Money Motivation

Motivation is a funny thing. When you have it, it’s great, but when you don’t, it’s tough to get it back. Some people are just naturally more motivated than others. And some people have to watch Chariots of Fire on loop and cover their office with inspirational posters that say things like “Believe in You” to ever get anything done.

So how do you stay motivated to save and invest? First, you should understand that there are two basic types of motivation:  extrinsic and intrinsic. Extrinsic motivation is what we usually think of as the carrot or the stick. Your motivation comes from an external promise to give you a reward or punishment—think bonus for hard work or jail for committing a crime.

Intrinsic motivation is the opposite. It comes purely from an internal drive—you aren’t trying to gain anyone’s approval, but there isn’t anyone waiting to give you a pat on the back either. Intrinsic motivation is why you workout, learn a new language, or give to charity. You do these things just for you.

And that’s where you have to pull the motivation to save. Unfortunately, saving is not a one-time decision. You may be reading this post thinking, “Yeah, saving is a really wise thing to do. I’m going to do it.” But the next time you want to buy something outside your budget, motivation wanes and saving drops in priority.

So how can we reduce the number of times we have to decide to save? Automate. Each year, decide what percentage of your salary you will contribute to your 401(k) and let it ride. Decide how much you can contribute to an IRA, divide that number by twelve, and set a monthly draft. The same process goes for any other savings vehicle you wish to use—HSA, brokerage account, or even just a regular savings account.

We know it’s good for us. We even have wise investors like Charlie Munger saying, “Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer.” But it’s still a challenge to stay motivated, so eliminate the number of times you have to draw from that intrinsic motivation.

A financial advisor can tell you “good job” and provide a little extrinsic motivation, but the day-to-day drive has to come from within. And since we know our intrinsic motivation is fickle, automate your saving to achieve greater success.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Indexing, Forty Years Later

As a proponent of passive investing, I want to acknowledge a major historic milestone: This summer the 500 Index Fund turned 40. Originally named the First Index Investment Trust, it was created by John C. Bogle in 1976 and introduced the world to passive index investing. Bogle is the founder of The Vanguard Group and served as CEO for over twenty years.

This fund has always had the same objective—to track the performance of the 500 largest US companies. And we now acknowledge the advantages of this approach to investing, but at the time, the fund was deemed “Bogle’s Folly” because the financial industry looked down on utilizing a passive approach. Active fund managers did not think that they could be replaced.

However, as Vanguard’s Michael Buek observes, “The case for indexing is based on the belief that investors in aggregate are unable to beat the market.” Everyone wants to think they’re a rock star investor, and they definitely exist. David Swensen, Chief Investment Officer of Yale’s Endowment, has averaged 13.9% returns for the past twenty years, which is about 4.5% higher than the S&P 500.

But for every David Swensen, there is a multitude of other managers like Lucidus Capital Partners, Fortress Investment Group, or SAB Capital Management, which are just three of the 979 hedge funds that closed in 2015. After a tough year of losses and volatility, they could no longer continue, and as a result, 2015 was the first year since the 2008 financial crisis that more hedge funds closed than opened.

And on top of lackluster performance, active management also bears a cost. Buek continues, “Their active returns are significantly eroded by costs. Therefore, investors who own the entire market at a very low cost through indexing reduce the hurdles that make successful active management so difficult over the long term.” In other words, you win by doing less.

The active versus passive debate lives on. But for those who endorse a passive approach, it is important to see where the industry has been and reflect on where the industry will go.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Hamilton, The Money Man

Until recently, Alexander Hamilton and his contributions as a Founding Father have been largely overlooked. In fact, my strongest mental association with his name is still the original ‘Got Milk?’ commercial from 1993—with ten thousand dollars on the line, a gameshow caller can’t answer the question, “Who shot Alexander Hamilton?” because his mouth was full of peanut butter.

But this summer, I redeemed myself by reading Alexander Hamilton by Ron Chernow. This biography inspired Lin-Manuel Miranda to write his Broadway musical, which has brought much love and attention to a great leader that is long overdue. It chronicles Hamilton’s political influence and highlights his role as the primary architect of our country’s entire financial system.

When he became the country’s first Secretary of Treasury, it was not his first choice; nonetheless, he commented, “It is the situation in which I can do [the] most good.” And he was absolutely right because not only did he create the Federal Reserve, establish our modern banking system, and guide economic policy throughout George Washington’s entire administration; he also set precedent for securities trading in the United States.

We take for granted that securities can be bought and sold freely, transferring along with them all rights and privileges, but it wasn’t always so. After the Revolutionary War, many veterans sold the IOUs for their wages to speculators who paid just pennies on the dollar. But once the new government was fully established and a system for repayment was created, their value skyrocketed.

