Real Cash Flow: A Fix for the Fixed Income

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Charlie Jacobs (CJ): Hello, Harold. May I call you Harold?

Harold Evensky: I guess it depends. Who are you and how did you end up in my office?

CJ: My name is Charlie Jacobs. I’m a wholesaler for the Special Income Portfolio.

HE: Charlie, I have to ask you this: how did you get past the receptionist? I don’t normally take cold meetings with mutual fund wholesalers or fund salespeople. I prefer to speak to them after I’ve done my own preliminary analysis.

CJ: Actually, I waited until your receptionist was distracted by another guest, and then I crawled along the floor until I reached the hallway and slipped past the doors of your other coworkers as soon as they turned their heads away from the door.

HE: That’s quite remarkable. All right, Ninja wholesaler, now that you’re here, have a seat. What can I do for you?

CJ: I’m here to convince you to recommend the Special Income Portfolio to all of your clients. I even brought some golf balls as a nice gift to get the conversation started.

HE: You can keep the golf balls. Just tell me the facts about your fund. This could turn into a very quick visit.

CJ: It’s an income fund. Some of your clients are retired, aren’t they?

HE: Yes, they are.

CJ: And they need income from their investments to supplement their pension and Social Security to support their lifestyle. By the way, if you don’t play golf, I brought candy. Or maybe you’re interested in one of these cute little jump drives with our company’s logo on it.

HE: My retired clients need cash flow from their investments to supplement their other income sources, and I don’t want or need candy or one of those jump drives.

CJ: Well, the Special Income Portfolio is carefully designed to give your clients exactly what they need in the form of dividends and interest. It’s invested in companies that pay high dividends and bonds that pay high income. I have a little form you can fill out so you can start moving your clients’ assets over right away—

HE: Hold on a minute. You just hit one of my hot buttons. Maybe you should sit back and relax. This could take longer than either of us expected.

CJ: What do you mean?

HE: I have to confess that I’ve got a lot of pet peeves about the kind of nonsense that gets foisted on the public as good investment advice. But one of my biggest is what I call the myth of dividends and interest.

CJ: I can assure you that our portfolio manager doesn’t invest in myths.

HE: What you’re saying probably sounds plausible to 99 percent of the investing public. Of course, many investors need cash flow from their portfolio. So you put the words income fund in the name of a mutual fund, and it sounds exactly like what people need.

CJ: It is what people need.

HE: I disagree. We plan for a lot more than a fixed income. We plan for a consistent real income.

CJ: I’m not sure I follow you.

HE: I’ll make it easy. Does the carton of milk you bought last week, your last doctor’s visit, or your last new car cost more than it did five, ten, or fifteen years ago?

CJ: Of course.

HE: And do you think all those things and everything else will cost more in the next twenty to thirty years?

CJ: Probably lots more.

HE: Today’s dollar isn’t what it used to be and tomorrow it won’t be worth what it is today. Do you agree? Don’t you think you and I and everyone else will need more of those greenbacks in the future just to hold our own?

CJ: Yes, I suppose we will.

HE: How long have you been doing this work as a wholesaler?

CJ: Oh, I have weeks of experience. I know my way around, let me assure you.

HE: Somewhere in your sales training, you heard that professionals use the term real dollars to mean an amount of money that will buy the same goods and services (milk, doctor’s visits, and cars) in the future as it will today. A real dollar means the same purchasing power going forward.

CJ: I think I have that somewhere in my notes, yes. But I think you’re missing the point. When someone retires, he or she needs a fixed income.

HE: What horsepucky!

CJ: Excuse me?

HE: Dangerous advice like that really infuriates me. If people plan a retirement based on a fixed income, they had better be planning on changing their diet from steaks to cat food throughout the balance of their lifetime. What retirees need is an income that will increase every year by the inflation rate. Other than winning the lottery, that’s the only way people can maintain their standard of living.

CJ: We also have a lottery fund that invests in a diversified portfolio of state lottery tickets that I could show you—

HE: Let’s go back to deciding what kind of investments my clients need to make in order to supplement their pension and Social Security income. Suppose they buy into this myth you’re selling and construct an “income” portfolio.

CJ: Great idea! That’s exactly the fund I want to talk to you about.

HE: Now they have a portfolio bond/stock allocation that is largely fixed by design—inappropriate design. In almost all cases, it will cause an inferior portfolio for two reasons: Not only will the portfolio not allow them to accomplish their goals in real dollars, but it will also be inefficient.

CJ: Okay, I understand that you have objections.

HE: What do you mean?

CJ: The sales training said that I should overcome your objections, and the first step is to get your objections out in the open. So tell me your objections.

HE: With pleasure. In fact, I’ll draw you a picture. Here’s an example I use when discussing this issue with my clients. Consider a simple world in which you have only three investment choices—a money market, Bond Fund A, and Stock Fund B. In this world, the investments will provide exactly the returns I’m writing down in this simple table:

Does that look right?

