​By Brad Thomason, CPA
 
Jimmy is going to roll a six, which will put him on Oriental.  Even though he’s running a little short on cash, he’ll buy it.  Bob already has Connecticut and Vermont, so it seems prudent to try and block him from getting a monopoly.
 
Bob will land on Chance, and then have to go to jail.  Which is just fine with him, as he is already well in the lead on land ownership.
 
Frank will land on Marvin’s, completing the yellow monopoly.  He will immediately start counting his money and thinking about how much to spend on houses in the next round. 
 
Chuck is hoping that he will finally land on Indiana.  He’s been around the board four times now since picking up Kentucky, and he really needs to complete the set.  Predictably, he’ll overshoot it, land on B&O, and have to fork over some much-needed money to Jimmy…
 
Plausible?  Of course.  Realistic chance of it happening?  You bet.  Certainly as equal a chance as any number of comparable scenarios.
 
But a prediction of the future that’s worth listening to?
 
Come on.  You know better than that.
 
Right now there is no shortage of media content purporting to tell you what the result of the pandemic is going to be.  I wouldn’t say that all of it should go straight into the not-worth-listening-to category.  Some interesting information is being raised and some not-obvious possibilities are being brought to light.  But after accounting for that?  Yea, at that point I’d have to say it’s not worth listening to.
 
The track record for humans being able to accurately predict how complex series of events will play out stands at roughly 0% effectiveness.
 
Please don’t tell me that so-and-so has access to special information which is not widely known.
 
Please don’t tell me that so-and-so made a correct prediction about something in the past, and therefore we should take the latest prediction as accomplished gospel.
 
I’ve said plenty of things in the past which ended up being reflective of what ended up happening, but I can assure you that having done so has, in no way, transmuted me into a being that can’t be wrong the next time I open my mouth.  Nor one that can see the future.
 
In times of stress we go looking for answers.  Those who think they have answers feel compelled to share them.  Speculation, in a void where no actual answers exist, often gets accepted as the real article – both by the speakers and the listeners. 
 
But just as no one could have foretold how the last two months have played out had they been asked back in January, neither can anyone today tell you how the next few months will play out. 
 
There are simply too many moving pieces involved, and too many points where a single person – politician, public health official, infected person – can do something which alters the equation.
 
I have heard a lot of smart people have serious conversations about what the world is going to look like this summer, this fall, next year.  Not may look like.  WILL look like.  These people are bright enough to know that human prediction of the future is impossible.  Yet they seem to have forgotten that.  It seems helpful to offer a reminder to not make the same mistake.
 
We all know what happens when we make plans on the basis of a weather forecast that is 8 or 9 days in the future.  We look at the forecast, we hope it’s right if it is conducive to what we want to do, or hope that it’s wrong if it isn’t.  But we know that we can’t really hang our hat on it, and that we really have no rational choice other than to keep the plans tentative until it gets closer to time and some of the uncertainty leaves the equation.
 
If that’s valid for a picnic or a fishing trip, how much more important is it to realize the changeable – and unknowable – character of the terrain right now as we think about financial decisions and put those decisions into action?
 
No one knows how this is going to play out.  Assuming that someone does, and acting on the basis of the possible future they pitch as inevitable, could lead to making some disastrous financial moves. 

By Brad Thomason, CPA
 
 
A lifetime ago (a professional lifetime, anyway), I read the Peter Lynch classic, One Up on Wall Street.
 
My central takeaway from the book was that when it comes to the stock market, one cannot lose sight of the fact that ultimately, everything comes down to corporate profits.
 
Profits are what you are ultimately buying a share in.  Profits are the reason that the company exists in the first place, and whether they are being made or not is a gauge to the effectiveness with which the company is reading the wants of the customer market place, and executing its plans to succeed.  Profits provide the perspective required to make inferences about whether stock prices are high or low, relatively speaking.
 
As you know, we are in the midst of a significant market decline, the third such decline in the past two decades.  While each of these three events bear obvious similarities in terms of the effect on prices, and the lost wealth represented by those changed prices, why each of them came about is quite different from the other.
 
I think you could make the case that this one may be the most real decline we’ve seen, at least in terms of how the market’s most basic machinery is supposed to work.
 
In the dot.com bubble we had a case of certain stocks becoming wildly overvalued because a new way of doing business lead some people (a lot of people) to conclude that new laws of commerce and economics had come into being.  They hadn’t.  The novelty of the goods and services offered by the tech industry would eventually come to be understood as a new verse.  But the song itself was the one which had always been playing (and continues to play, today).  The process of realigning price with value was chaotic, to say the least; and destructive to wealth as chaotic moves frequently are.
 