At the time, many people thought it was unfair that these soldiers lost out on their pay. They had made tremendous sacrifices, yet speculators garnered their reward. Obviously, this issue was politically sensitive, and Hamilton could have pandered to the masses by arguing only the obvious impracticalities of tracking down original owners.

Instead, Chernow explains, “Hamilton stole the moral high ground from opponents and established the legal and moral basis for securities trading in America:  the notion that securities are freely transferable and that buyers assume all rights to profit or loss in transactions.” He understood that there was too much at stake to surrender to political expediency, and this concept is fundamental to securities law today.

Sure, he is on the ten dollar bill and was famously killed by Aaron Burr, but the story of this Founding Father goes much deeper than that. Without him, we may not have some of the basic tenants that govern the greatest financial system in history.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Social Media, Spend Money

Social media advertising is big business. There are virtual unknowns like Liz Eswein, who joined Instagram back in 2010 and snagged the handle @NewYorkCity. She now has over 1.2 million followers and charges companies $15,000 per shot and $1 per like, which adds up pretty quickly since some of her posts get over 23,000 likes.

So why are companies willing to pay so much money for these posts? In a recent poll conducted on behalf of the AICPA, nearly 4 out of 10 respondents with social media accounts said that they shopped for similar products or experiences after seeing them on someone else’s account. Essentially, it’s the new wave of guerrilla marketing.

For example, when you follow someone like, I don’t know, say Dwayne “The Rock” Johnson, who constantly posts pictures from his “Project Rock” collection with Under Armour, it shouldn’t be a surprise that you end up wanting to buy a new duffle bag for the gym or a Rock Clock™ to wake you up in the morning with inspirational messages from Johnson himself.

So what does this mean for you and your social media consuming behavior? Really, it just means that you need to be aware of what a powerful effect it can have. When you see the picture perfect moments from someone’s vacation, don’t start planning something that’s way outside your budget. Be happy that your friends got some R&R, and stick to the financial plan you have in place.

And when you get caught in celebrity posts or the inescapable vortex of @richkidsofinstagram, don’t start Googling how much it costs to charter a jet for the weekend. Realize that those accounts are purely for entertainment and shouldn’t alter your own reality—you know the one where it’s not reasonable to take champagne showers and wear three gold watches at the same time.

We always need to be aware of why we make financial decisions. If we can identify the motive, then we can quickly determine whether or not it’s in our best interest. But we should be especially aware when social media is the primary influencer.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Defeating Your Natural Inclination

Malcolm Gladwell has made me think more than any other author or teacher I’ve ever encountered. He has written many influential books including The Tipping Point, Blink, Outliers, and David and Goliath, all of which are among my favorite, and most recently, he created the podcast “Revisionist History.” He has a way of asking just the right questions to uncover detail and nuance that bring new revelations to light.

However, during a recent interview on the “Tim Ferriss Show,” he admitted to being naturally very impatient and sloppy with his work. He further explained that he has traditionally been a “good enough” person but realized early in his journalism career the importance of being thorough. As a result, he became obsessed with fixing these two flaws.

Expounding on this transformation, Gladwell noted, “When you observe or measure someone's natural inclinations, you haven't got a picture of them because you don't know what they do with those natural inclinations.” The world knows Gladwell as a perfectionist because he concentrated on his two biggest flaws to become their opposite. In other words, he didn’t allow his natural inclinations to dictate his actual behavior.

This is an extremely liberating idea. I think that so many times we judge ourselves by these natural inclinations and completely discount our capability for change. Whether you have always been out of shape or terrible with money, that does not have to be your identity forever. If you know that about yourself and want to change, you can start exercising or keeping up with your finances and become a better version of yourself.

Like with Gladwell, the change starts by recognizing the “problem” inclination. For example, I hear people say things like, “I’ve just never been very good with money,” which is especially tragic for people who actually make good money but can’t keep track of it. It’s as if making that statement excuses behavior and takes their personal actions out of the equation. It doesn’t. If you’ve never been good with money before, start now.

Paying attention to detail, getting in shape, and managing finances are not skills reserved for the world’s elite like competing in the Olympics or playing at Carnegie Hall. Developing these skills is simply a matter of recognizing your natural inclination and deciding to change it.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Good Intentions, Bad Results

Have you ever made big plans that would have been great except you completely failed on the execution? Maybe back in January you joined a new gym, bought new workout clothes, and even started drinking kale smoothies, but you forgot to, you know, workout? It happens. It’s even worse when your intent is to save money, but the result is that you end up spending even more.

I’m talking about the articles you read in popular “personal finance” magazines that feature credit card hacks to upgrade flights, secure free hotels, or even pay for entire vacations. The articles highlight which credit cards to sign up for and how their benefits accumulate, usually through points or miles. But here’s the thing—to earn points you have to spend money.