CJ: It could be.

HE: Now suppose you’ve saved $200,000 for retirement and you need $14,000 a year from your savings to add to your Social Security and pension income. If you planned to get your needed $14,000 cash flow from dividends and interest, you would have to invest 100 percent in the Bond Fund. The reason is because, as you can see from this table I’m now drawing, the cash flow from Stock Fund B’s dividend payments is so low, any amount invested in stocks would drop your cash flow to an amount less than the $14,000 you need.


Bond A Cash Flow Stock B Cash Flow

Allocation from Bond Allocation from Stock Total Cash Flow

90 percent $12,600 10 percent $ 600    $13,200

50 percent $7,000   50 percent $3,000  $10,000

40 percent $5,600   60 percent $3,600  $9,200

CJ: Doesn’t that make my point?

HE: No. Because if you look at the future, then the purchasing power of that $14,000 starts to decline. Let’s say you’re retired, and I recommend the all Bond Fund. You might feel good today receiving the $14,000 you need; however, how would you feel ten years later if inflation had been 3 percent and your $14,000 only bought $10,417 worth of stuff?

CJ: I’d be calling my attorney to see if I had grounds for a lawsuit against you.

HE: And what happens twenty years later, when your diet has switched from steak to cat food, because that’s all you can afford?

CJ: I don’t like where this is going.

HE: I don’t want to give my clients fixed income when they need real income from a long-term portfolio that has an allocation to investments that are likely to rise in value and provide protection against inflation. In other words, I don’t want to guarantee that my clients will suffer losses in real-dollar terms. And that’s what you’re offering me.

CJ: Is that your objection?

HE: My objection is that investors do not need dividends or interest—they need real cash flow. So they shouldn’t fall for this myth that you’re selling about dividends and interest. Now you can feel free to overcome my objections, if you want. And please put those golf balls away.

CJ: Actually, I was wondering if I should move my money out of the fund.

HE: If you’re planning to live more than a couple of years, you might think about it.

CJ: Thanks, Harold. Thanks for the advice. Are you sure you don’t want one of these jump drives?

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.



Pay Taxes Now or Later? Traditional 401k vs. Roth 401k

Katherine Sojo

Katherine Sojo, CFP® Financial Advisor

If your employer offers you a traditional 401k and a Roth 401k, you might find yourself wondering what the difference is and why it matters. Traditional and Roth 401ks have several similarities such as that they are only offered by employers, the contribution limits are the same ($18,000 for 2017 plus $6,000 if you are over the age of 50), and the employer match is always pretax regardless of which option you choose. The biggest difference between a Traditional 401k and a Roth 401k is the timing of payment of taxes. In a Traditional 401k, your contribution is termed as pre-tax dollars; you receive an upfront tax break, reduce your taxable income, and pay the taxes when you take the funds out during retirement. The money withdrawn at retirement from a Traditional 401k is taxed as ordinary income using your tax rate at that time. A contribution to a Roth 401k is termed as after-tax dollars; this means you pay taxes on the contribution now, at your current tax rate, and therefore during retirement you withdraw the money and the earnings tax-free.

How do I decide? Ask yourself the following questions:

  1. Do I want to pay taxes now or later? What is my tax rate differential? If you believe you are in a lower tax bracket today and will be in a higher tax bracket during retirement, then paying the taxes now by funding a Roth 401k is a good option. If you believe you are in a higher tax bracket today and will be in a lower tax bracket during retirement, then funding a Traditional 401k and paying the taxes later is a good option.
  2. Can you afford to pay the taxes now? Knowing what the actual tax dollar benefit of a pre-tax or after-tax contribution means for your pocket is also a deciding factor (your tax advisor can help with this calculation). If you pay the tax now (Roth 401k), then your paycheck will decrease; therefore, you will have less money to cover expenses and/or less money for additional outside savings. A traditional 401k provides for a current tax deduction that results in some extra cash in your pocket now.
  3. Do you distrust future tax regulations? Do you believe taxes will increase in the future? If so, then taking advantage of a lower tax bracket now will signify contributing to a Roth 401k. Do you believe taxes will decrease in the future? If so, then hold off on paying taxes on the contribution until retirement and utilize a Traditional 401k.

There is also an argument for using a combination of both a traditional 401k and a Roth 401k to diversify your tax exposure. A combination of the two can provide some upfront tax benefit and also some protection on any tax rate changes in the future. It is not a simple decision, but truly thinking about your answers to the questions above can help you make the best decision possible for your retirement planning.

Feel free to contact Katherine Sojo, CFP® with any questions by phone 305.448.8882 ext. 243 or email:

Advisors: Who’s Who Anyway?

HRE PR Pic 2013

If you decide you’d like to get some professional advice, it would probably be nice to have some idea where to begin.


John Smith (JS): Hello, Harold.

Harold Evensky (HE): Hi, and who am I speaking with?