With the Financial Crisis you had a situation of such complexity that even today most people don’t fully understand the details of what happened; and even the ones who do have a tough time reducing it to a quick summation.  But at base, you had another wildly overvalued situation, albeit in some assets which for the most part initially seemed quite tangential to the broader financial market.  Once the realization of that imbalance became understood, the market started trying to make adjustments to realign price and value.  However, the way that the mortgage paper and the credit default swaps interacted with each other was an untested problem, and the resulting uncertainty essentially caused market participants to start freezing up.  Again, that’s not even remotely a full explanation, despite that fact that everything just mentioned was a significant factor.  But it will serve for the point I’m working up to, here.
 
The precipitating events in both of these were related to finance and valuation.  In the aftermath, consumer spending declined, which in turn lead to lower economic output.  For sure, some firms saw their profits drop.  But not all of them, and certainly not in equal measure.  Many of the losses booked by the most heavily-impacted industries (tech in 2001, finance in 2008) were due to one-time write downs, versus losses from the ongoing sale of goods and services to customers.
 
That’s what makes this one different.  You can make the argument (and I have…) that the stock market was too expensive going into this thing.  But not the same version of overvalued that we had in the other two.  This time it was more of a garden variety type of too-expensive, driven mostly by boredom and inattention (people kept progressively bidding prices higher, in relatively modest increments, because they couldn’t, evidently, come up with anything else to invest in).  But it was not an unwinding of that valuation mistake (“mistake”) that lead to the decline.
 
This decline has occurred because people have stopped buying stuff.  Like, a lot of stuff.  And the decline in sales (from the company perspective) occurred far faster than the related drop in expense levels.  The natural, mathematical, and mechanically-inevitable result:  profit levels have fallen.
 
The market has adjusted accordingly.
 
What we are seeing right now is about the most straight-forward expression of the fundamentals that I can remember.  Sales are down.  Profits are down.  Prices have adjusted to reflect that condition. 
 
It is too early to tell if the market “got it right” in terms of revaluing the changed reality.  But there’s no mystery or complexity as to what has driven the revaluation.  Stock prices have changed because profit reality has changed.
 
As I said, even though the price decline is similar to what we have seen before (in excess of 30% already, and no confirmation that we have seen the low point yet on this latest one), the how and why seem very different.  At least they do to me.
 
So I don’t really know if any of that tells you much in the way of what to do.  Consider it more of a perspective piece.  Like all of you, I’m spending a fair bit of time these days wondering what all of this means, and I think the process by which we come to those answers lies in picking things up and looking at them from different angles.  This is the angle that’s been on my mind the past couple of days, so I thought it might be something you would find interesting, too.  Stay safe.

​By Brad Thomason, CPA
 
Today I’ll tell you a quick story which you might find interesting in light of everything that’s going on.
 
Back in 2007, when the market started declining ahead of what would come to be known as the Financial Crisis, I had an office in the same building as one of those executive office centers.  In fact, our suite of offices was just down the hall, and we frequently used the center when we needed a large meeting room, extra clerical help, access to high-volume printing, etc.  And that's where the coffee machine was.  So I was in and out of there a good bit, and as is the case with most office situations, had a group of folks that I routinely chatted with when we passed in the hall.
 
One fellow who had an office there was constantly asking me what I thought about whatever was going on in the market.  This had been going on for some time, but as stock prices started to fall, he would often ask more than once in a day.
 
As the decline really got in full swing, the Dow traded down through 8,000.  This would have been in October 2008.  The previous high-water mark had been about 14,200.  For some reason, I remember talking with him that particular day.  I recall stating that based on our analysis the market had most likely reached the point of being undervalued.  He asked me where I thought it should be.  I replied that it probably ought to be somewhere in the vicinity of 10,000.
 
The thing about determining where the market “should” be is that no one can actually do it.  You never really know.  And yet, there are times when it seems almost certain that wherever the market is at that moment is a level where it should NOT be.  Paradoxical?  Quite.  Yet I have lived long enough to be comfortable with the proposition that just because something is paradoxical, it doesn’t render it wrong or invalid.
 
The market would go on to descend further from that day and that conversation.  It eventually bottomed out around 6,500.
 
About a year later, though, it was in fact back up to 10,000.  When I saw the guy that day he stopped me and told me that he remembered me saying that the market had shot past where it ought to be.  He said that I had “called it” and that I had been proven right.  The decline had been steep and fast, but it snapped back pretty sharply too in the months that followed.  He concluded that it really should have been at 10,000 all along since that’s where it had come back to on that day.
 
Well, in a lot of respects, I didn’t agree with his conclusions.  At least not the details.  I didn’t really think that I had been right in the exact sense as to the level itself, just because the market had now traded back to where it had been.
 
But broadly speaking, the point that I had been attempting to convey in that earlier conversation was that sometimes in the midst of scary circumstances, market declines go right past fair value without looking back.  In that, I think I was right.  Although for anyone who studies the history of how markets behave in times of crisis, what I told him certainly would not have been news.
 
The supply and demand aspect of market prices is really not something your typical investor thinks about day in and day out.  Yet those forces are always at work, and always hold sway.  In any market, when demand dries up, prices fall.
 
Not a whole lot of demand for investments going on right now. 
 
