not have completely arrived, you should at least have a better feel for what path you are on. That makes it a good time to see if you have the right financial tools for the journey.
Print the personal finance: age 30 checklist
Use the printable checklist below to see how well you've done on your financial journey.
Comment: Did you reach these financial milestones by the time you were 30? What's your score?
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April 27, 2016
While the Federal Reserve decided to stand pat for the third consecutive meeting, the way economic conditions are developing suggests reason to believe the door to future rate increases may start to open.
Economic factors determining bank rate increases
The Fed has consistently reminded people that it is primarily concerned with stabilizing two factors: employment and inflation. The Fed acknowledges that continued job growth means employment has not been a problem recently, leaving inflation as the primary area of concern.
Traditionally, when the Fed had an issue with inflation it has entailed trying to stop inflation from getting out of control. However, since the Great Recession, the Fed has been grappling with the opposite problem: chronically low inflation. The Fed has set an inflation target of 2 percent, and the actual inflation rate has consistently fallen short of that.
Fed keeping an eye on inflation target
While it is easy to understand the traditional concern with keeping inflation from getting too high, this more recent concern with bringing inflation up to a minimum target is not universally embraced. Some maintain that low inflation is a symptom of general economic malaise, but not itself a root cause. Others feel that low inflation is not a problem anyway, because it helps consumers.
However, the view of the Fed and many mainstream economists is that low inflation or deflation is bad for growth because it encourages people to delay purchases. With stable or declining prices, people are in no rush to buy things because they are confident prices will be the same or even lower in the near future.
Whether or not you accept this theory, the reality is that as long as inflation remains below 2 percent, it will be a deterrent to the Fed raising interest rates. Over the past 12 months, inflation has been just 0.9 percent, though this has been largely due to a 12.6 percent decline in the energy sector. However, take out the energy sector and inflation for the past 12 months has been 2 percent - precisely the Fed's target. It seems likely that as energy prices stabilize, overall inflation will start to approach the Fed's target and no longer be an impediment to raising rates.
How the dollar's value affects future rate hikes
One factor whose influence spans both inflation and employment growth is the value of the U.S. dollar relative to other currencies. This influence has generally been working against further rate increases, but lately things have started to change.
In 2014 and 2015, the dollar rose sharply. This can be bad for jobs because it puts the U.S. at a trade disadvantage, and it is also deflationary because it make foreign goods cheaper. A dilemma the Fed has faced is that interest rate increases would likely further boost the value of the dollar.
However, the dollar has been falling since the end of February. This decline, along with stabilizing oil prices, could open the door to Fed rate increases in the months to come.