Now, if it’s money you will spend anyway, then that is absolutely fine. I get cash rewards on my personal card all the time, and I have paid for two flights this summer with points from my business card. So I totally get it. But you have to be aware of the psychology that goes into your purchases. Do not justify a purchase by thinking about the points you will earn. In other words, don’t spend a dollar to save a nickel—you’re still out 95 cents.

But if you have accumulated rewards by using a credit card for regular purchases, make sure you actually use them. According to a recent Harris poll, while 58% of Americans think it is financially prudent to use credit cards “points,” only 15% have actually used them to help pay for a trip. So it sounds like a lot of people are racking up rewards that they never even use.

And if you were spending money with rewards as some kind of justification, then the illusion of saving by spending should be completely busted by now, especially if you are part of the 14% of Americans who have used their credit card to finance a trip they couldn’t pay off before their next billing cycle. The penalties and interest you will incur far outweigh any benefit you may have been seeking.

I’m not going to preach against credit cards because I use them every day. They are extremely convenient and provide a layer of protection against fraud. But do not fall prey to the false psychology of “building rewards.” It’s just a euphemism for spending money.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Discipline Equals Freedom

If this mantra sounds hardcore, maybe it’s because I heard it from Jocko Willink, SEAL commander of the most decorated unit of the Iraqi war, on Tim Ferriss’ podcast last year. But you don’t need a Silver Star for this idea to apply to you. In fact, the essence of this mantra can even be distilled into something very applicable to your financial life.

Now, even Willink will admit that this concept sounds counter intuitive—when we think of discipline, we think of rules and restrictions, not freedom. But he broke it down by explaining that while he was serving, his teams had standard operating procedures (SOPs) for everything. And while SOPs are essentially a list of strict guidelines for a given situation, they give everyone the freedom to act independently because they know exactly what everyone else is doing.

For example, he could tell four guys to take down a building, and because they were all highly trained and strictly followed SOPs, they knew exactly what he wanted them to do without explanation. Likewise, Willink knew exactly what they were going to do.  This understanding left both sides confident of what was about to happen and free to calmly perform the immediate task and concentrate on bigger things like, you know, staying alive.

The same can be said of your financial life. If you are disciplined with your finances, you will have the freedom to spend money where you want. Your budget defines SOPs, so within your budget, you establish how much you save and spend each month. Saving is always the priority, but if you have budgeted for an expensive vacation or new car, you have the freedom to spend that money guilt free.

Conversely, if you are not disciplined but spend impulsively, you will not have money left for the things you would truly enjoy. For example, if you budget for a much needed September vacation in Bora Bora but throw your budget out the window in March for an impulse bathroom renovation, you will not be free to enjoy the vacation you really wanted.

Long story short, in addition to being a decorated war veteran, Willink unknowingly gives some pretty good financial advice too. If you are disciplined with your budget, you will be free to truly enjoy your money.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Millionaire Next Door, Part 3

This will be my third and final post about The Millionaire Next Door, so I wanted to drive home the central theme about the inverse relationship between consumption and wealth accumulation. Instinctively, we are much more prone to only contemplate wealth through the lens of income—we seek to earn more to accumulate wealth, but that is only half of the equation.

The authors note, “The majority of people do not have the ability to increase their incomes significantly. Yet income is a positive correlate of wealth. What, then, is our message? If you cannot increase your compensation significantly, become wealthy some other way. Do it defensively.” In other words, you don’t have to start a side business or even wait around for your next raise. You can immediately increase your wealth by decreasing consumption.

Ironically, the authors add, “It’s much easier in America to earn a lot than it is to accumulate wealth. Why is this the case? Because we are a consumption-oriented society.” Our culture lends itself well to over-spending—everyone over-spends, which puts more money in the economy for everyone else to over-spend. So everyone earns a living, but no one accumulates wealth because they give it back when they buy stuff from everyone else.

And the problem is compounded when you think about how spending decisions are interlinked. It usually starts with a house and escalates from there. The authors warn, “Living in [high consumption] neighborhoods requires more than just being able to pay the mortgage. To fit in, one needs to “look the part” in terms of one’s clothing, landscaping, home maintenance, automobiles, furnishings, and so on. And don’t forget to add high property taxes to all the other items.” So you think you’re just buying a house, but then you feel pressure to buy so much more.

Hear me when I say that there’s nothing wrong with having nice things. But we all have choices to make, so just make sure that you are spending less than you can afford. It is easy to want just a little more, but the satisfaction of financial independence will drastically overshadow the fleeting joy of an impulse purchase.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Millionaire Next Door, Part 2

As I mentioned in my previous post, The Millionaire Next Door has been on my reading list for a number of years now. Honestly, it took me this long to read because it just sounds boring. The gist of the book is:  don’t spend your money on stupid stuff and save—which is neither revelatory nor exciting. But the individual stories within this book have made me much more self-reflective than I thought I would be.