But that doesn’t necessarily mean that the prices of the moment are “right.”  They weren’t back in 2008.  They may not be today.  It may take the market a few  months to sort that out.  But assuming that the market is actually worth what it’s trading for right now, is liable to be a premature conclusion.
 
Do with that tidbit what you will.  I can’t really offer you anything in the way of certainty today.  But I hope that folks won’t spend too much time trying to extrapolate what current levels may mean for the years to come.  It’s questionable how much prognostication should ever be done with market price trends, though it is a much-practiced activity.  But if history is any indicator, the data coming in right now, in the midst of everyone being concerned and acting accordingly, has very little value as a basis for projection.  So maybe save yourself the time…and the angst.

By Brad Thomason, CPA​
 
 Author’s Note
 
It is often the case that blogs which appear in this space are written weeks, and sometimes months, in advance.  Then we pick a day out in the future, tell the software what we selected and the system auto-posts them when the day arrives.  This particular post is just such an entry.  I wrote it back in December or early January.  I don’t remember exactly, but the point is it was written long before anyone knew there was such a thing as a corona virus, or that we would be in the midst of a steep market decline by the time March 2020 rolled around.  We decided to let it go ahead and post.  But I want to make clear that it is not a coy suggestion that I knew this was all going to happen ahead of time.  To be sure, I have written many, many times about the effect of something like this happening.  But I didn’t know this was what the latest version would look like any more than anyone else did; nor when it was going to show up.  I also don’t want to be accused of offering unhelpful advice – that is, saying you should prepare for problems after the problem has already arrived.  I understand you can’t change the past.  However, as I said, we made the affirmative decision to go ahead with this post, and did so for the simple reason that it is sometimes very tough to get people to think about what might go wrong in the midst of good and prosperous times.  Sometimes the only way to get a lot of traction on that topic is to wait until everyone is a little jarred by recent events.  I think the current moment qualifies.  Even if you have already missed some opportunities to do anything about this latest problem, some contemplation of these topics may help you to be in a better position when the next one comes along out there in the future.  History says we’ll get past this one.  If history is wrong, then there’s nothing left for us to talk about.  But if history is right then the sun will shine again, prosperity will come around again, people will get giddy and careless again, and another problem will eventually come along to shock the financial system.  Essentially, I went ahead and let this blog post today in anticipation of that distant event.  If you don’t like the way things feel right now, once the dust settles, take some actions so that the next time one of these things comes around, it won’t sting as much. 

​
When you make your living as an advisor, you spend a lot of time going back and forth between fact and opinion.  The basic structure of advice is ‘here are some facts, and here’s what I think you ought to do about them.’  As long as we live in an uncertain world, the portion about how to react will always be somewhat tied to opinion.  As such, the action step is more open to interpretation than is often healthy for the parties involved.
 
It is always my hope when I’m talking to someone that when I show them the four (as an example) most relevant facts for a particular situation and say based on the facts I think they should turn right, they too look at the facts, give a nod of the head and agree that a right turn is the obvious choice.
 
That’s not always how it goes, though.  Over the years there have been plenty of times when the person I was talking to concluded that a left turn was the correct response.
 
Sometimes, no ill effects resulted.  But there have been plenty of times when they did.  A few times, catastrophically so.  The nature of these conversations has a common structure.  I say something to the effect of, “I wouldn’t do that if I were you.”  The response which comes back is usually some variant of, “I’m sure it will be fine.” 
 
I have come to accept that I can’t always make people see things the same way I do.  Moreover, it is certainly the case that some of the negative possibilities which I spot never come about.  But when they do it feels especially unfortunate.  It feels like the pain could have been avoided.  As much as I like being right when things go well, I hate being right, even more, when they don’t and we foresaw it as a possibility.
 
When we start to focus in on the specific matter of retirement income planning, we inevitably start to envision a version of the future which we need to figure out a way to bring about.  What we come to understand pretty quickly is that even if everything goes according to plan, it’s still a mighty big job.  And of course, things might not go according to plan.
 
Well, to pull all of that together, having seen a lot of things go right over the years, as well as a fair number of things that went wrong, I have observed that success stories tend to come in one of two types.  There are the ones where everything works out fine, primarily because nothing of any real negative impact comes along, and they never really get tested in the first place.  Then there are the ones which encounter some curveballs, but find a way to win anyway.
 
I can’t tell you which version of the two you will encounter (note also that there is a third category: those stories which don’t end in success).  But I can tell you that in a lot of cases where a family weathered a storm or two on the way to an eventual win, they were able to do so because they anticipated problems from the outset.  Or they were at least mindful of the fact that things might not go according to plan.  As a result, they had prepared for them.
 
How do you prepare for every eventuality which might go wrong?  You don’t.  At least not in terms of specific counter-measures.
 
Instead, the general approach is more robust.  Such an approach is based on two basic concepts:  insure yourself against the most likely risks, and have the ability to quickly access some cash without it disrupting your entire portfolio or causing you to have to take massive discounts to get liquid.
 
