Investment Charts, Helpful or Not?

Warning, nerd alert. I had the chance to meet with two wonderful financial planners recently. While I was waiting for our meeting to start, I was looking at some charts that they had up on their wall. One 

of the charts was of the stock market over the last 100 years, along with different events that happened during that time period. One line of the chart included the different presidents that have been in office over the last 100 years.

As I was looking at the chart and making sense of the information, Jenny one of the planners walked into the meeting room. She and I talked for a minute about the chart and how they use it to help communicate with their clients about investing. Jenny made the observation that despite what her clients believe about the current president, the stock market has performed positively during both democrat and republican presidents. This discussion reminded me of two important investing lessons.

1. The need to look at the big picture

2. Our assumptions about why things happen can be wrong

When it comes to investing we all have to contend with our emotions, perceptions of risk, and why we think things happen the way that they do, but when we can look at data and talk with someone else about our perceptions, we then have a chance to see things in a new light.

Before I loose you, I realize that the very idea of looking at investment charts is intimidating. Yet this may be the very thing that you need to consider for overcoming your fear of investing. Having a professional help answer all your questions, can in turn help you feel confident about making the best decisions for your family. None of us have perfect information, but professionals through their years of education and experience can usually help put things in perspective.

When it comes to investing, the more that you understand, the more likely you will feel confident to use investing to provide for your families future. Too often the investment world is positioned as a risky one, yet with a good advisor on your side, you will grow in your confidence about inventing. The planners that I met with are members of the National Association of Personal Financial Advisors. This group has very strict guidelines for membership and client advocacy. I trust that these professional would be well qualified to help make sense of investing for you and your family.

The Danger of Being Smart

What happens when you think you are smart? A long shadow emerges. It is the dark side of being smart without maturity. In my mind maturity allows us to see the benefits of our strengths but also the limitations of our strengths. I have the good fortune of working with many highly talented, bright and yes smart individuals. Yet as I try to work with them, I have noticed three trends.

The Trends
1. The little voice in their head says they know it all.
2. Their intelligence gets applied to areas they know nothing about (part of number 1)
3. Being wrong is a threat to their identity

Sadly these trends are why many smart couples remain overwhelmed and frustrated. Often both people in the marriage are very smart, highly educated and trained to think. Yet their problem solving skills in the areas of marriage and money are not developed. The reality is that many of the problems in our marriage and with our finances will not be resolved by intelligence alone. Rather they will need to be addressed at the emotional level first before logical answers can emerge. This thinking is based on the findings of research based Emotional Focused Therapy.

Rather than our intelligence serving us well, it acts as a protective measure against feelings of insecurity. In the field of psychology intelligence is seen as one of the most complex defense mechanisms. Intelligence allows us to navigate many obstacles in life, but it has its limitations. As we grow in maturity and recognize the limitations of our intelligence then the weight of responsibility can begin to fall of of your shoulders.

In our culture which prides itself on knowledge, the risk of looking like we don't know something is high. However when we recognize the necessity of vulnerability in our marriage and money then we can see that our intelligence is not threatened, but rather encouraged. When we start to acknowledge the limitations of our intelligence, then we can become receptive to getting the feed back that we need to grow and make the necessary changes. Sometimes this feedback needs to come from outside sources including financial planners and marriage counselors before we are ready to hear it from our spouse.

Getting to the place of recognizing the limitations of your knowledge may be difficult in part because you have been prized for your intelligence for so long. Yet in order to get along in your marriage and money it is not about letting go of intelligence, so much as it is about recognizing it's limitations.

Changing Social Class Leads To, Who Am I?

What happens to us when we move up or down in social class? Typically, the values and views that we developed as children are challenged. In our married life this an area ripe for arguments

For most of us, the way that we were raised forms our core financial identity. Our core financial identity informs many unspoken rules about our personal values and the way that money is to be used in our lives. Hence, this is why we feel challenged when we experience a shift up or down in social class. Such feelings also are brought on when we encounter people of other social classes than our own, because most often, these individuals hold different values that sometimes challenge our own values.

As we move across social classes, we enter into new rules, and new ways of relating to people. If a part of our core identity does not have flexibility, then we become overwhelmed by the transition and do everything we can to revert back to a place of comfort and familiarity. Much of this happens at a subconscious level.