JS: I’m John Smith, a reporter with the Florida Times Journal Gazette. I need a sentence or two on who provides investment advice to consumers.

HE: A sentence or two? This is a pretty big topic. It’s often confusing even to us professionals.

JS: Maybe you can give me the gist of it.

HE: Well, I guess we could start with professionals known as money managers. They’re the people who know all about picking stocks and bonds. They may not know what kinds of stocks or bonds you should be buying or even if you should be invested in stocks or bonds at all, but if you need to make those investments, money managers are the experts to hire.

JS: Okay. Where would you go to find these people?

HE: For most investors, the best place to find an experienced money manager is a mutual fund.

JS: A what?

HE: If you’re a financial reporter, you must have heard of them. They’re portfolios of stocks or bonds or international stocks or sometimes other assets, sometimes in combination, managed by some of the world’s best money managers. They might not know a thing about you, the actual investor, but the better ones sure know about their portfolio.

JS: Okay, so I hire one of those—

HE: You don’t want just one. You need to diversify sectors and styles. The good news is you can hire lots of these managers, each one a specialist in a different area of the economy: one for big U.S. companies, another to pick stocks in small U.S. companies, a third to find you the best foreign stocks, and then others who specialize in government bonds, or municipal bonds, or different flavors of corporate bonds. When you check out those managers, keep an eye out for a CFA designation. That stands for Chartered Financial Analyst and is an internationally respected credential for money managers.

JS: I see. Okay. I want to thank you—

HE: Wait. That’s only one of many types of professionals you may need.

JS: What else could I want?

HE: Knowing how to pick stocks and bonds is terrific, but for individuals the most important question is how you decide how much to invest in stocks versus bonds.

JS: The money manager won’t help me with that?

HE: That’s the job of the expert known as the financial planner. That’s a professional who is educated and experienced in helping individuals—such as your readers—make good financial decisions.

JS: Let me write this down. This is good stuff. So how does this financial planner decide if I should be in whatever those international or small things were?

HE: Financial planners follow a six-step process to help advice their clients. A credentialing body called the CFP Board of Standards—which I chaired some years back—defines this process. Basically it means that the financial planner gathers your personal and financial data, helps you define your goals, and analyzes where you are today financially. Only then will this person make recommendations and give you alternatives. When do you want to retire? What kind of lifestyle do you want to be able to afford when you do?

JS: And then I hire the money manager?

HE: Again, it’s not manager but managers, and, yes, you could hire them on your own. However, with thousands of choices, most investors are better served letting a professional do the hiring for them. The financial planner will usually recommend a portfolio that will include several money managers in which he or she has confidence, in various investment sectors. Then the planner will monitor your progress toward your goals and watch over the money managers to make sure they’re doing the best possible job for you.

JS: I’m not totally sure I understand the difference.

HE: The money manager is an expert on portfolios, but doesn’t know a thing about you. For example, are you in a low or high tax bracket?

JS: I think I’m in a low one.

HE: Do you already have other investments that might overlap with the money manager’s stocks? Do you need current cash flow from the investments? Are you comfortable with market volatility?

JS: Even I don’t know the answer to these questions.

HE: The financial planner helps you understand and answer these questions. I could go on and on, but you get the point. It’s the financial planner—the expert on people’s financial needs—who will know all of that and much more about you.

JS: Do these financial planners also get the CFA designation?

HE: No, that’s the professional designation for a money manager. In my opinion, the certified financial planner (CFP®) credential represents financial planning’s highest standard. A professional holding the CFP mark has demonstrated not only knowledge of investments and planning but also an ability to apply that knowledge for your benefit.

JS: Does that mean that you’re a CFP planner?

HE: Yes. But in fairness, there are two other respected credentials in the profession: the insurance industry’s ChFC (chartered financial consultant) and the accounting profession’s PFS (personal financial specialist).

JS: I think I have more than my two sentences. If there’s anything else—

HE: There’s a lot else.

JS: [Sigh.]

HE: Tell me about it. It’s amazingly confusing for the poor consumer. Other types of designations reflect statutory registration or licensing requirements.

JS: Licensing? You mean like a licensed hair stylist?

HE: Some of these are actually sales licenses. Examples are the Series 7 licenses, which are required for advisors who earn commissions for selling investments, and the RIA (Registered Investment Advisor), a registration required of individuals who charge fees for providing investment advice. Depending on the business model used, a professional might be registered as an investment advisor as well as holding a securities license.

JS: I hope we’re finished. Please tell me we’re finished.

HE: Well, we haven’t actually talked about what kind of professional I happen to be.

JS: Sigh. Which is?

HE: A wealth manager. The term wealth manager, as we use it, was introduced in a book, by that same name that I wrote for other professionals in the late 1990s. I defined it as a financial planning professional whose business specializes in a client’s needs regarding investment and retirement planning.

JS: So that means you are—

HE: I’m a CFP licensee, and my firm is a financial planning firm specializing in what we call wealth management.