As I have stated elsewhere, throwing money at a problem may not be an elegant solution.  But it is often damn effective. 
 
Writing an unexpected check is never fun.  But not being able to write one, or having to do gymnastics to get in a position to (at a time of great stress, no less), is a lot less fun.  When problems arise, it is so much better to know that you have some resources available to respond with. 
 
Will it cost you some money to pay insurance premiums or keep some of your capital in more easy-to-reach places that carry lower interest rates?  Yep.  But it is just a feature of reality that benefits have costs.  Like you granddad told you:  no free lunches. 
 
My advice to you today is this:  don’t assume everything is going to be fine.  I hope it will be.  But reality is that it may not. 
 
I bet you already knew that, though.  So really what all of this comes down to is what you are going to do about it.  Some day in the future, when a problem shows up, a little voice inside your head is going to say, “Yep, I thought something like that might happen.”  What you do or don’t do in preparation of that day will determine whether or not being right was a good thing or a tragic one.

By Brad Thomason, CPA 


Recently I saw a TV commercial in which a seller of silver coins was arguing the case that silver is a good investment.  Spoiler alert:  I’m not going to take a position on whether it is or isn’t.
 
I’m bringing it up because of something that was said in the commercial.
 
They lead with the “fact” that experts were saying that silver could go up by as much as 200%.
 
Now I’m not a fan of statements of this type, but I generally tend to respond to them with an eye roll.  They are at base fairly innocuous, on account of the fact that they are meaningless; and I think that’s pretty obvious to most people.  Could they have found someone who said silver might go up by 200% in the future?  Sure.  For that matter, had they asked me, I would have said it.  Because it might.  I’m not aware of any reason that would make it impossible for it to happen.  Doesn’t mean I think it will.  But it could.  Especially if your conceptualization of “the future” encompasses enough years.  A nonspecific statement that something could happen is not a statement that it will happen.  In fact, such a statement   isn’t really much of anything at all.
 
So that wasn’t the problem.
 
Later, they had a recognizable spokesman come on screen to sing the praises of silver, and say that he liked it.
 
Didn’t have an issue with that either.  People who really do believe in some particular financial instrument or product aren’t obligated to keep their mouths shut about it.  Even if they stand to make money from it.  The folks who make and sell Subarus really do think their cars are particularly safe, and they have never been shy about saying so.  Obviously they make money when you buy a Subaru, either because the safety story is appealing to you, or something else causes you to make the purchase.  Doesn’t strike me that they have done anything wrong at all by saying nice things about something they sell. 
 
Not everyone lies because it would be in their financial interest to do so.  In my experience, it is far more common for people to decide to sell something because they believe in it, rather than “believe in it” because they sell it.  Even if the latter version certainly does happen with regularity.  I tend to give people the benefit of the doubt, absent overwhelming evidence to the contrary.  Which is how I would like for other people to treat me. 
 
So that wasn’t the problem, either.
 
The problem was the last thing the spokesman said.  Something to the effect that not buying silver could end up being the worst financial mistake you ever made.
 
What a patently ridiculous thing to say.
 
Spend even just a moment picking that apart.  Missing out on a possible (but highly speculative) return on a nontraditional asset which would, at most, make up maybe 5% to 10% of your total savings (probably less) is going to be the worst thing to ever happen in your financial life?  Come on.
 
I can think of a long list of things which are both more likely to happen and would have a bigger negative impact.  I’ll share a few in just a second to prove the point.
 
Rate of return is the flashy variable in the investment and capital growth equation.  It’s the most fun to talk about (i.e. brag about), it’s the easiest to get preoccupied with, it’s the one that tends to spark the most feelings of regret when we miss out on it.  But just because it is the loudmouth of the bunch, doesn’t necessarily make it the most important.
 
Big returns are great when they happen.  No one I have ever met is opposed to them – when they actually occur.  That’s why they make such good advertising fodder.  Otherwise sensible people can be easily distracted from all of the other important parts of the exercise when the prospect of missing out on a juicy windfall is put onto the table.
 
Don’t get me wrong:  you need returns.  Over time, most people even need some pretty good ones now and again.  But in the final analysis, if the success or failure of your plan comes down to one particular investment (whether it’s a big loser or a big winner), that’s an indicator that it was an unbalanced plan to begin with. 
 
Obviously not getting a return will have a mathematical impact on your balances.  But even if you do pick up that eye-popping 200%  - on what, 3% of your capital? – then the net effect is the equivalent of one year of your whole portfolio earning about what it should have earned anyway:  200% x 3% = 6%.  If not earning 6% in one year of your decades-long retirement management process is the worst thing that ever happens, then you my friend, have dodge many, many bullets.  Good for you; but don’t plan on it.
 
The kinds of things that are more likely to do substantial damage in real-life cases are much more boring.  It’s usually stuff that gets neglected year after year, and the damage builds, cumulative effect style, without even realizing it. 
 