So this week I want to share another story. The book gives an account of a high-earning executive who “can’t afford” to participate in his employer’s stock purchase plan. As you can probably guess, his high salary was eaten up by a monthly mortgage in excess of $4,000, car leases, country club dues, and taxes. Yet despite his spending, he stated that one of his primary personal goals was financial independence.

Unfortunately, there is no way that this series of decisions will ever lead to any meaningful wealth accumulation. Or as the authors note, “He has sold his financial independence,” which is more appropriate because it puts the responsibility back on the executive. To say, “I can’t afford it,” creates a helpless and defensible connotation, but the executive has made identifiable decisions that led to his situation.

This story begs the question:  How can the executive not see what he’s doing? To have any type of high-earning job, the general assumption is a good education and a moderate degree of intelligence. But those factors do not automatically guarantee accumulation of wealth. Even if you’re well educated and have a high-paying job, you still have to plan your finances and sacrifice. 

Of course, sacrifice will look different for everyone. For the executive, maybe he should downsize his house in order to have a more affordable mortgage payment. Or maybe instead of leasing what I can only assume are luxury vehicles, he could purchase something more modest with cash. There are a number of things he can adjust in order to be able to participate in his employer’s stock purchase plan, but he chooses not to.

The authors also note, “Remember, wealth is blind. It cares not if its patrons are well educated,” which is both humbling and encouraging. To those with multiple degrees and a high-paying job, it reminds them that their accomplishments do not entitle them to wealth. And to those from a more modest background, it assures them that they are not excluded from the opportunity to save and accumulate.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Millionaire Next Door, Part 1

The Millionaire Next Door is a book that I have been meaning to read for about ten years. I finally started it, and even though I’m only half way through, I wanted to share some of its insights. One of my favorite quotes so far is from one of the “next door” millionaires interviewed for their study:  “I don’t own big hats, but I have a lot of cattle.” In other words, he doesn’t look like much, but he’s got plenty of money in the bank.

Obviously he’s from Texas, and he owns a small business that rebuilds diesel engines—not very sexy but he does well for himself. He went on to say, “My business does not look pretty. I don’t play the part, don’t act it. When my British partners first met me, they thought I was one of our truck drivers. They looked all over my office, looked at everyone but me.”

It is fascinating to hear about small businesses that don’t look like much because they are dirty and rough but make a ton of money. When I was young, an entrepreneurial family friend said, “I would sell pig slop if I knew it would make me a million dollars.” But that idea of hard, or sometimes even gross, work doesn’t fit the prototypical idea of wealth, so people avoid it, even though it’s just as good a way as any to accumulate a lot of “cattle.”

You can also tell that it’s a point of pride for him that he doesn’t wear a suit or look like someone with a high net worth. Instead, he wears jeans and generally looks the same as the blue-collar men who work for him. I’m sure that as a practical matter in his line of business it just makes more sense for him to wear jeans. But he could certainly be flashier if he wanted to be.

Of course, there’s nothing wrong with having nice things, but as mentioned later in the book, “It is easier to purchase products that denote superiority than to be actually superior in economic achievement.” As a result, people waste time, money, and energy trying to convince the world of success that doesn’t exist. Instead, we should be more introspective and learn what it will take for each of us individually to achieve our own version success.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Comparative Happiness

Comparison is human nature. As a society, we constantly compare not only physical appearances but also our careers, families, and of course wealth. You hear people say things like, “I mean he’s rich, but he’s not that rich,” because people keep a mental score. Studies even show that people say they are happier making less, as long as it is equal to or more than their neighbor. That’s comparative happiness.

For example, if Joe makes $50,000 per year while his neighbor only makes $40,000, Joe says he’s happier than if he made $100,000 per year while his neighbor made $150,000. In absolute terms, they are both much better off in the second scenario. But because of comparative happiness, Joe feels happier making less money since it’s more than his neighbor—kind of messed up.

But this type of happiness isn’t true happiness. It’s like a combination of the high from impulse shopping and schadenfreude. I know I had good parents, but didn’t everyone learn at a young age to just do your best and not worry about everybody else? I thought that was Personal Happiness 101.

Now, don’t get me wrong. We have all had run-ins with someone from our past and been momentarily taken aback by their apparent success. Maybe you notice their watch or see their car, and at least for a moment, jealousy flares up inside of you. That’s normal and understandable, but that’s also where it should stop.

Don’t dwell on it or compare your own success to theirs. Your plan and your goals are all that should matter to you. Moreover, you never know what’s truly going on with people. They may look wildly successful on the surface, but underneath, it’s all paid for on credit.

Also, they may not have the family love and support that you do. You never know what’s going on with people at home. Or—and this is crazy—but maybe they are wildly successful AND have a great personal life, AND—that’s great for them. Don’t begrudge someone else’s success. Focus on your own.

There will always be someone who makes more money. Even if you catch up to Jim from high school, you forgot about Dave who went to Stanford and has a single digit employee ID at Fitbit. He cashed in his options and is set for retirement at 30.