JS: I don’t think any sane person could keep track of all this.

HE: If you have to remember only one thing, then understand that current laws do not ensure that all professionals providing investment advice are looking out for your best interests.

JS: Don’t I want somebody serving my best interests? I don’t want to pay somebody to convince me to buy something that earns more for their company than it does for me.

HE: Now you’re getting it.

JS: So what do I do?

HE: If you want my best advice, no matter who you ultimately select to guide you, your best protection is to ask the advisor to sign a simple, “mom-and-pop” commitment acknowledging that they’re really looking out for your best interest.

JS: Can you send me a copy?

HE: I will. Be sure and use it for your own protection.

And I did. Below is the document I sent.


I believe in placing your best interests first. Therefore, I am proud to commit to the following five principles:

  1. I will always put your best interests first.
  2. I will act with prudence—with the skill, care, diligence, and good judgment of a professional.
  3. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.
  4. I will avoid conflicts of interest.
  5. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.


This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

How to Start Happily Ever After…


Your wedding day was beautiful, you married your one true love, and everything was perfect. You are back from your honeymoon, and reality is setting in. How do you proceed to finalize all the remaining details to start your lives together, things like name changes, employee benefits, and estate planning?

Name Change

Will you be changing your name? Traditionally, one spouse takes the last name of the other spouse; however, it is not required. When I got married a few years ago I used a checklist2 from as a starting place for what I needed to do to change my name.

But whatever you decide, make sure that you follow the requirements for your state since each state’s laws differ. Most states require that you have your marriage license/certificate prior to any changes. It may take up to six weeks up from filing for your marriage license for you to receive it.

Places to change your name:

Employee Benefits

Employee benefits should be considered at this time. Marriage is a qualifying life event that allows you to have a special open enrollment period (normally 60 days) to add your spouse to your employer benefits for health insurance. Whether you are both employed and have benefits to look into, or one of you has benefits for the other to be added to, it’s a great time to review what is available. If you both have health benefits, you can have primary and secondary insurance if it makes financial sense or change over to your spouse’s plan.

Other employee benefits to consider reviewing if they are applicable:

  • Life and disability insurance (Do you have dependents to care for now?)
    • Review terms
    • Update beneficiaries for life insurance
  • Child and elder care benefits
  • Retirement plans – look to maximize benefits and update beneficiaries
  • Other available options through cafeteria plans

Estate Documents/Update Beneficiaries

Each major life event is an optimal time to review and update your estate plan. Review and update any beneficiaries on retirement plans, life insurance, or other investment accounts. Accounts that have beneficiaries listed do not go through probate, and your will does not determine who receives the assets unless you list your estate as the beneficiary.

If you do not have any estate documents such as a will or power of attorney, this maybe a good time to consider having them drafted and executed, especially when there are dependents involved. An attorney will help you answer the necessary questions and draft the documents for you.

Many couples also seek legal counsel for post-nuptial agreements as a precaution in case things don’t work out in the marriage, particularly if either spouse comes into the marriage with a significant amount of property or an uneven earning potential. If needed, ask your personal financial planner for a recommendation.

Common Law Property vs. Community Property

Most states are common law states, which in layman’s terms means that marital property remains separate unless you title it differently. However, there are nine states that are community property states (show in blue below — Alaska is an optional community property state1).

5.b After-Marriage_AB - Image file.

Community property means any property acquired during the marriage is owned jointly. This would include work income and investment earnings. Property owned prior to the marriage such as inherited assets or gifts received is generally considered separate property. It is a common practice for individuals in community property states to keep any separate property that was either obtained prior to the marriage or received as a gift/inheritance during the marriage in separate accounts in their individual name.


Another topic to discuss, if you haven’t already, is the management of household expenses. Will the responsibility be split or will one spouse take on the majority of the responsibility? Will your accounts be comingled or separate?

Student loans are usually a topic of discussion in terms of the best way to pay them down. By consolidating the loans you would strip away necessary characteristics that could qualify the student loan for forgiveness later in life. Proceed cautiously when looking to combine debt, and consult with your financial planner as to the best way to reduce debt.

Also, in this day and age many, if not all, of our accounts have a way to access them online. It may be helpful to use a password management system to help keep access to your accounts available to each other. Especially if one of you does the management of household accounts or expenses on a frequent basis, you want to make sure your spouse has access just in case something happens to you and you are unable to access the accounts.

May you each learn to live with each other’s quirks and enjoy each day with one another. Who knows what this adventure will hold for you?

Disclosure: This list is not exhaustive, but a basic starting place to combine separate financial lives.