Maybe you let money just languish in between investments, not completing the compounding cycle, or staying in cash because you are too busy planning a trip or re-sodding your yard to have time to mess with it. 
 
Maybe you end up getting hit with a medical expense which you knew for years you should have insured yourself against, but never did. 
 
Perhaps you allow yourself to get talked into making an “investment” into some really goofy thing a friend or family member wants to try, and even though you know it’s a bad idea, you agree out of some sense of wanting to be supportive. 
 
Or what about this all-too-common one:  leaving your money exposed to substantial investment risk past the point that you need it to grow.  In other words, not leaving the field of battle once you’ve achieved victory, and ending up forfeiting the victory to some future moment of rotten luck.
 
Don’t even get me started on people who don’t bother to do any meaningful retirement prep in the first place (i.e. the majority of the population).
 
These are the kinds of things that have the potential to be the worst mistakes.  Like, ever.
 
But missing out on a few silver coins appreciating in value?  If that’s the worst thing that ever happens you will have lived a charmed life. 

By Brad Thomason, CPA
 
I don’t spend a lot of time talking about budgets, living within your means and having some dollars left over for savings.  My focus is retirement, and that’s the primary thing my audience is interested in hearing about (I think…).  To my way of thinking, those aren’t really retirement topics, per se.  Let me explain.
 
 It’s not a matter of those things not affecting retirement.  In fact, they impact it quite a lot.  Without them, it’s hard to see how retirement, as a financial proposition, could even be a thing.   
 
In other words, if you don’t have those basics out of the way, we can’t really talk about retirement in the first place.  They are essentially the entry requirements.  Retirement is about growing capital, over time, so that it can support income withdrawals in the future.  Can’t have much of a capital discussion if there’s no capital, nor any basis for knowing what the income requirements might be.
 
So my tendency to not talk about them is an assumption that anyone listening already has them squared away.  Or at least knows they will have to, and is working on it.  Either way, there’s not much need for me to bring it up. 
 
But since we are now on the topic, let me mention another assumption.  It might not be as obvious as I think these other factors are.
 
Just because you know that you are going to have some bills in the future, and are saving money today to help with that effort, it doesn’t mean there’s a match between the two.  The exercise, ultimately, is not about merely putting back some money, but enough.
 
How much is enough?  Well, as we’ve addressed over a great many of the materials on this site, that’s not an easy thing to answer.  The process for answering it is well defined and logical, maybe even so much so that it would be fair to call it simple (i.e. not complicated).  But that’s not the same thing as easy, and in our experience, any of the one-step approaches leave something to be desired.
 
But you can get a broad sense by merely observing a handful of facts that you already have at your disposal.  For instance, you probably know about what you spend over the course of a typical year right now.  You probably know what your annual income is.  What are those amounts multiplied by 15, or 20 or 25?
 
You may not spend as much in retirement as you do now (though that’s often not the given that some people expect it to be), and you’ll have some help from Social Security.  Maybe (hopefully) your capital earns net returns – meaning not only that it makes positive returns, but that it does not give them back at some later date due to losses. 
 
On the other side of the equation, inflation will erode your purchasing power over the decades of your retirement.  And medical expenses may show up in ways that pay no attention at all to your yearly budget assumptions.  The interplay of these factors, for and against, has a lot of impact on what the answer ends up being. 
 
Then again, to some extent, those impact items have a tendency to at least partially cancel each other out.  So using your current income and expense levels as the basis for some rough estimates is not completely off base.
 
I talk to folks all the time who ask me how they are doing.  They show me their numbers, they tell me what they earn and spend.  Frequently I take a glance and tell them, surface level, it looks pretty good.
 
Sometimes though I get the question from people who should frankly already know the answer.  I’m not trying to be mean when I say that, and I try not to be unkind to the people who ask me.  But if your savings equal one or two times what you spend every year, is there really any question about how long that’s likely to last?
 
Complex discussions almost always exist within a context of certain assumptions.  To meaningfully discuss retirement implies that there is already a level of financial control in place which covers such basics as budgets, consciousness of expense levels, and the accumulation of savings to fuel the capital growth effort.  But those aren’t the only assumptions. 
 
In addition, there is a requirement of something we might think of as scale.  A sense that the resources bear a logical relationship to the job we are asking them to do.  It is not always apparent, without some measurement and calculation, what the exact match needs to be.  But when the mismatch is great enough, no such efforts are required.  Such disparities are obvious if we only look. 
 
If we look and find them, then we need to realize that the immediate goal should be to get them squared away.  Until they are taken out of the equation, all of the rest of the work we need to do to get a retirement win is going to be difficult if not impossible.
 
Knowing what the assumptions are and making sure they are met is a basic step.  So basic it is often overlooked.  But just because it doesn’t get the airtime that other topics get doesn’t mean it isn’t important.  In fact, just the opposite is true.

By Brad Thomason, CPA
 
Jiu Jitsu is a Japanese martial art which is essentially a form of wrestling.  Most cultures around the world developed their own styles of wrestling, and this particular one developed alongside Judo, and in response to the proposition of an unarmed peasant having to take on an armed samurai wearing armor.  That’s the legend, anyway.
 
