The Three Keys to Surviving Major Life Transitions
- Created on Sunday, 26 October 2014 19:00
You might think that the most important work a financial advisor can do is related to allocating a client’s investment portfolio, or perhaps helping secure a timely insurance policy or drafting the optimal estate plan. In fact, the most important work is done when clients are in the midst of navigating life’s major transitions.
I recently experienced two of these major life events — a job change and a move — in the span of five months. Crazy, right? Who would willingly subject themselves to two of life’s most stressful changes within such a small window of time? Fortunately, I had at my disposal three keys to surviving major life transitions, and I’d like to share them with you:
Key No. 1: Flexibility
“Blessed are the hearts that can bend; they shall never be broken.” —Albert Camus
In February, I left the company I loved after seven years of life-changing work to lock arms with a national alliance of financial advisory pioneers dedicated to the practice of “building relationships by doing the right thing.” But in order to build a new and rewarding relationship with them, I had no choice but to sever some relationships with others.
I had to tell colleagues at my former company — good friends — that I was leaving, knowing that our work was the primary basis for our friendship. I also had to forgo working with some clients whose financial plans I’d helped craft, and in whom I’d invested personally.
I had to impose myself on new colleagues as I fumbled through onboarding. I had to learn new systems, protocols and personalities. I had to wonder if, at the conclusion of a probationary stretch of forgone forgiveness, my new colleagues would still want me on their team!
So much change in so little time.
You’ve heard that death and taxes are life’s only guarantees. But I’m still holding out for an Elijah-style exit, and half of Europe pays taxes little mind. No, it is only change that is a guarantee in this life, and flexibility is its only effective counteragent.
We can and should envision and plan for major life transitions, but we should also expect our path to be diverted by unknown variables. We must be willing to flex our plans in these dynamic times of change.
Key No. 2: Margin
“Everything takes longer than it does.” — Ecuadorian proverb
In the first week of June, my family moved from our beloved Baltimore — leaving behind our close-knit families, community support systems and favorite sports teams — in an experiment to see what life would look like from a different vantage point. We chose Charleston, S.C., as the backdrop for our adventure, pinpointed for its promise of a slower pace, higher quality of life and lower cost of living.
Major life transitions, however, are necessarily taxing on our time and money, at least initially. And because of the elements unique to every major life event, it is virtually impossible to accurately forecast the necessary allotment of time and money that will be required.
This can be maddening to me as a financial planner. I strive to forecast every expense one could anticipate, but change invariably costs more money and consumes more time than expected.
The only solution is to plan for the unexpected by leaving a reasonable margin of time and money — a buffer — that can be consumed by the inevitable surprises that arise. Expect that it will take 20 percent longer and cost 20 percent more. This is the only defense against heaping more stress on an inherently stressful event.
I’ll also add that our move was, in part, an exercise in the creation of margin. Despite Charleston’s great reputation as a city that offers a high quality of life, the cost of housing, especially, is still lower than in the Mid-Atlantic. We were able to reduce our overall monthly housing costs, our biggest single expense, by 20 percent.
We also added a significant margin of time to our calendars. We effectively wiped clean our slate of commitments, decades in the making, and now we get to choose exactly what, where, when and to whom we’re willing to dedicate ourselves.
Key No. 3: Grace
“Failures are finger posts on the road to achievement.” — C.S. Lewis
Failure is inevitable, especially in the case of major life events. Grace is unmerited favor in the face of failure. This brand of grace is most often discussed from the pulpit on Sundays, but I raise the topic here more for its practical benefits than its spiritual.
The nature of life’s major transitions — specifically the changes and surprises that come with them —are a breeding ground for failure. Some are inconsequential while others come with great risks, but most come as a result of our limitations.
We err, and in order to move forward, we must extend grace to ourselves and to the others on our journey.
It must be said that not all major life transitions are equal. The benefit of my recent life events is that each of them, while taxing and stressful, led to something new and exciting. You may be facing another brand of life event — a death, a divorce, an injury or a loss not of your choosing. Your situation is different — it’s harder — but that makes the use of these three keys even more vital.
When we employ flexibility, margin and grace in navigating life’s biggest transitions, we have the opportunity to not only survive them, but to thrive in, through and even because of them.
This commentary originally appeared on Forbes.com.
Tim Maurer is the director of personal finance for the BAM ALLIANCE. He is a regular CNBC contributor and writes for Forbes.com. A central theme, that “personal finance is more personal than it is finance,” drives his writing and speaking. You can follow Tim on Twitter at @TimMaurer.
