Friday, November 12, 2010

Why are we such lousy investors? - Episode 1

Landing Page Description:
Why does the average investor earn returns far below the market return?  It turns out that our natural instincts often lead us to make poor financial decisions.  “Why are we such Lousy Investors?” is part one of a four-part series that explains why, and what you can do about it.

Video Script:
The Center for the Research of Security Prices at the University of Chicago has records for NYSE prices dating back to 1922.  They tell us that over the past 90 years or so of booms and busts stocks traded there have earned an inflation adjusted annual average return of over 7 percent.  Yet according to an article in the Journal of Finance by Alok Kumar of the University of Texas, the typical investor earns far less on his stock investments.  Why is this?

The answer starts in dark prehistory with our cave man ancestors.  In those days scattered bands of humans hunted and gathered their way through life, following the food supply from place to place.  To survive in the land of the Mastodon and Saber Tooth Tiger required finely tuned senses and hair trigger reflexes:  the difference between lunch and being lunch was often only a few inches or seconds.  This threat environment also caused us to develop a predisposition to 'follow the herd':  in a world full of predators it was not safe be alone.  And wherever the crowd was headed was probably where the food was anyway, so it paid off to pay special attention to what your neighbor was doing.
Anthropologists tell us that the skills that helped us survive the Serengeti have been passed down to us  today.  The only problem is that today's world is no longer filled with large hairy Elephants.  It's filled with computers and investments. And the skills and tendencies that allowed our ancestors to get us here alive aren't necessarily the ones best adapted for today's complex, advanced economy.
Take for example those finely tuned senses and hair trigger reflexes:  in a world where threats are a little less obvious than a charging Rhino, they cause us to overreact:  stocks go up?  Buy!  Down a little?  Sell!  Nothing happening?  Move my money!  Our bias is for action, which makes it hard for us to be patient and tolerate the ups and downs that come with investing.
And our highly developed ability to perceive our neighbor's intentions and actions?  Well they too get us into trouble in the world of IPods and pads.  Is everyone selling?  Buying?  Flipping Florida real estate?
It's called the 'behavior gap' and it costs investors tens of billions every year.
In the next few videos I will take a closer look at the behavior gap and what we can do about it.  First, I'll take you through an example of why our impatience yields such poor results.  Then we'll talk about tools and techniques that Financial Planners use to help mitigate our natural tendencies.  Finally, we'll share with you a way of thinking about your financial affairs that will make it easier to ignore that cave man or woman that lurks inside each of us.

Is Social Security Secure?

Landing Page Description
Everybody says Social Security and Medicare are going 'bust'.  Is it true?  In this short message we tell you what is important to keep in mind about government entilement programs.

Video Script
Everybody says Social Security and Medicare are going 'bust'.  Is it true?  

Well, no.  But it's more complicated than that.

Both programs are 'pay as you go' meaning that the only money available to pay for them comes from Social Security and Medicare tax revenues or other general government revenues.  Taken by itself, Social Security  is in fairly good shape with revenues from the Social Security tax projected to cover most payments owed to seniors. With modest increases to the retirement age to reflect our increasing life spans and perhaps some tweaks to the cost of living formula, Social Security should be here for the long run.   

But Social Security only works with Medicare.  It does you no good to get a Social Security check if you simply have to turn around and pay it all out for health care.  And here's where the story gets disturbing.  The cost of healthcare paid for by Medicare is rising far faster than inflation and incomes combined.  In fact Medicare outlays are growing so fast that eventually they will be about as large as old age pensions.  With inflation and more people eligible, experts project Medicare to double its share of national income in less than twenty years.

And the problem is that the premiums that seniors pay for Medicare only cover a small fraction of the total costs.  The rest is supposed to be covered by the Medicare tax.  But with healthcare costs spiraling ever upward the tax no longer covers it all.  This means that at some point the government will have no choice but to cut back the proportion of the premiums it pays.  The result:  more health care costs falling on the shoulders of seniors.

So you probably can count on that Social Security check coming every month, perhaps a little smaller and starting a little later.  But be prepared to pay more, much more for your health care.

Thursday, November 4, 2010

Advisor Interview Questions

Questions Approved
The personal interview should focus on showcasing the Advisor's personality and perspective.  The italicized comments are simply guidance for the type of message outcome each question is designed to elicit.  The goal is to give a prospective client a picture of who you are and how you operate in less than 
two minutes.

Landing page description:
Recently Comunicato asked a few questions of (advisor) .  Here's what he (/she)  had to say.

Video Script:
Why did you become a financial advisor?
Showcase values and beliefs.  Talk about clients/people.
I grew up in the business.  My father was an advisor and I watched him help people build safe and secure futures.  

I started out in Accounting but I found that what I loved most was working with people on their most important issues.  Helping someone achieve their goals is so much more fulfilling than debits and credits.

Roughly 80% of all financial advisors quit the business after a few years.  Why have you stayed?
Showcase success, expertise, enjoyment etc.
I decided from the start to treat my practice as a business.  I was going to invest in the tools, expertise and resources necessary to create the kind of value that clients deserve.  

I had a plan and I worked my plan.  I didn't give up and lo and behold it paid off.  Just like a good financial plan.  I also had some great early clients that helped me understand what it meant to be a true advisor.

Well I had an advantage, coming from Investment Banking - my earliest clients were people I'd developed strong relationships with in the Corporate world.  And they introduced me to their friends and they to theirs and so on.  The rest is history.  I've found that if you good work people will beat  a path to your door.

Can you give an example of how your work as an advisor makes a difference for people?
Specific client story.
Early on I had a client with significant health problems come to me.  He was fearful that he wouldn't be around long enough to protect his wife and kids.  We put an aggressive plan together and he made it.  Like he feared, he died young, but he died knowing his family was protected.  They're all still clients.  I'll never forget him.

What are the most important factors in building a successful financial future?
Short list, simple, clean concise.
Having a realistic plan and sticking to it over the long haul.  Covering all the bases.  Patience.  And faith, in yourself, and in your plan.

Honesty.  First and foremost telling yourself the truth and using that as the basis for your financial future.  After that:  consistency - doing the basics year in, year out.  And finally, trust.  Trust your judgment, including that of the advisors you've chosen.

Is there anything else you think someone considering a financial advisor should keep in mind?
Branding message for you.
An advisory relationship is built on trust.  Trust in their expertise, their judgement, and most importantly:  their integrity.