The point is that you will inevitably compare yourself to other people. But you should rein it in quickly and refocus on yourself.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Choices

We have all heard that money isn’t everything. It’s important but shouldn’t be the only factor in decisions we make. Instead, there should be a healthy balance between supporting yourself and doing something you love. And that balance looks different for everyone.

For example, I went to a wedding reception over the weekend, and the entertainment for the party was a guy who is both a lawyer and a musician. He splits his year between the beaches of Florida and his Mississippi hometown. At each location, he does miscellaneous legal work and plays gigs at local bars. He can practice his trade, do what he loves, and make a living out of it.

Contrast that with a Wall Street Journal profile about Manuel Rodriguez who just retired from AIG with 62 years of service. He started as a messenger in 1954. Through his tenure, he was able to earn a college degree, build industry expertise, and move up the corporate ladder. Now at 79, he is finally cutting ties with his first and only employer. He was loyal to the company, and it was loyal to him.

Now, I think both of these stories are incredible. On the one hand, you have a guy who has found a way to couple doing what he loves with a new take on a traditional profession. And on the other, you have an extremely loyal man who has essentially given his life to the pursuit of honing an expertise and building relationships within one company. And while these two paths are completely different, both men seem fulfilled.

Unfortunately, society tends to judge the former and extoll the latter, which puts pressure on people to have a career that looks more like the “company man.” But if you work your entire career for a life you don’t even want, then what’s the point? If you are happier earning less but doing something you love, more power to you. There is no rule that says you have to pursue a six figure job so you can afford 2.5 kids, a black lab, and a white picket fence.

This is not an endorsement for being flaky or lazy. And I’m certainly not encouraging you to shirk the responsibilities of supporting a family. But everyone has choices. So make a sure you are happy living the life you’ve built.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Background Noise

Over the weekend, someone asked me what I thought about the market rally last week. To be honest, I didn’t know there was a rally. I knew the weekly auto draft to my investment accounts occurred and that those funds would be invested accordingly to my long term goals. But I never track the effects of oil prices, fed announcements, or any other “breaking” news.

Carl Richards talks about this concept in his book The Behavior Gap:  “If investment success is truly about behaving correctly over the long term and choosing investments within the context of your plan, what happens in the market day to day should have no impact on your decision-making.” In other words, who cares?

CNBC is background noise. It alternatingly sells greed and fear because they are exciting. But investing isn’t about excitement; it’s about building wealth. Richards further comments, “Saving money, avoiding speculative investments, and repeating that process over and over may not be sexy, but it gets the job done.” So don’t get distracted from the process by market news.

People like to think they control their own destiny, so absorbing financial news feels empowering. And conventional wisdom provides that a more informed decision is a better decision. But the key difference with market information is twofold: financial news is mostly dated or irrelevant.

How can “breaking” news be dated? If you are learning about it from your laptop while sipping green tea in your kitchen, there is definitely a Wall Street analyst that was hopped up on Adderall making a PowerPoint presentation at 3 a.m. about that very thing two days ago.

But mostly the news is just irrelevant—not because it won’t affect the market but because its effects are impossible to predict. The market will do what the market wants to do, even if it doesn’t make much sense. No one is trying to figure out what the effects should be; they are trying to figure out what everyone else thinks they should be. So it’s essentially a game of predicting emotional reaction.

Market movements represent short term reactions to daily events. Your financial goals should be long term, so one has little to do with the other.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Equities: The Rollercoaster Ride Worth Taking

When you’re a kid, rollercoasters are scary. I have a very vivid memory circa 1993 of my parents talking me into riding the Batman rollercoaster at Six Flags in Texas, the world’s first inverted rollercoaster. I wanted the fun and bragging rights, but I was also scared about getting on. Fortunately, my parents knew I would regret not riding and managed to get me on, and of course, I thought it was awesome.

Investing in equities is a very similar experience. You have to ride out the emotional ups and downs, but in the end you get to enjoy the benefits of sharing in the earnings of the world economy. Here are the answers to the two most common objections to this notion:

Can I just put money in a savings account?

You know how your grandparents always talked about going to the movies for a nickel when they were kids? Well, the last movie I saw cost $10.50, so it’s safe to say that the purchasing power of a dollar definitely fades over time. And while moderate inflation is good for the economy, it will erode your hard-earned savings.

Even if you were born in the mid 1980’s, you have seen inflation of over 122% during your lifetime. So it may make you feel warm and fuzzy that your principal investment is “safe” in a savings account, but that’s not actually true at all. You will retain the same nominal amount, but after inflation, the purchasing power of each dollar will decline and impede the accumulation of wealth.

What if the stock market tanks again?