Let's look at two examples of dealing with change in social class, one which is commonly known, and one which is much less known. First, let’s think about young new professional athletes, entering into a pro sport, who perhaps may have come from humble beginnings and little money. These athletes enter into their new world flooded with an abundance of cash and opportunity unlike they have ever imagined. Sure, they may have dreamed of having loads of money and success—which is likely a contributing factor to how they reached the amazing level of success that they have achieved—however, too often, athletes in these types of situations forget one important thing: They forget to consider the necessary work needed to realign their core identity with their change in social class. As a result, inside, deep down, they likely still see themselves as someone from humble beginnings, and so they live out the deeply ingrained cultural values of a lower social class. This works fine, until their careers come to an end and their cash flow is cut off. For many of these professional athletes, they end up right back where they started from, and sometimes find themselves in worse shape than before. That is, they now have to figure out how to deal with the financial trauma of moving up in social class, and then slamming back down in social class, all without the necessary core identity changes along the way.

The second example probably happens more often than the first, yet it tends to get much less press. For the second example, let’s think about a young couple who have decided to start a young family. For comparisons sake, let’s say that they too have come from humble beginnings, like the professional athlete. This couple has taken the time to educate themselves and have now gotten to a place where they are successful professionals.

However, with the demands of two full-time professional careers, and their growing family, they need some additional help around the house. Though they both have full-time jobs, the wife is primarily responsible for managing their home. As a result, she proposes to her husband that they hire a housekeeper. Her husband’s reaction is not what she expects, as he grew up in a family where his family and their friends where “the cleaning people.” Feeling somewhat disgraced by her request, he says to her "we can't hire my people" to do this kind of work for us.

In sum, though the husband is a successful and well-educated professional, for him, the idea of hiring someone to clean his home does not mesh well with the core financial identity he grew up with. For the husband, there is an implication and remembered resentment of the families that used to hire his family to clean their homes, and he thinks to himself, “I don't not want to be one of those people.” The husband’s core financial identity is rigid on the topic of “hiring household help” because he has continued to identify with his lower social class, though he and his wife together earn a much higher level of income than his own parents did. He has not adequately adjusted his core financial identity since moving up in social class. Obvious differences of core financial identity between he and his wife lead to loads of frustration. They do not know how to move forward on this subject, and so they continue to fight. Ultimately, the stress of their financial identity differences takes its toll, and the couple grows apart from each other.

It can be more difficult than imagined, to cross social classes.  Many people imagine that having more money would provide them with greater opportunity. It can; however, such change requires a person to reestablish his/her core financial identity. You have to develop a new set of skills and abilities to be able to manage your money well. You must become aware of your own internal rules about money, the purposes they served at your previous economic level, and how some of those rules may no longer be relevant.

For me, one social class rule in particular that has evolved as my work has changed, relates to “packing my lunch” as a money saving strategy. Growing up in the blue collar middle class, I have always practiced this money saving rule. Yet, the more I grow my business and find myself working with white collar professionals, “having lunch out” is not only a normal practice, it is expected. I have realized that eating out for lunch within this different social class is not so much about the food as it is a way to share ideas, to network, and to build working relationships over a meal. Because these opportunities are important in helping me to continue to grow my business, it has become vital for me to readjust my thinking regarding this financial rule, and I have had to reestablish a part of my own, previous core financial identity.

To start the shift in your core financial identity it will take time in reflection. You will want to consider the rules about money and its use you learned during your upbringing. Then compare them to the rules that you observe for where you live now. Don’t rush this process, often the social class rules we live by are subtle and not always so obvious. With time and observation you can start to determine which social class rules you want to participate in and which ones you prefer to avoid.

The Dreamer and The Practical's Dilemma

“Help - I married a visionary! They have all these great dreams and ideas for what they want in the future, but I have no idea how it will ever happen. All I can think about is how much it’s going to cost and how we are never going to be able to afford bringing all of those visions to reality.” 

Does this sound like a problem in your marriage? In many relationships, there is often a dreamer and a more practical person. It does not always start out this way, but there is an inherent need in life to dream about the future while managing the demands of the present. Over time and throughout marriage, we unofficially decide who gets permission to dream and who gets to be practical. Why does this happen? Because each person has a history that they want to fulfill; part of it is their personality, and another component is station and place in which they live now.