Feel free to contact Anne Bednarz, CFP® with any questions by phone 806.747.7995 or email:

1 Bishop, S. (n.d.). Dividing Property in Alaska. Retrieved December 27, 2016, from

2 Black, A. (n.d.). How to Change Your Last Name After the Wedding. Retrieved December 27, 2016, from

3 Change or Correct a Passport. (n.d.). Retrieved December 27, 2016, from

4 Change Your Name with the Texas DPS & DOT. (n.d.). Retrieved December 27, 2016, from

5 Perez, W. (n.d.). Community Property States. Retrieved December 27, 2016, from

6 Social Security. (n.d.). Retrieved December 27, 2016, from

You’re Engaged! Let the planning begin…


Anne Bednarz, CFP®, AIF® Financial Advisor

Congratulations on your upcoming marriage! It’s an exciting time in your life, with a new chapter to begin with your love and your lives together. Let the planning begin for the big day; it is also a good time to tackle a topic that will affect you long after your wedding day. This is an essential time to discuss your finances. Where are you currently? Where will you be after your wedding day? What are your long-term goals for the next five to ten years and beyond? By setting the tone prior to your wedding day and knowing what your goals are, you can work together as a team to accomplish them.

Where are you each currently?

How much do each of you bring to the marriage? Is it in a bank account, a retirement account, other assets, or debt? Bring it all to the table so each of you knows exactly what you’re stepping into. What are your spending habits? Do you live paycheck to paycheck, or are you a saver? Often opposites attract, so this could be an important discussion point for you.

Do you live in a common law state or a community property state? (Community property states are Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico and Wisconsin.) This is particularly important for those in community property states. Anything that you own prior to marriage will remain your own in a community property state, and anything that is earned, purchased, or comingled during the marriage could be considered joint property. Will you keep these assets separate or combine them?

If you bring debt to the table, what type of debt is it? Do you own your own business and have business debt that you are personally responsible for, or do you have consumer or student loan debt? If it is student loan debt, there are several ways to approach how to pay it off, and a personal financial planner can help you understand the best way for you and your spouse to approach it. Some types of student loans can lose their potential loan forgiveness characteristic if not treated properly. Tread carefully.

How to conquer everyday living

How will you approach your everyday living situation… will you divide and conquer, or will you both take it on jointly? This is also a good time to sit down and make a joint spending plan. What items are essential for each of you beyond basic living expenses?

There are several approaches when setting up your finances together:

  1. You can combine everything and have a joint account from which you both spend.
  2. You can keep separate accounts. Each of you is responsible for one-half of the bills, or depending on earnings, keep it proportional to the income you earn.
  3. A combination approach. Have a joint account to pay for the basic joint bills, utilities, rent/mortgage, insurance, etc. Then have your separate accounts to pay for any separate debt obligations, or separate spending money for what you consider essential.

It is also a good idea to set boundaries for what amounts are okay to spend without seeking your spouse’s consent versus making an expensive purchase without consulting your spouse and possibly damaging your financial trust. As many of us have read, the divorce rate in the US is roughly 40 to 50%,1 and a common issue is money. If one of you handles the money most of the time, then set aside a time each month to review what is happening so you both are in the loop.

Future Goals — Do a little dreaming…

What would you each like to accomplish in the future? Write down the goal, the amount it is expected to cost, and the estimated time horizon. Revisit your goals each year, and modify them as needed. Life happens, and the best laid plans get interrupted, but being able to adjust and move on is essential in life.

For example:

Year 1:

  1. Start retirement savings accounts.
  2. Maximize the amount that your employer contributes.
  3. Set up an adequate emergency fund.
    1. 3–6 times your monthly expenses
  4. Set up a debt reduction schedule.

Year 3: Pay off all your student loan(s) by your third anniversary.

Year 5: Purchase your first home for $X.

Year 10: Purchase a boat or recreational vehicle for $X.

As uncomfortable as it may be, it’s also a good time to discuss your current financial situation now, rather than later. You will both be able to have a better understanding of where you were coming from and where you are going in the future. Enjoy your engagement and prepare for your life together.

Feel free to contact Anne Bednarz, CFP® with any questions by phone 806.747.7995 or email:

1 American Psychological Association: Marriage & Divorce,

Umbrellas and Bumbershoots: How Risky Investments Can Make for a Safer Portfolio

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Harold Evensky: Good morning, class.

Class: Good morning, Professor Evensky.

Andrew: Professor Evensky, why are you carrying that umbrella? The temperature outside is 110 degrees and it hasn’t rained in the past three months!

HE: Andrew, that’s an excellent question. And this umbrella is what we call a prop. It will help introduce one of the most important issues in wealth management: diversification and asset allocation, and why they’re so important in helping our clients meet their goals.

Elizabeth: Professor Evensky, will this be on the test?

HE: So I’ve prepared a little exercise to help all of us think through how to make investment recommendations in light of client goals. Is everybody ready?

Class: Yes.

HE: In this exercise, our clients live in a simple world where they have a choice of only three investments. Two of them are risky. I’ll write the choices here on the whiteboard:

HE: Everybody got that? As a sophisticated planner, you recognize that the swimsuit and umbrella company stocks are very risky, since an investor will either make a great return or no return, depending on the weather. So you’ve consulted with some of the world’s greatest meteorologists and arrived at the following:


Meteorologists’ Predictions

80 percent probability that it will be rainy 90 percent of the time

60 percent probability that it will be rainy 70 percent of the time

30 percent probability that it will be rainy only 20 percent of the time


How would you recommend my clients allocate their investments? Where do you start?