If history is any indication, it probably will. I obviously wasn’t alive for the Great Depression of 1929, and I was only two in 1987. But I remember the tech bubble of 2000 and graduated college just after the housing bubble of 2008. I was fortunate enough to land a job, but so many other millennials were not as lucky. And the lasting effects of that market downturn have somewhat defined the millennial generation—we fully realize that a college degree doesn’t guarantee a career or stability, just massive amounts of student debt. Given this reality, it’s no wonder that younger investors are a bit gun shy when it comes to investing.

So if we are all but certain that the stock market will tank again, why put our money into it? We invest in the stock market because the earning power is incomparable over the long term. For example, if you had invested in the S&P 500 in October of 2007, just before the downturn, and kept your money invested through this week, you would still be up 35%. There is not a savings account in the world that can give that kind of return.

So even though investing in the stock market can be scary, it’s worth the ride. Over the long term, your investments will grow and allow you to accumulate wealth at a rate that outpaces inflation and any other investment type.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

The Waiting Game

Patience has got to be the worst virtue. I would much rather practice courage or prudence than focus on showing restraint and delaying gratification, especially now with the convenience of modern technology. For example, if I can’t order the Kindle edition from Amazon directly to my iPad, then guess what, I don’t read that book. It’s shameful but true.

However, patience can be an incredibly powerful tool, especially in the realm of personal finance. Showing restraint can save you money and allow you accumulate wealth over time:

Patient Purchases

Generally, if I’m going to spend over $100 on something, I make myself wait for at least a couple of weeks. If it’s a purchase of $500 or more, I generally wait over a month. The reason why is twofold: First, waiting ensures that I actually want what I’m buying. If a couple of weeks or a month go by and I still want whatever “thing” I have my eyes set on, then I probably really want it.

Second, even if I do still want that “thing,” often something better comes along, and I’m glad I haven’t already spent that discretionary money. So in the end, you have potentially either saved yourself from buying something you really didn’t want to begin with or enabled yourself to buy something even better. Either way, waiting pays off.

Patient Profits

The greatest tool for wealth accumulation is time. Saving a little now can accumulate into quite a lot through the power of compounding interest. For example, say you max out your Roth IRA from the age of 30 until you are 65. That’s 35 years of investing just $5,500 per year ($6,500 once you reach the age of 50). If you continue this practice and assume a modest return of 6% per year, your contributions will have accumulated to over $675,000 by the time you reach 65.

Now, that’s not enough to retire on a private island, but that’s a pretty decent sum considering the limited contributions made each year. Imagine the accumulation if you are fortunate enough to have an employer provided 401(k) where you can contribute $18,000 per year ($24,000 once you reach the age of 50). But the point remains the same: consistent contributions made over a long period of time create big returns on your money.

Impulse purchases and quick investment gains give our brains a temporary mood boost and make us feel good right now, but patient purchases and profits are the key to long term wealth accumulation.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Homeowner Perks

In an early episode of The Hitch Hiker’s Guide to the Galaxy, a character named Hotblack Desiato cannot be reached because, “He’s spending a year dead for tax reasons.” British humor rarely makes a lot of sense, but the absurdity of this comment speaks to the flawed logic that all too many people apply to purchasing decisions.

You should never buy anything for “tax reasons.” A former colleague of mine used to say, “Don’t spend a dollar just to save fifty cents,” referring to the practice of creating expenses to reduce taxes. For example, small business owners frequently want to wipe out taxable income by purchasing large equipment at year-end, which is great if they actually need the asset but a complete waste of money if they don’t. People get so wrapped up in the appeal of saving tax dollars that they lose sight of the overall objective—wealth accumulation.

The same rule applies to home ownership—you should buy because it makes financial sense to own rather than rent, not because it will save you taxes. That being said, there are tax benefits to owning a home that you should understand. Every taxpayer gets to choose whether they will take the standard deduction ($12,600 for married filing joint in 2016) or itemize. The most common itemized deductions are home-owner related:

Mortgage Interest

Unlike credit card interest, which isn’t deductible at all, and student loan interest, which is capped at $2,500, generally all of your mortgage interest is deductible. The main two requirements are that the home acquisition portion, meaning the amount borrowed to buy, build, or improve your home, is less than $1M and any other amount secured by your home, is less than $100K. So essentially, you can deduct interest on up to $1.1M in debt for your home, vacation home, or both.

Mortgage Insurance

Many first-time home buyers do not have a significant down payment for their house. As a result, the mortgage lender will require them to obtain mortgage insurance, which protects the lender in case of default. But the IRS essentially treats these payments as additional mortgage interest payments. However, this deduction will be limited or eliminated for married taxpayers who have adjusted gross income over $100K.

Property Taxes

Somehow it’s easier to stomach making payments to the state if you know they will reduce your federal income tax liability. Fortunately, real property taxes are added to state income tax and property tax as another itemized deduction.