Let’s start with history. Each of us draws heavily from our childhood experiences and its influences. Our parents and our position in the family (like it or not) heavily influence the way that we see the world. Perhaps your parents told you to dream and shoot for the moon, which naturally lays the foundation for a visionary. If not, maybe your parents expected perfection and high marks in school, and for you, that meant hard work and discipline. No time for dreaming there. While most of us probably had a blend of both attitudes, it is these early years of our childhood, and our family values that shape our orientation toward dreams and dealing with the practical matters of living. 

From our early influences, we start to see the world in a certain way. That is the nurture component of who we are. The nature component, on the other hand, leaves us with predispositions toward dreaming or practicality. The formation of our personality is semi-fixed by the coding that we are born with. Personality profile tests have shown the consistence with which certain characteristics remain constant over time. A common example is our preference for extroversion or introversion. Please note that I said “preference,” which means most of the time that is the way that we experience the world. We inevitably all experience to varying degrees the other end of the continuum, too. 

Combining our early childhood experiences with our given personality type, we end up in the adult world ready to forge our path. Whether we are aware of it or not, our history and personality shape the decisions we make about where we live, who we spend time with, the type of work we engage in and ultimately who we marry. It is in marriage that we find two worlds of history and personality colliding over what we think is love, which in reality is a deep need to be connected with another human and to have unfulfilled needs met. 

While in our culture we are infatuated with romantic love, we must come to see that it is far more complex and dynamic. A quick Google search of "types of love" will produce loads of interesting results. Yet what is important to keep in mind is that there are various types of love and needs we are trying to fulfill. The question is why? Often, opposites attract to meet unconscious and unspoken needs. Fulfilling the need to dream and to be practical is a major part of living and an inherent part of the person that we marry. Every person has the capacity to dream and be practical, but it is because of each person’s unique path in life that they tend toward one direction or the other on the continuum. As one partner moves in direction A, there is a natural need for the other partner to move in direction B to keep things in balance. 

Here is where it gets tricky: most couples are dynamic. One person is not fully responsible for dreaming while the other is fully responsible for practicality. The roles often shift given different areas of living, such as parrenting, saving for the future, or careers. It is as if couples dance through life trying to manage their unfilled dreams while meeting the demands we all face. They are constantly calling their partner back into balance, as their relationship can only handle so much tension.

Remember that when you are getting frustrated, angry or overwhelmed with your partner’s preference for dreaming or practicality, it is often their reaction to your opposite response. Spend time coming to the other end of the continuum, it will change your dynamic. 

Feel free to give me a call to talk more at 980-275-1627.
Ed Coambs

Edited by Reena Arora of Arora Media, connect on FacebookFor all your communication needs, she is all you need.

How Facebook Can Help You Understand Compound Interest

Compound interest is one of those financial terms that gets thrown around a lot but is seldom understood. It’s like the sharpest knife in the kitchen block. When used to your benefit, it can carve the most beautiful masterpieces of food, but when mishandled, you can quickly cut your hand off while trying to prepare a delectable meal. 

The impact of compound interest works in two ways. 

1.) Compound interest works for you when you are saving and investing.

   

2.) Compound interest works against you when you are borrowing. (Not all borrowing is bad.)

So, what is compound interest? How can you better understand it?

Let’s use Facebook as an analogy. Do you remember when you first registered for an account? Let’s say on day one, you find  30 friends. The next day, Facebook recommends 10 other friends you could add. Why is that? Because there was a base connection amongst your first 30 friends, and so Facebook could go out and find who else you might know. After two days, you have your 30 original friends, plus 10 from the next day, which brings your friend count up to 40.  You take a few days off, and by day five, Facebook finds another 13 friends for you to connect with. Now you are up to 53 friends. By the end of the week, you start to realize how many people you are connected to and have met in the past. A year has now gone by, and your Facebook friend count is in the hundreds. Why is this? Because you made a small investment of your time and told Facebook who your friends are. Facebook then started to help you connect with others from your past. This is the job of Facebook, to continually help you try and find ways to grow and add to your initial investment of connecting with friends. 

While Facebook’s job is to grow your social network, the financial market’s job is to grow your financial network and net worth. The more connected you are to the financial markets, the greater the value they create for you. 

The expectation is that, when you put money into the financial network, it will grow over time and at an ever-increasing rate. 

Important Words to Know

·      Principle = Money you initially invested

·      Interest = Money you earned on the principle

·      Compound Interest = Money you earned on both the principle and previous interest earned

Short example:

You make a $100 investment. For investing that $100, you expect a 10% rate of return.  (The rate of return simply represents the level of risk the investor is taking on.) 

