Archives for March 2022

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Do You Need a Financial Planner?

A common refrain in the realm of DIY personal finance is that by the time you know enough about investing to be able to pick the right type of advisor, you likely don’t need an advisor.

If we’re only talking about investing, I think that’s true. The more you learn about investing, the more you realize that a very simple approach (i.e., a portfolio with a few low-cost index funds or ETFs) is quite possibly the best approach. Or, if it isn’t the best approach, it’s at least close.

And no, you probably don’t need professional help to manage a simple index fund portfolio, especially if you’re still in your “accumulation” stage. (Though even then, a person might still choose to delegate such responsibilities.)

The financial planning industry grew out of the stock brokerage industry, so many people still think of financial planners as “people who give investment advice.” But investing is only one piece of personal financial planning. And, frankly, it’s the easiest piece.

Insurance planning can be complicated. With life insurance, simpler is generally better. But there’s plenty of complexity involved with choosing a health or disability policy. And if you already own a deferred variable annuity and you’re trying to figure out what to do with it, there’s nothing simple about that decision. Professional assistance may be valuable.

And then you’ve got tax planning. I’ve worked in the tax field for ~15 years, and I’m still regularly learning about a new tax law, learning about some state tax law that I haven’t had to know about before, re-learning about an existing law that I haven’t had to deal with recently, or learning about the interaction of two pieces of tax law.* It’s complicated. And the more I learn, the more I realize the depth and breadth of what I still don’t know.

Estate planning is similar. For some people, it’s not so bad — get your basic documents in order, and you’re all set. For other people (e.g., combined families, or people trying to provide for a disabled loved one after their own death) it can get complicated in a hurry. Guidance from an experienced estate planning attorney (e.g., Bruce Steiner) or a financial planner who deals with estate-related topics (e.g., Elliott Appel) could provide a better financial outcome as well as considerable peace of mind.

With regard to student loans, the rules for public service loan forgiveness can be bewildering. If that’s a path that could be available for you, advice from somebody like Ryan Frailich who deeply knows those rules could be extremely valuable.

Running a simple portfolio is indeed simple. But financial planning involves a lot more than just running a portfolio. In fact, it involves so much more that there’s no way for one person to be an expert in all of it — even if it’s their full-time job and they have decades of experience. If/when one of those more complicated situations becomes relevant to your household, requesting professional assistance isn’t some sort of failure. It’s a prudent decision, to minimize the likelihood of a mistake undoing the smart decisions you’ve already made.

*Among tax professionals, the words “quick question” (or “simple return”) are self-contained jokes/punchlines. Almost everybody thinks they have a quick question. What makes things complicated isn’t so much any one particular provision in the law (unless it’s the QBI deduction). What makes things complicated is the interactions between multiple provisions. There are many tax topics/situations that are individually very common (e.g., dealing with a particular deduction or credit, the sale of a home, sale of a business, the way long-term capital gains and qualified dividends are taxed, etc.). But each household has a handful of different things from that menu that happen to be applicable to them. And the possible combinations are endless. So even if a tax professional has worked with each of these individual topics many times, this may well be the first time he or she has dealt with this specific combination and the ramifications thereof.

Investing Blog Roundup and A Favor Request (Social Security Made Simple)

A favor request: When the 2022 edition of Social Security Made Simple went up on Amazon (print version here and Kindle version here), the reviews from prior editions did not carry over. If you have read the book and have a moment, I’d sincerely appreciate it if you could post a short review of what you thought.

Other Recommended Reading

Thanks for reading!

Accounting for Illiquid/Intangible Assets on Your Household Balance Sheet

A reader writes in, asking:

“What do you think about including the present value of human capital, social security, pensions, etc when calculating your asset allocation? I have read about doing so in various sources over the years, but it strikes me as the sort of thing that makes sense in an academic world but causes problems if actually attempted in real life.”

I’ve written about this before with regard to Social Security, but my thoughts are similar regarding other such assets (and liabilities).

Human capital: it’s not a stock. It’s not a bond. But it is a very real asset (unless of course you’re permanently retired/disabled).

Social Security: it’s not a stock. It’s not a bond. But it is a very real asset.

Your home, if you own one: it’s not a stock. It’s not a bond. But it is a very real asset.

Future consumption: it’s not a stock (or a negative stock). It’s not bond (or a negative bond). But it is a very real liability.

Point being, yes, you should be thinking about all of those things when you make financial planning decisions. But I don’t think it makes a lot of sense to try to lump them into categories in which they don’t really belong.

But what does it mean to be thinking about these things when making financial planning decisions?

Let’s go through some examples.

An asset allocation that’s appropriate for somebody with a safe job in a safe field (e.g., a tenured professor) may not appropriate for somebody with a very risky job in a very risky field (e.g., a sales position for a start-up), even if everything else about the two people is exactly identical.

That doesn’t mean that we should calculate the present value of each person’s human capital, assign that human capital a stock/bond rating (e.g., “Sarah’s human capital is 30% stock, 70% bond”), and then rebalance accordingly every year. Because doing that can lead to all sorts of wacky decisions. For example, such an approach could require a 25-year old to shift her 401(k) allocation wildly back and forth from one year to the next, because her financial assets are a very small figure relative to her human capital, so any changes in the human capital could require massive changes to the allocation of the financial assets.

But yes, if you have a riskier job, you should probably have a safer portfolio. And it’s really not a good idea to fill your financial portfolio with assets that would be highly correlated to your human capital. For example, if you work in the tech sector, you probably don’t want to have tech stocks dramatically overweighted in your portfolio. And it’s really, really not a good idea to have a big part of your portfolio invested in your employer’s stock.

As far as Social Security and pension income, if your spending needs are completely (or mostly) met by such safe sources of income, then you can afford to take on more risk in your portfolio than if your guaranteed income sources were very small relative to your spending needs. But that doesn’t mean that you need to be regularly recalculating the expected present value of your pension assets and including that figure in the math every time you rebalance your portfolio.

Or, consider two retirees whose circumstances are exactly identical, except that one owns her home and the other rents. The homeowner is meaningfully less exposed to inflation risk, and that could inform the asset allocation decision. In addition, that home is a chunk of wealth that could be turned into spending if necessary (e.g., via a reverse mortgage). And that likely means that the homeowner can safely spend a greater dollar amount per year than the renter. But again, that doesn’t mean that we should pretend the home is some sort of stock/bond hybrid and include that in the portfolio rebalancing math.

Investing Blog Roundup: Active Share, Not a Great Bet

There is, at this point, roughly half a century of evidence showing that actively managed funds generally underperform their lower-cost passively managed counterparts. (And then there’s William Sharpe’s classic piece The Arithmetic of Active Management which succinctly demonstrates that the average actively managed dollar by definition will underperform the average passively managed dollar, assuming active management means higher costs.)

But back in 2009 two researchers found that there might be a way to pick those actively managed funds that will outperform: by selecting based on “active share” (essentially, how different are this fund’s holdings relative to those of its benchmark).

Sadly, that finding hasn’t really held up well. At all.

Other Recommended Reading

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