Obviously such a match-up would not be a very fair fight.  But the result of trying to figure out how to deal with this problem was a surprisingly complex set of maneuvers which exploit bio mechanics (elbows only bend one way, for instance), off-balancing your opponent, and generally trying to use physics and forethought to create an advantage where normally you would have no hope at all of winning.  It has become a huge international sport, and has wide appeal to people looking for physical activity that is both vigorous and has to be thought about pretty deeply, too.  Many have referred to it as whole-body chess.
 
As you might imagine, if you are up against an experienced opponent, you can find yourself in some truly awful positions.  A lot of the training comes down to learning what these positions are, how to do them to other people, and what to do about it if you find yourself on the receiving end.
 
A significant portion of the advice about how to deal with a bad position comes down to ‘don’t get yourself in that position in the first place.’  Which is about the most unhelpful advice in the world if you are in fact already there.  Yet it happens to be good advice:  prevention really does trump cure in a lot of those situations. If you watch the best guys on the mat for a while, you come to realize that what makes them so good is their ability to stay out of trouble to begin with.
 
Serious discussions about retirement usually take place among people who are at least fifty, and often older.  The reasons are plain enough.  Even if you know that retirement is out there in the future, the needs of a growing career and maybe a growing family too, are what soak up virtually all of the attention span when you are younger.
 
But as folks get closer to actually having to retire, they naturally start to think about it more.  They get more interested in making sure to take the steps they need to take, and become more and more preoccupied with whether or not they have the bases covered.
 
It turns out that even if most of the heavy lifting gets done after fifty, what you do as a younger person sets the stage for how tough the job is when you are older.  Below I’ve listed four things that a person can do to keep their future self from having to work too hard to get out of a bad spot:
 
1.        Be capital efficient.  Pay attention to when it is time to sell and reinvest.  Make sure that interest checks and dividend payments don’t just lie around doing nothing.  Turn them into investment capital; that’s what makes compounding happen, and as we all know, compounding is the heart of the secret sauce.
2.       Be proactive about setting the stage for future income streams.  That could be by way of a job with an old-fashioned pension plan, or getting some rental houses that the tenants can spend the next 15 years or so paying the debt down on, or even something in the farming or forestry realm like a stand of pine trees (a favorite here in Alabama) or something similar.  Having ongoing income after you no longer receive a paycheck, even if it only covers a modest portion of your ultimate retirement withdrawal needs, can count for a lot more than you might think from a casual glance.
3.       Have good outcomes when you risk capital in pursuit of a return.  Admittedly, there’s luck involved with this one.  Then again, the prudent tend to have better luck than the imprudent.  If the market rewards you for your risk, and your own sense of caution keeps you from taking on goofy risks, the net effect will be that the you of tomorrow has more resources available to make everything work out.
4.       Front load your savings.  In order for you to benefit as much as possible from a long compounding period, you not only have to start early, you have to have enough capital for it to make a difference.  The great thing about retirement savings is that both time and capital act as force multipliers.  But you have to have some force to multiply in the first place.  Saving a bigger portion of your earnings in the early years, so that your balances can reach significant sums while there’s still a lot of time left on the clock for compounding to work, is one of the most sure-fire retirement tactics out there.   
 
As you get older the focus shifts from growing the size of your nest egg, to protecting what you already have.  The shift to lower risk assets in most instances means that overall return levels are going to come down too, later in life.
 
When a person can do one or more of the things listed above when they are young, it puts the future self in a much better place to be able to accept these lower return levels that are common to the less risky asset classes.
 
Even if you no longer think of yourself as being all that young, there are probably still things which you can do today that will make tomorrow a little easier.  This is especially true if you are still working, or could be working - even to some degree - if you wanted to be.
 
Fighting out of a bad position is something that some folks just have to do.  It’s unfortunate, but it happens.  That’s why it’s important to spend some time looking at how to not get all the way into the bad position in the first place.  Even if it ends up happening to someone, maybe that someone doesn’t have to be you.  Starting sooner is better when it comes to prevention.  But even if things have already started to progress in the negative direction, there may still be things you can do to contain the damage and keep the situation from getting worse.
 
If you think about it, all of us make decisions everyday on behalf of the person we are going to become next week, next month, next year.  Makes a lot of sense to help them – us – out, if possible.  At the very least, we don’t want to make it harder for our future selves than it has to be.   Either way, being aware that what we do in the present has impacts out into the future is the first step.  But only the first step.  Since it is beyond our power to keep the present from becoming the future anyway, ideally we should use the event to our advantage.

By Brad Thomason, CPA

​​The S&P 500 just closed up 28% for the year of 2019.  Which is a big number, and an accurate number.
 
But is it a misleading number?
 
A big part of the reason that 2019 looks so good, is because 2018 finished the year basically at the bottom of a pretty sizeable dip.  So the recovery of that dip boosted the results for 2019. 
 
