Top 10 Financial Lessons

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10 things I’ve learned over the years as a financial planner—that also serve as lessons for investors.

1. Everyone loves volatility when it’s volatile upward. When everything tumbles out of control, you discover your true tolerance as an investor.

2. The vast majority of taxpayers still prefer tax refunds over what is to many taxpayers the insulting—no matter how large or small—IRS payment due April 15. I cringe when I read advice on how to increase your exemptions to lower your tax withholding so you do not give the IRS an interest-free loan. Well, that’s a noble cause for sure. But what happens if your tax projection is not that accurate or the unexpected happens (for instance, larger mutual-fund dividend and capital-gain distributions or capital gains) that messes up your plan and then you owe, sometimes adding interest and penalties to the amount due? So it is easy to lose big trying to avoid giving the IRS an interest-free loan. Play it safe and get a small refund. It’s not like you will be making too much in interest income on it these days. Having a bigger refund is OK, too, if you have trouble saving for a specific purpose. It is not recommended, but the truth is this small act of forced savings works for many people.

3. The next time you read another study or survey, check to see who sponsors it. It is usually some mutual-fund or insurance company. They are in the business of scaring you to buy what they are selling. So keep an open mind at all times and consider the source.

4. If you tell me the day you are going to die and accurately predict the investment returns going forward along with all cash inflows and outflows in your portfolio, I will present you with the best financial plan you will ever see. If you cannot give me this precise data, all we can do is have a general plan to maximize the probability of getting you where you want to go. Stick to a general plan, stay flexible, and continue making good decisions and things will work out. We humans are resilient creatures and adapt well.

5. The tax-identity theft and IRS swindler scams are out of control. Can we get someone in Washington to focus on this, maybe even a czar? I still can’t get over what I experienced in a tax seminar a few months ago. A colleague had recorded and played back for us a swindler calling him to talk about the “back taxes” he owed. The smoothness and audacity of this person was off the charts and I can see unsuspecting people falling easily for it. When we e-file tax returns for clients these days, we pray they are not rejected by the IRS because it usually means a scammer had already filed using their Social Security number. Two words of advice: File early!

6. You are planning to marry again? Congratulations! Now get a prenup. Please. No excuses. Everyone getting married again should include a prenuptial agreement in their wedding plans.

7. No, the advice you were given was not free. You likely paid for it and are not being told about it or are not seeing it as it is nontransparent. You should know how much it costs you any time a financial-services person advises you (or sells to you).

8. It is 2015 and all of us who advise people regarding financial matters are still not required legally to be held to a fiduciary standard, to put our clients’ interests first. There have been endless studies and yet … still no rule. We are inching closer to that day and yet it is so far away. Financial advisers should be held to a fiduciary standard and our compensation should be totally transparent and fully disclosed. Investors should demand it at all times. Ask your adviser sign the fiduciary oath. If he/she refuses, you should reconsider working with this adviser.

9.  I still find myself surprised at how many people are not participating in their companies’ 401(k) plans. Of those who are participating, few contribute the amount that entitles them to the full matching company contribution. Even fewer contribute the maximum allowed ($18,000 and another $6,000 catch-up contribution for people over age 50). So much free money (in matching funds and in tax savings) is left on the table. Then again, some of the smaller 401(k) plans have investment choices that are horrific. Hopefully, with the latest initiative by the Labor Department we will see an improvement in this area leading to better advice to participants and higher participation rates.

10. Try to explain the alternative-minimum tax (AMT) to taxpayers getting hit with it for the first time. In fact, many have not even heard of this parallel stealth tax. It usually first hits taxpayers crossing the $200,000 earnings mark–and once you are liable for it you tend to be in AMT territory for a while. It is imperative to do some tax planning in advance to avoid surprises come next April 15. You can learn more on how to minimize the AMT impact in this article.

 

 

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