Andrew: Well, you say we should always start with what we know about our clients.

HE: Great start, Andrew. And what important things do we know about them?

Andrew: To achieve their goals, they need at least a 10 percent return. We also know they are not very tolerant of investment volatility. They don’t like their investments to bounce around a lot.

HE: Good so far. Kiran, where does that take us?

Kiran: Only now should we look at the investments. We should look at the possible investment outcomes—which, in this case, seem to depend on the weather.

Nicholas: Professor Evensky, while everybody else was chattering on about the clients, I made up a little table that shows all the different possible portfolio returns based on the weather data you gave us.

HE: Thank you, Nicholas.

Nicholas: I also created a neat little algorithm that will do these same calculations if we ever run into a problem like this again. I could show you after class.

HE: Nicholas, I’m going to go out on a limb and predict that you have a bright future as an investment analyst.

Nicholas: Whatever. Wait. That doesn’t mean I’ll have to talk to actual people, does it?

Carly: Professor Evensky, I’ll check Nicholas’s math.

HE: Thank you, Carly. So does everybody see where the numbers come from?

Suppose, for example, you have 90 percent allocated to umbrellas and it rains 70 percent of the time. That means you will profit from all of the 70 percent rainy days. That’s a net of 14 percent to 20 percent, maximum, times 70 percent, right, Nicholas?

Nicholas: Obviously.

HE: Okay, now let’s consider how we did with our swimsuit company investment. Since only 10 percent is invested in the swimsuit company, and there are 30 percent sunny days, the swimsuit company can profit from only some of those sunny days. So my return is 20 percent, maximum, times the 10 percent I have invested in swimsuits, which equals 2 percent. Add 2 percent return from swimsuits to 14 percent return from umbrellas, and you get a total of 16 percent. If this turns out to be the real weather pattern, I didn’t get the full 20 percent because I owned too many umbrellas and not enough swimsuits.

Kiran: And that’s where all the other possibilities came from?

HE: Correct. You can use the same process to calculate the other figures in the chart. So now what? Do you have an answer to the proper allocation for these clients who need 10 percent a year and don’t like a lot of volatility?

Alicia: Well, I guess we have to toss out the safe investment.

HE: Good, Alicia. Why?

Alicia: At a fixed 8 percent, the CD is a nonstarter. For someone who needs 10 percent, only receiving 8 percent, no matter how guaranteed, would be a failure.

HE: Good thinking. Of course, when you present the alternatives, our client might elect to revise the goals so that 8 percent would suffice. But before we recommend that, let’s look at the risky alternatives. What do you see here?

Kiran: I’d apply Modern Portfolio Theory, and come up with a blend of the risky investments. If you blend investments that respond differently to different investment climates, then the result is a portfolio with less volatility.

HE: Very good. And did y’all get my joke? Investment climate—rain or sun—pretty funny, right?

Kiran: Professor Evensky, maybe you shouldn’t try to be funny in class.

HE: Yes, well, the important thing is that we can blend these risky investments. And in this simplified investment world we’ve created, what do you notice immediately?

Alicia: The risk and return patterns are exactly the opposite. You make money in swimsuits when it’s sunny, and when it rains, your return comes from umbrellas. It either rains or it doesn’t.

HE: Right. So?

Alicia: So in that simplified investment world, if we put half in swimsuits and half in umbrellas, we’d always be making 20 percent on half of our portfolio and 0 percent on the other half.

HE: And?

Andrew: For these clients, if they invest half of their money in swimsuits and half in umbrellas, no matter what happens, even if it never rains again or the deluge never ends, or anything in between, the clients will get a guaranteed 10 percent return—which is exactly what the client needs.

HE: Excellent. Of course, in the real world, you probably have thousands of different drivers of the profits of tens of thousands of different companies. If you were to bet on any one of them, there’s the possibility that whatever you were betting on, just the opposite would happen and you could lose a lot of money. But if you spread your bets around, and the economy grows—which it has done since people were living in caves—then all of those bets across all of those different drivers will smooth out some of the ups and downs. And there’s a high probability, based on history, that your clients will get returns commensurate with their willingness to wade into the world of market risk. Diversification really works.

Kiran: But there’s still risk, right?

HE: Of course. The moral here is not that you can eliminate risk; but in designing your portfolio and evaluating risk, you need to consider the risk of the combined investments, not the risk of each individual investment. And let’s not miss something equally important: you need to consider the risk of not achieving your goals by confusing certainty and safety. Does everybody get it?

Class: Yes, Professor Evensky.

HE: And yes, Elizabeth, this will be on the test.

Elizabeth: What’s that?