At the end of one year, assuming you get the 10% rate of return, you will have $110. This is your original investment plus $10 of interest earned. You are happy that things worked out this way and so you decide to stick with your investment. You leave all $110 invested. Again, your investment earns 10%. This year, the 10% was earned on not just your principal $100, but also on the $10 of interest from the previous year. So you earn $11 dollars of interest, which is 10% of $110. Add that $11 to the account, and you have a balance of $121. If you keep up with this pattern, by year three, you would earn $12.10 in interest, bringing your account balance to $133.10.

To recap:

·      In year one, you earned $10 in interest and have an ending balance of $110.

·      In year two, you earned $11 in interest and have an ending balance of $121.

·      In year three, you earned $12.10 in interest and have an ending balance of $133.10.

As you can see, every year you earn a bit more interest than you did in the previous year. While it initially happens in small increments, the magic happens when you stay with this process over decades. Let me jump to the 10, 20, 30 and 40-year marks.

·      Year 10: You earned $23.59 in interest and have an ending balance of $259.37.

·      Year 20: You earned $61.16 in interest and have an ending balance of $672.75.

·      Year 30: You earned $158.63 in interest and have an ending balance of $1,744.94.

·      Year 40: You earned $411.44 in interest and have an ending balance of $4,525.93.

Okay, so by now, you are thinking one of two things: “Wow, this is amazing! How do I get a piece of the action?” or,  “This sounds great, but this is not what happens in reality. This is too good to be true.” It is natural to feel skeptical about what is really possible in the financial markets, yet I would encourage you to know that this is how it works mathematically and in reality. I have seen the impact personally and through the accounts of clients with whom I have worked. 

However, I do have one short warning for you to consider: there are few, if any, investments that will consistently give you a high rate of return. What you should be thinking about as an investor is, “Over the long run, what will my average return be?”

Two Key Assumptions of Compound Interest

1.) When you investment money, you should get a financial increase for the risk that you are taking.

      2.) Over time, the financial markets will continue to grow and become more valuable.

Best of luck in continuing to grow both your social and financial network. Give it time and some attention, and in the long run, you will be impressed with the return on your investment.

Feel free to give me a call to talk more at 980-275-1627.

Ed Coambs

Edited by Reena Arora of Arora Media, connect on Facebook

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Your Greatest Financial Risk Is Not What You Think?

Risk is everywhere. 

The potential for loss and its negative financial impact has allowed for the vast and complex world of the insurance industry to develop and thrive. As adults, we learn through many different lessons that we should fear economic loss, and that the best way to manage that risk is to make sure we have the proper insurances in place.

Often, our first introduction to insurance happens after getting a drivers license. Then, when we complete college and get our first job, we start to sort through health insurance. Life then continues on, and at some point, we start the process of building our family. We get married, buy a home and have children, which bring on another host of insurance policies to purchase: life, home owners’ and disability. 

Stay with me, I know talking about insurance and risk management is about as much fun as getting a root canal, but I promise I have a point.  

Now that your family is growing, you start to think about college savings and retirement planning, and you realize that you not only need insurance, but you also need to be setting aside money for the future. So, you and your wife start to faithfully put money into your companies’ 401K plans.  You are no longer the kid learning to drive and hearing about insurance for the first time; you have a complex life with many different financial responsibilities.

Then one day, it happens: the financial risk you did not plan for, nor can you insure against or save enough money to prevent: divorce.  

This news rocks your emotional, spiritual and financial life. Everything changes. All the hard work of building, creating and maintaining financial security evaporates, and  myriad of questions about your financial security open up. 

What can you do? We don't get married for financial support, do we? We (hopefully) get married because we love someone. Yet, over time, we come to trust our partner, and there is a financial element to the relationship. This is the very reason why we buy life insurance; we don't want to leave our spouse with an unreasonable financial burden in the event of our untimely death. 

Creating marital stability and security at times can seem overwhelming, frustrating and exhausting, but the effort is far worth it. While financial security should not be the determining factor in making a decision to stay married or get divorced, it is important to get help in really understanding the full cost of divorce from an emotional, spiritual and financial perspective.  

There is hope for restoration in marriage, even in the darkest of days. Consider working with a trained marriage and family therapist to help keep your marriage on the right track. 

Feel free to give me a call to talk more at 980-275-1627.

Ed Coambs

Edited by Reena Arora of Arora Media, connect on Facebook

For all your communication needs, she is all you need.

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