Market Turmoil: Why You Shouldn’t Care

While we wait for folks to log on, try looking up the “expense ratios” of the funds you are currently invested in.

Would you rather….

Have 3.5 million dollars up front?

Start with a penny and have your balance double every day for one month?

or

Where my approach/advice comes from

Although I have a passion for these topics, the views expressed are not intended to serve as a forecast, a guarantee of future

results, investment recommendations or an offer to buy or sell securities. This should not be interpreted as tax advice and please consult your personal tax advisors if you have any questions.

Housekeeping

@FutureAdvisor

Who I am

Who I’m not (Disclaimer)

Topics Behavioral Finance

Understanding your current situation

Credit Scores

Retirement, the time value of money, & 401k / 403b

Investing 101

Savings accounts & fees

Love & Money

Home ownership, mortgages, refinancing, & renting

Tax strategy

Life insurance / Health Insurance

Tactical next steps

Happiness & Wealth

Wealth

Happin

ess

Why we need an automatic plan…

People are not rational with financial decisions (susceptible to framing, prospect theory, anchoring, choice architecture, & the default option)

Study: the more often you check your portfolio the worse you do

We don’t like losing! (Prospect Theory) (DMR) Commitment devices!

Google’s anchoring experiment (3% increase)

Why we need an automatic plan (cont.)“Save More Tomorrow” (12% vs 4%)

Allocation decisions & 1/n:

Scenario 1:

Fund A: StocksFund B: Bonds

54% allocation to stocks

Scenario 2:

Fund A: StocksFund B: ½ Bonds ½ Stocks

73% allocation to stocks

Scenario 3:

Fund A: ½ Bonds ½ StocksFund B: Bonds

35% allocation to stocks

“I’ll worry about retirement later…”

Time Value of Money is HUGE!

Frick & Frack brothers

The “Rule of 72”

$$ saved from 25-35 > $$ saved 35 on

Everyone should have a (ROTH) IRA & 401k!

Are you on-track?~75% of ending salary per year

Share this!See handout

Retirement AccountsIRA

• 2014 Limit: $5,500

• No matching

• Hold at any institution

• Thousands of investment options

• Only contribute cash

• Income limits • Different for Roth vs Trad

• Jan 1 – Apr 15 (of following year) open period

401(k) / 403(b) / TSP

• 2014 Limit: $17,500

• May get matching

• Hold at company’s chosen firm

• Limited choices

• Only contribute from payroll

• No income limits

• May get a Roth option

• Jan 1 – Dec 31 open period

Uncle Sam will always get paid

Roth

• After-tax contributions (pay tax now)

• Earnings grow tax-free

• Roth IRA’s have no RMD’s

• Roth IRA income limit: < $114k

• “Backdoor Roth” option

• Better inheritance options

Traditional

• Pre-tax contributions (get a tax break now)• $120k salary, contribute max

amount of $17,500• Taxable income now $102,500• 28% x $17,500 = $4,900

• Taxed on the way out

• Traditional IRA’s have RMD’s

• Really depends on tax bracket now vs. retirement• Beliefs on long-term tax brackets / code / law• Solution: have some in each

• Cash

• Bonds• Debt instrument• Corporate, government, municipal• Value fluctuates based on demand and interest rates

• Stocks• Underlying ownership in a publicly-traded company• Value fluctuates based on demand in the marketplace• All research shows stock picking does not work!

• Mutual Funds• A pooled basket of cash, bonds, and/or stock• Can be actively managed or track an index (called index funds)

• Exchange-Traded Funds (ETFs)• Also a pooled basket of cash, bonds, and/or stock• More tax-efficient than mutual funds• Typically cheaper• Trade & settle quicker than mutual funds

Exchange Traded Fund (ETF)

Mutual Fund

Cash

Bond

Stock

Investment Types

I N V E S T I N G 1 0 1

CashBond

Stock

Mutual Fund Exchange Traded Fund (ETF)

Invest

ment

Types

Acc

ount

Types

Checking Taxable Account

(Individual, Joint, Trusts)

Traditional IRA

Roth IRA 401(k)

(Can be Roth or

Traditional)

Goal

s Expenses and Emergency

Savings

Expenses prior to retirement: house, college,

wedding

Expenses in retirement

Investing 101

I N V E S T I N G 1 0 1

CashBond

Stock

Mutual Fund Exchange Traded Fund (ETF)

Checking

Taxable Account

Traditional IRA

Roth IRA 401(k)

Expenses and Emergency

Savings

Expenses prior to retirement: house, college,

wedding

Expenses in retirement

Invest

ment

Types

Acc

ount

Types

Goal

sInvesting 101

CashBond

Stock

Mutual Fund Exchange Traded Fund (ETF)

Checking

Taxable Account

Traditional IRA

Roth IRA 401(k)

Expenses and Emergency

Savings

Expenses prior to retirement: house, college,

wedding

Expenses in retirement

Invest

ment

Types

Acc

ount

Types

Goal

sInvesting 101

Investing 101 & active vs. passive

Write down your financial principles / guidelines

20-25% for “fun” if you must

Active vs. Passive Investing: research shows ~80-90% of active funds underperform their benchmark

8,000 2,000 500 125

20% most actively traded accounts performed much worse -men worse than women

Past fund performance has very little predictive power to future performance!

In fact, expense ratios are the best predictor

Expense Ratios (the enemy)

Industry average (0.80% 2.50%)

Low cost options (0.06% 0.50%)

Get angry…it’s your money!

Use the calculator

Why “Rollover”

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair

Asset allocation & rebalancingWith proper allocation, you should reduce risk

(volatility) and outperform the S&P 500 Rebalancing: meeting long-term policy target

weights

Use it as a disciplined way of buying low and selling high

“..shunning the loved & embracing the unloved. Most people do the opposite.” (Swensen)

“Contrarian behavior lies at the heart of most successful investing programs.” (Swensen)

Example: 1990-2012 portfolio: +0.5% difference in return, -2% difference in volatility

My target allocation:

You Can’t Control the Market, But….

You can control:

1. Your asset allocation

2. Your reaction to the markets

3. Your expenses

Never underestimate the value ofdoing nothing!

Why does Warren Buffett hate dancing?

Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Precedence of Saving1. Matching 401(k) or 403(b)– Max it!

2. Emergency fund (~6-9 months)

3. Pay down debt(s)

4. Roth IRA / Roth 401(k) or TSP

5. Taxable account

6. Alternatives (exotics)

Invest in yourself too!

Tactical next stepsAutomate your savings (pay yourself first)

Open a (ROTH) IRA

Enroll in your company’s 401k

Stick to low-cost index funds

Help a friend (ER) or 19 yr old cousin

Company stock plans

Don’t let inaction win!

Schedule a call w/ FutureAdvisor

My favorite personal finance resources

Fatwallet Finance Forums

Bogleheads

Blogs: Mr. Money Mustache, Oblivious Investor

The Coffee House Investor

*Bonus Material*Tax Loss Harvestingthe Credit Card game

Questions?What is FutureAdvisor?

Free product – analysis & advice Premium product – does it all for you + Tax-Loss

Harvesting – for 0.5%

How do you differ from the competition? We are holistic – they are not! Where you have to hold your $$

Why would I pay 0.5% for this service? Because it’s 1/2 to 1/3 the price of a traditional advisor Because it will actually get done! (80% fact) Tax-loss harvesting can recover > 0.5%

What funds do you use & are there commissions?

A free analysis takes two minutes:www.FutureAdvisor.com