Market Expectations for Interest Rate Increases
- Created on Sunday, 12 October 2014 19:00
Q: Should you stay invested in the short term while waiting for interest rates to rise?
A: First, other than very short-term interest rates that are heavily influenced by the Federal Reserve, it’s difficult to predict changes in interest rates. Second, to determine whether a short-term fixed income approach will be superior to an intermediate-term fixed income approach, you need to know that rates will rise and that they will increase by more than what the market already projects. This second point is one of the most fundamentally misunderstood concepts when it comes to fixed income investing. The ability to correctly predict such changes would be enormously valuable, but research continually shows that doing so is virtually impossible.
Market Expectations for Interest Rate Increases
Using current market interest rates, let’s compare two investment strategies covering the next four years:
1. You can buy a four-year bond with an expected return of 1.80 percent per year and hold it until maturity.
2. You can buy a two-year bond with an expected return of 0.80 percent over the next two years, hold it until maturity and then buy another two-year bond and hold it until maturity.
A simple question to ask: When will the first strategy produce higher returns than the second strategy and vice versa? Crunching the numbers reveals that the only way the second approach will come out ahead is if the expected return on the second two-year bond that you purchase is greater than
2.80 percent. So for the second strategy to outperform the first strategy, interest rates on two-year maturity bonds must increase by more than 2 percent.
This simple example shows that knowing interest rates will increase is not sufficient. You also need to know whether they will increase by more than what the market has already accounted for.
Bottom line: Investors can benefit from taking minimal credit risk in their fixed income portfolios and by generally keeping their portfolios fairly short term in maturity. This, however, does not mean investors should keep everything in very short-term fixed income at all times. In environments in which the yield curve is steep, it can make sense to move a portion of your fixed income portfolio out a bit longer in maturity.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Investing against the Odds, and the Facts
- Created on Sunday, 05 October 2014 19:00
By Carl Richards
Earlier this summer, I was on a hike with a friend and mentioned that while we’d started at about 9,000 feet, we’d reach an elevation of 12,000 feet by the end of the trail. My friend replied, “That’s a fact I just don’t believe.”
Yes, it sounds silly, and of course, we laughed about it. Maybe it was the thin air going to his head, or his good lungs that didn’t cause him to realize how high we had hiked.
But the conversation stuck with me. What is a fact, anyway? Merriam-Webster defines it as “a true piece of information,” and we tend to think of facts as things we can prove through direct observation or scientific experimentation.
For instance, paying 22 percent interest on your credit card while having money in a savings account earning only 1 percent is a bad idea. The numbers make that a fact.
Another fact, proved by the weighty evidence of history, is that it’s very unlikely you can outperform a simple stock market average or index over a long period of time by trying to pick the next “hot” stock or mutual fund. It’s not impossible, but the facts show it’s highly improbable.
The interesting thing about facts is they exist whether we accept them or not. They don’t change simply because we don’t believe them. But once a fact is established as true, we still have a choice. Do we dismiss it? Believing a fact can have all sorts of implications, but perhaps the most important is whether it leads to action.
Let’s go back to the idea of beating the market. I know of no study that contradicts the truth of the high improbability of doing so.
Assume we know this fact and do believe it’s very unlikely we’ll beat the market. Why, then, do so many of us act contrary to what we know and believe? Do we keep betting on individual stocks because we genuinely think we’re the exception? Or do we keep jumping from stock to stock because we like the way it makes us feel?
Asking these questions may well lead to uncomfortable answers about our behavior. But those answers are revealing too. Understanding that we’re doing something because it feels fun, for example, may be a real eye-opener; your actions don’t align with what you know and believe because you enjoy the excitement of tracking stocks and trying to predict what will happen next in the market.
It seems like a small thing, but understanding how you reached this point — acting contrary to what you know is a fact — can help you avoid a similar disconnect in the future. For instance, once you know that you like how it feels to trade individual stocks, maybe you decide to experiment with only a small portion of your money. It’s an acknowledgment of the facts, but it also addresses the reasons you ignored the facts in the first place.
We like to tell ourselves that with enough information, we’ll always make the smart decision. Personal experience has probably shown by this point that facts alone may not always be enough. But learning to understand the relationship between facts, beliefs, and our actions can greatly increase our odds of behaving wisely.
This commentary originally appeared September 15 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.
© 2014, The BAM ALLIANCE