HE: But I wanted to get back to something we talked about earlier. Who thought that my investment climate joke was funny? And try to keep in mind that your grade might depend on it.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Credit Card Benefits

Josh Mungavin

Josh Mungavin CFP®, CRC® Principal, Wealth Manager

Credit cards can come with significant benefits, many of which are commonly overlooked. As significant value can be derived from credit card benefits, it’s important to understand the benefits both of currently owned credit cards and potential new and better credit cards. Having the best credit card for personal use and taking advantage of everything it offers can add substantial value over time. Obviously, one of the most focused-on benefits is the reward program that is advertised with a card, but that is not everything that you get when you use a credit card to its full potential.


Some credit cards protect your purchases and provide options if anything should go wrong with a purchase, or if the price of your purchase is reduced in the near-term future. Here is a list of some of the different types of purchase protections that credit cards can have.

Price Protection — This benefit allows you to buy something and get a partial refund if the item goes on sale during a set period of time. This generally requires that you register the purchase with the credit card on the credit card’s website and then petition the credit card company to refund the difference in price. Obviously, you would not want to do this for every small purchase, but for some large purchases, especially those purchases that have a history of price volatility, it may very well be worth your while to put them under the price watch for your credit card and to check during the time price protection is available on that item to see if the price decreases.

Purchase Protection Insurance — This benefit covers you in the case of theft or damage of a newly-purchased item within a given period of time. This can be used strategically. For example, this coverage could be used if you intend to purchase a new phone and have a trip coming up in an area of the world that is prone to pickpocketing and theft. You can coordinate the purchase of a new phone with the Theft Protection coverage on your credit card so that you don’t have to take an old phone or worry about your new phone being stolen while you are on vacation.

Extended Warranty Protection — This benefit extends the manufacturer warranty on purchases for a certain amount of time. This may mean the offer to purchase an extended warranty may be of much lower value than it would have been otherwise, had you not had the coverage from your credit card. Obviously, you need to know the details of how this type of coverage works before making any warranty decision for any large purchases. It is always worth checking on any potential insurance coverage from your credit card before you purchase an extended warranty or a replacement product at your own expense, as you may have a warranty that you did not know you had through your credit card company.

Some credit cards will even refund the amount of a purchase if the store where the purchase was made will not accept a return.

Travel Benefits

One of the areas in which credit cards can add a significant benefit is travel. Below are a few of the benefits the travel cards have that may be of use to you, but that you may not know about.

Travel Insurance — This insurance can include medical and dental coverage within certain limits if you’re traveling outside of a certain radius of your home.

Car Rental Insurance — It is important to know whether the insurance provided by the card is primary or secondary insurance. Primary insurance means the card’s insurance covers the incident up to the benefit amount without factoring in any existing auto insurance coverage you may have. Secondary insurance requires that your personal auto insurance policy pay any claim up to your personal auto insurance limit first, then the secondary insurance will cover the remainder up to the secondary insurance limit amount.

Access to Airplane Lounges — This can be access to a particular network or provider of lounges and will often include free showers, food, drinks, WIFI, and a quieter place in the airport to relax and wait for your flight. The airline-specific lounges may also be able to help you with any ticket changes without the need to wait in the normal check-in lines in the case of a canceled or delayed flight. This may also allow the card holder to bring a certain number of guests into the lounge for free or for an added charge.

Trip Cancellation Insurance — This insurance will give you a refund for any eligible non-refundable trip expenses if certain emergencies arise that mandate a trip cancellation.

Trip Interruption Insurance — This provides a stipend if your trip is delayed by a certain amount of time. For instance, the card may give a certain dollar amount credit per person on the trip if your flight is delayed by more than four or five hours. This credit can generally be used for lodging or dining.

Baggage Delay Insurance — This insurance provides a stipend if your baggage from a flight is delayed for a certain amount of time so that you have money to replace essential items while you wait for your bags to be delivered to your hotel or home.

Lost Luggage Reimbursement — This is similar to baggage delay insurance as it provides you with a certain amount of money if your bags are lost and never recovered. This is intended to allow you to replace the items in your baggage up to a certain dollar limit.

No Foreign Transaction Fees — This can be meaningful as some credit cards charge 1 to 3% in foreign transaction fees on any purchase paid for in a foreign currency; often, paying for things in U.S. dollars while in foreign countries comes with hidden expenses.

Credit for Global Entry or TSA Pre-Check Fee — This may be provided to cover the cost for the owner of the card to get Global Entry or TSA Pre-Check, both of which help in getting through airport lines much more quickly.

Accidental Death and Dismemberment Insurance — This provides for a certain amount of insurance if an accidental death or serious injury should occur while you are in transit paid for with the credit card. This amount can range from around $100,000 to $1,000,000 per person.

Emergency Evacuation and Transportation Insurance — This is used to help you leave a country you are visiting if there is a medical emergency, and may provide help ranging from special flight accommodations to being escorted by a doctor so that you can get medical care in your home country.