How much so?  Well, let’s put it this way.  While the 12-month result was 28%, the 15-month result was around 10.5%.  Same stock market.  Same impact on any holdings you had going into the Q4 2018 dip.  Now, to be sure, 10.5% is still a healthy increase.  But it certainly isn’t the same as the 12-month number.
 
The 24-month annualized average shows an even more tame picture, by the way:  about 7%, compounded for both years.
 
Part of the problem with trying to interpret statistical information about outside events is that it is not always clear what the implications are for your portfolio.   For instance, if you had two investors, one of whom was fully invested 24 months ago (a typical scenario for a retiree) versus someone who started their investing career on 1/1/2019, you would have vastly different results from the exact same market. 
 
So part of the challenge of answering the question ‘how does this affect me?’ is tied to all of the particularities of your individual story.
 
External measurements mean different things for different people; and even different things depending on how many weeks or months you include in the measurement picture.  That’s a lot of non-specificity, you know?
 
When looking for more solid ground, one approach is to focus more on internal measurements than the external ones.
 
You know how much your current investment balances are.
 
You know how you have your capital allocated among the various asset classes.
 
You know what percentage of your investments could be affected by a major downturn in a particular market or some other sort of loss.
 
You know more or less how much you are going to need to spend for planned items in a typical year.
 
These are the elements which form the backbone of both a current assessment, and the basis for future plans. 
 
Moreover, there are important principles which don’t change at all, whether the market is going up, going down, or doing nothing at all.  These include the understanding that when the retirement period starts, the job of the portfolio changes from growing, to providing a source for income withdrawals.  Another one?  The understanding that the risk level needs to come down as you age, and that the way that happens mechanically is by reallocating balances, or depleting higher risk pools of money ahead of lower risk pools (and in most real-world cases, likely some combination of the two).
 
When the stock market has a nice run, and you end up with more money than you had in the past, that’s a good thing.  For sure, it is.  Great to experience, and fun to talk about.
 
But don’t let that distract you from the more enduring aspects of what’s important.  You won’t find them listed in the Wall Street Journal.  Instead, you already have that information at your finger tips – or if you don’t you certainly know how to get to it.  That’s the stuff you should be paying the most attention to as you plan, act, monitor and adjust your finances in the service of getting an eventual win in the retirement game.

By Brad Thomason, CPA​
 
I love to cook.  Have for a really long time.  But I didn’t necessarily have the smoothest of starts.  If you had known me back when I was a young man then you would have been impressed with the amount of destruction that I could visit upon a kitchen during the preparation of a meal.
 
To some extent I did it because I could.  I spent a lot of time on the weekends at a farm house/hunting camp with all of my friends, and the rule was that if you cooked you didn’t have to clean.  I loved cooking and hated cleaning, so this didn’t even register as a choice.  But since that was my context, that was my assumption when I cooked elsewhere, too; whether for roommates at college or even back at Mom and Dad’s for holidays.  I cooked, and others had to undo the damage.
 
But there was another aspect of my mess making, which is why I’m bringing all of this up.  It was always very important to me to do a good job with the food.  Better than good, actually.  In those early days, when I was still learning to develop tastes and manage the process of getting everything ready at the same time, I stayed right on the edge of being overwhelmed.  Every minute I was in the kitchen was a minute in which I felt things could rapidly spiral into total collapse.  I’m not sure I would have described it like this at a time, but I was essentially making a declaration to my diners:  you can have good food to eat or a small mess to clean, but you can’t have both.  I didn’t have the skill level to deliver both at the same time.  So I didn’t try.  I made the choice for them, and settled on the food.
 
Sometimes we can’t accomplish everything we’d like to do at the same time.  It is pretty typical for most adults to have more than one reason for why they are doing something.  But what happens when all of those reasons can’t be met at once? 
 
Well, nowadays I can walk through a kitchen with a much lighter step.  Like any practiced skill, I can handle all but the most complicated of meals with only about half of my brain switched on.  Rinsing bowls, wiping counters, sharpening knives, adding to the grocery list, sorting things in the refrigerator – I can do them all while running a pair of sauté pans and keeping an eye on the bread to snatch it from the oven when it gets to the right shade of brown.  No problem. 
 
But even though I don’t still cook the way I used to, I haven’t forgotten the lesson of knowing when to focus on the most important win, when all of the wins can’t be had together.  This has become a key principle in my career, both as an advisor, and as a business owner.  Sometimes we have a single challenge that is so important to the overall equation that it makes it OK to fail on all of the others if doing so gives us the focus and resources to get the one main one.  That’s not always the situation.  But sometimes it is.  Recognizing when you are in the midst of such a situation is a key to being able to wade through the tough stuff to get to the other side.
 
As we roll in to the end of the year I hope that you and your family have a chance to have many good meals together, and that the person doing the cooking doesn’t wreck the place too badly.  The end of the year is of course also a time for reflection on the year drawing to a close and the one about to start.
 