All of these expenses are reported by your lending institution on a Form 1098 that you should receive around February. These are typically the biggest deductions for people, so be sure to include this form with your tax information.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

#BRK2016

There are really just two kinds of people in the world:  Those whose Twitter feed has recently been filled with either Met Gala pics or a running commentary on the Berkshire Hathaway annual shareholder meeting. And yet, somehow I had both, so for those who didn’t follow Warren Buffett’s yearly marathon Q&A about his company and life in general, here’s what you missed:

Buffett gives great investment advice, but he would make a terrible nutritionist/life coach:

In the most controversial question of the event, journalist Andrew Ross Sorkin asked Buffett if Berkshire investors should be proud of the company’s stake in Coca-Cola. It is one of America’s most beloved brands, but its products are also extremely unhealthy.

Buffett readily admits to drinking four or five Cherry Cokes per day, and he rebuffed the question by noting everyone makes their own personal decisions. He further commented that if you do what makes you happy, you’ll live longer. I’m not holding my breath for verification from the New England Journal of Medicine.

Buffett does not believe Berkshire’s success hinges on the presidential election results:

Buffett is a Democrat and Hilary Clinton supporter, but he isn’t worried about the election for business reasons. His outlook on our country’s future is bright regardless of who wins. Appearing on Squawk Box after the annual meeting, he even stated, “Your children are going to live better than you if we elect three bad presidents in a row.” He is nothing if not confident.

Buffett is no fan of hedge funds:

He made a bet with Protégé Partners back in 2006 that they couldn’t outperform a Vanguard S&P 500 index fund over a ten year period. It was their idea, and they even wanted to measure the results net of their fees. There is a year left in the competition, but as of the end of 2015, the S&P has yielded 65.7% while their fund-of-funds has yielded only 21.9%.

He went on a rant right before lunch about “hyperactive” investing and expensive managers. In general, he thinks people would be better served using passive investments, commenting, “You just have to sit back and let American industry do its job for you.”

As an admirer of Buffett, I always pay attention when he says something. He has a way of simplifying and clarifying even the most complex of financial issues. However, despite his moniker, he is not an oracle. Even the great Warren Buffett is fallible, so it is important for all investors to make their own decisions and not take his opinion as fact.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Panama Papers

If you’re a fan of Saturday Night Live, you may remember Stefon, a character who regularly appeared during the show’s Weekend Update. Bill Hader and John Mulaney co-wrote the sketches that always featured long, ridiculous descriptions of “New York’s hottest club,” but the biggest laughs always came when Hader, who played Stefon, broke character and started laughing himself. As a result, Mulaney started adding a joke to the queue cards between dress rehearsal and the live show, so when Hader began each sketch by saying, “This place has everything…,” he never really knew exactly what he was about to say.

Not nearly as funny but just as ridiculous, the Panama Papers also have everything: FIFA kickbacks, political corruption, money laundering, fraud, and pretty much any nefarious use for an offshore bank account owned by a shell corporation you can imagine. It is a term used for the collection of over eleven million leaked documents from the Panamanian law firm Mossack Fonseca. A source only identified as “John Doe” released them to the German newspaper, Süddeutsche Zeitung, in early 2015 who, in turn, enlisted the help of the International Consortium of Investigative Journalists to review the massive amount of data. The following are just a few of the stories exposed:

International Corruption

The roster of individuals implicated in the Panama Papers is extensive: 12 current and former heads of state, 128 other public servants, and 33 individuals and corporations blacklisted by the US government. Since they are unable to prosecute, the US government blacklists international entities for evidence linking them to illegal activities. The 33 identified companies are linked to drug cartels, Hezbollah, North Korea, and Iran. Gabriel Zucman, who is an economist at the University of California, Berkeley and author of The Hidden Wealth of Nations:  The Scourge of Tax Havens, which was coincidently published at the end of 2015, said that, “These findings show how deeply ingrained harmful practices and criminality are in the offshore world.” In other words, crime and corruption proliferate when left outside of public scrutiny.

Tax Evasion

In 2010, after paying $780 million in fines and admitting to fostering tax evasion, UBS turned over information regarding its US customers, marking the beginning of the end for Swiss banking secrecy. Until this point, UBS and Mossack Fonseca had extremely complimentary businesses and worked together often. UBS clients needed offshore companies to hold assets, and Mossack Fonseca could provide them. The Panama Papers include countless emails not only detailing this close relationship between the firm and UBS, but also HSBC, Société Générale, RBC, and Credit Suisse. This web points to years of hiding assets from tax authorities and fostering tax evasion.

Billionaire Divorces

We all know that divorces are expensive, but when you are Russia’s fourteenth wealthiest man, it’s expensive enough to start an international game of hide and seek with your marital assets, which is exactly what Dmitri Rybolovlev did according to the Panama Papers. With the help of Mossack Fonseca, he created a company called Xitrans Finance Ltd that held a vast wealth in paintings by Picasso, Van Gogh, Monet, Degas, and Rothko. When their marriage went south, Rybolovlev physically moved the paintings to Singapore and London, away from their Swiss home. Hiding assets in divorce proceedings is considered marital fraud, but if you make the assets too expensive and difficult to find, it’s very difficult to prove.