When you look back at 2019, did you get the win you were after?  When you think about how you’d like to see things go for 2020, is there one particular thing that you need to have happen even if nothing else gets accomplished?  I hope that you can make progress and find success on many undertakings.  But don’t underestimate the power of knowing which one is most important.  Throwing all of your effort behind that one most important thing may lead to results that are simply impossible when split focus is the tactic of the day.  You need to be thoughtful about the things which may go unaddressed – a lot more thoughtful than I was back during my early reign of kitchen terror.  But don’t automatically rule out the possibility that those lesser goals may be part of the price you have to pay to get the big one.  Sometimes, the big one is worth it. 

By Brad Thomason, CPA
 
 
What kinds of things do you spend your time thinking about? 
 
It’s a simple question, but one that’s not so easy to answer.  As I’m sure you are aware, in the span of just a couple of minutes we can jump from one topic to the next and end up a long way from where we were in less than the time it takes to drink a cup of coffee.
 
I raise the question though because it ends up being a factor in the mission of planning for retirement income.  As we have discussed before (and as you have probably seen from any number of other sources), most people report that they don’t really spend an adequate amount of time thinking about and working on their retirement plans.
 
I have been interested in the question of why that is for many years.  I have developed a degree of comfort with the belief that I will probably never have a complete answer.  But I think that one of the factors - a major one, most likely – is that at the end of a typical day, most people are already too mentally fatigued to get in the right frame of mind to make headway on the project.  As such, it gets pushed to tomorrow.  Tomorrow the same thing happens.  Next thing you know, 30 years have passed.
 
When we go looking for means to bring about change in basic human behavior and the default ways in which our brains work, I’m not sure there’s much to be encouraged about.  Someone pointed out a long time ago that we are creatures of habit, and the evidence seems resolute on that point.
 
But as to the matter of why we got mentally fatigued in the first place though, there may be something we can work with there.  I have noticed over the years that there is a category of decisions which people are willing to attack with great vigor, but which in the end, don’t amount to a lot.  Being on the lookout for these can yield some big dividends.
 
I first noticed this set of circumstances back in the days when people still had land lines and there was a great quest to find the cheapest long distance provider.  The latter day version has to do with which phone and which data plan.  Other versions include obsessing over what kind of car to get, and/or whether to lease or buy.  Picking a vacation spot is for some, a strong contender.  The fact that Vacationer Planner is now a viable profession tells us a lot about the importance assigned to such decisions.
 
I think what is going on here is that people see these decisions sitting there, and they appear to be easy as compared to retirement planning and similar activities.  People, perhaps unconsciously, do some mental math and conclude that while they don’t have enough left in the tank to tackle the big stuff, they probably do have enough to tackle one of these lesser questions.
 
But here’s where it gets interesting.  Once they get involved, they end up turning all of the higher level brain functions back to the ‘on’ position.  They start spending mental energy at a high rate.  They go about these minor decisions as if they were of great import; they do a job that would earn them an A if the whole thing were an assignment in graduate school.     
 
Which in turns makes them even more mentally exhausted, and that much less likely to take up more important questions and actions.
 
The little stuff ends up getting the attention, and the big stuff not only stays on the shelf, it gets pushed even further toward the back.
 
Now obviously the underlying theme here is prioritization.  But this is more than a mere call for prioritization.  We need to understand that when we don’t prioritize, not only does the more important thing go undone for the moment, there is also the possibility that we have made it even more unlikely that we’ll get to the important thing anytime soon.  If a normal day greatly diminishes our stores of mental energy, adding minor decisions on top can fully deplete us – perhaps to such a degree that we can’t recover from just a single night of sleep. 
 
An easy way to think about prioritizing decisions is to ask yourself the simple question of whether or not the thing you are contemplating is going to have an impact on when you can retire.  If not, it may not be a major decision.
 
As for the little stuff, I’m not saying to ignore it.  I’m just suggesting you recognize those decisions for what they are and treat them accordingly.
 
If you are wrestling with picking a data plan and the choices are $130 a month versus $150 a month, realize that you are not making a $1,800 decision ($150x12).  You are making a $240 decision ($150-$130=$20; $20x12=240).  As such, that’s probably like a five or ten minute decision.  Not an hours-long process, or an entire Saturday lost to driving back and forth between competing providers trying to get the best deal.   Knock it out and move on.  I mean how wrong could you possibly be in that scenario?
 
In order to tackle big decisions, you need some mental energy available.  It’s important to have an awareness of which decisions are big ones and which aren’t, so that you will know how to allocate your limited attention span (which is not an insult, just an apt description of how all of us work).  If you burn it up on the little stuff, not only will the big stuff remain unsettled in that moment, it will probably also mean you need to recover before you are in the right frame of mind, pushing it even further out into the future.
 
No one would purposefully take the position that having the right cable package is better than having a well-engineered retirement.  Just make sure to be aware of how you spend your time and attention, so that you don’t inadvertently end up putting more energy into the small thing than you put into the big thing.