The Panama Papers do not share the familiar intrigue of Ashley Madison where you are likely to know someone on the list, but with more names to come, this massive leak will have many legal and financial implications in the years to come.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Tax Loss Harvesting

What do these four TV shows have in common:  The Wonder Years, The Fresh Prince of Bel-Air, Friends, and The O.C.? There are actually two acceptable answers to this question. The first is that they all have iconic theme songs—you are guaranteed to be humming one of these for the rest of the day. But more relevantly, they all have at least one character that was played by two actors during the series—sometimes producers have to make a change and assume that no one will notice the switch.

Similarly, investors can also be forced to make a switch. Tax loss harvesting is the practice of selling a security at a loss and replacing it with one that achieves the same investment objective. The switch allows investors to create a loss for tax purposes while maintaining the target investment allocation for their portfolio. If most of your investments are in tax deferred accounts like an IRA or 401(k), there is little need for this strategy, but for all other accounts it is essential to achieve tax-efficient investing and portfolio rebalancing.

For example, say you purchase $10,000 of an S&P 500 ETF, such as Vanguard’s VOO, and the fund decreases in value by 20% over the next several months. Instead of waiting for the fund to rebound, you could sell it, recognize the $2,000 loss for tax purposes, and replace it with a total market ETF, such as Vanguard’s VTI. This new position will maintain representation of US equities within your portfolio while also allowing you to receive the tax benefits of a capital loss.

Generally, you can deduct up to $3,000 in capital losses on your tax return. So the $2,000 from the previous example could go against other capital gains, or if there are none, the entire amount can be taken against other types of income, lowering your tax bill in the process. So when you are rebalancing your portfolio, this practice is especially important. If you are forced to sell a position for a gain, tax loss harvesting from a different position would provide an offsetting loss, potentially eliminating the entire taxable gain.

Now, you may be wondering why you cannot just sell your position at a loss and repurchase it the next day. The answer is simple—there are explicit “wash sale” rules that disallow losses from securities purchased within a 30 day period before or after the sale which are “substantially identical.” So it is important that you replace the stock or fund sold with a different security but one that also achieves the same investment objectives.

Tax loss harvesting can be a fairly sophisticated procedure, so I would not recommend trying it on your own. But I do think that it is important for you to have a basic understanding of what the term means so that you can knowledgeably discuss this practice with your financial planner or investment manager.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Portfolio Rebalancing

On July 23, 1996, Kerri Strug landed her second vault to guarantee the US women’s gymnastics team an Olympic gold medal. Despite going into the final rotation with a strong lead over Russia, Strug needed a solid vault performance to secure the win. She fell on her first attempt, injuring her ankle and imperiling the team’s victory, but she limped bravely back to the end of the runway for a second try. This time she nailed the landing, rebalancing her weight off the hurt ankle to solute the judges

Obviously, it won’t make you a national hero, but rebalancing your portfolio is a similarly the essential capstone to any successful investment year. You can save and choose efficient, diversified investments, but if you don’t rebalance your portfolio at least annually, your nest egg will quickly fall out of line with your investment goals.

So what is it?

Investment allocations are set based on an investor’s goals, age, and risk tolerance. For example, most people in their 20s and 30s would have an allocation of 90% stocks and 10% bonds because they are years away from retirement and have moderate risk tolerance. However, as their portfolio grows, one asset class is bound to out-grow the other, so the 90/10 allocation between stocks and bonds becomes out of balance. Therefore, investors must sell off part of the position that has out-grown its allocation to purchase more of the position that has not, rebalancing their portfolio to restore its ideal allocation.

Why does it matter?

Even the most passive investors should rebalance their portfolio because the proper mix of stocks and bonds reduces volatility and makes you more likely to sell high and buy low. Consider a portfolio with the previously mentioned allocation of 90% stocks and 10% bonds in a year where there is a significant rally in the market—the S&P 500 skyrockets, and the bond market takes a dive. It would be easy to get caught up in the emotion of a strong rally and think it will last forever, letting your stock positions continue to grow. But there will eventually be a correction, so rebalancing the portfolio by selling stock to purchase bonds will protect part of the gain and create greater potential for future gain on bonds.

How do you do it?

If you have an investment manager already, that individual should be rebalancing your portfolio at least annually and discussing these issues with you as well. If you prefer to do things yourself, I’m sure there are some people who are capable and willing to perform this function manually. But it would be much more prudent and efficient to use a robo-advisor like Betterment that leverages technology to rebalance portfolios and provide other valuable services at extremely low prices.

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.