Special Arrangement with Travel Providers — This can include priority boarding, free checked bags on flights, frequent customer or preferred customer status with a travel company, free upgrades if available, free nights at hotels if you booked for a certain number of nights, free Internet access, resort credits, or free breakfast.

Other Benefits

Many credit cards come with a concierge service. Generally speaking, the low quality of help provided never ceases to amaze me regarding these services. That’s not to say that value cannot be derived by using these services, but the value varies greatly depending upon the request and the individual working for the concierge service assisting you. The best uses of these services, in my experience, tend to be along the lines of a very basic task-oriented personal assistant. It is unusual to be able to get any reservations or tickets from these services that you would not be able to get on your own. It can be very useful to call the service before leaving for vacation and ask for a city guide for the city that you are visiting to include things along the lines of best restaurants, entertainment, things to see, any special events happening in town while you are there, best hotels in town, or a list of available tours. The service can also be used to coordinate with companies in other countries that only have an international phone number so that you do not have to make an international call in order to do business with the company in the other country, for instance, buying a product or making a restaurant reservation.

Some credit cards arrange for special access or discounts on tickets for sporting, music, or entertainment events.

It has become more common for credit cards to provide you with access to your credit score so that you can monitor it for free on a regular basis.

Roadside assistance is a benefit that is often overlooked by those with credit cards that have the coverage and may be paying for roadside assistance unnecessarily.

Some of the higher-end credit cards also provide annual credits. These can be for any travel-related expenses, a particular named airline and the associated fees, or for some specific service such as Uber. These credits, if available, generally amount to hundreds of dollars per year. The way that these credits are given may also lead to some opportunities. Often, the credits are given on a calendar-year basis. This means that each January the credit resets. Membership fees, however, are usually charged on a membership-year basis, in other words, twelve months from the date you sign up for the card. This means you may be able to sign up for a credit card in June so the first year’s fee covers the timespan between June and December, get a new credit in January and use the new credit before June, then cancel the card having only paid for one year’s worth of membership but receiving two years’ worth of credits.

Special Considerations

Credit card fees can range from nothing to hundreds, or even thousands, of dollars per year. These fees may be worth paying if the benefits are substantial enough to justify the cost and in fact you may end up making a profit from owning a high-fee card if the card is a good choice for you and the way you use credit and the benefits involved. The signup bonus provided by the card may good be enough to justify the first few years of fees, regardless of any other benefits.

Credit Card Rewards

Credit card rewards and redemptions are a benefit that can add some of the highest value if used strategically. Often, it seems that credit card rewards schemes are built to be intentionally misleading or confusing which can cause people to get a far smaller return than that which is possible. This section could go very in-depth and certainly the more time someone spends understanding these rewards, the more they are able to get a good or very good return from the rewards that they have earned. The purpose of this section is not to teach you how to maximize rewards, as that is a constantly-changing field, but to help you at least get an acceptable level of return from the rewards you are earning. For our purposes, a 2% return is what should be expected as a minimum from your credit card purchases. The reason for this is that there are cards available that provide you with 2% cash back in every category with no yearly fees.

If you are not getting at least 2% back from your purchases, a cash back card may be the best card for you on a day-to-day spending basis. As a general rule, it is less beneficial to use rewards for products, cash back, or cheap airline tickets. An easy way to tell if you are getting at least 2% back is to look at the price of the airline ticket or other benefit you would be redeeming and compare it to the number of miles or points you must redeem to get the same ticket. Here is an example: let’s say you earn 1 point per dollar spent. The ticket you want to book is either $300 or 30,000 points. We would calculate your percentage return by dividing the $300 cost of the ticket by 30,000 points, which gives us 1%. Because you were only earning 1 point per dollar spent, you would multiply the 1 point per dollar spent by the 1% and get a final return on your reward of 1%. In this case, you would have earned twice as much money just by having a cash back reward card that gave you 2% cash back and you would be able to book any airline ticket or other benefit you wanted with the money earned from the cash back. In the case of an airline ticket, you would also have the benefit of earning frequent flyer miles on the airline for the miles flown during the flight.

It is not uncommon for me to see people receiving less than half of a percent back from their rewards. Keep in mind, there are some cards that will pay you multiple points for every dollar spent in certain categories. This means that if you earn 3 points per dollar spent in the situation mentioned above, you would multiply the 1% redemption by the 3 points per dollar spent to give you a 3% return. Returns can significantly exceed 2 or 3% if you are willing to spend the time to maximize them, but it will take some time and research in order to be able to learn to do so. The reason to perform the calculation is to know what you are actually getting in rewards so that you know if you should switch to a cash back card, that will not provide the most optimal rewards, but will provide ease of use and at least the minimum amount of rewards back, or if you should choose to learn more about rewards and how to maximize them.

One last point to mention on rewards is the Rewards Network. This is a service that is at the center of many airlines’ dining programs and Upromise college cash back. You can add any credit card to one of these services online, and if you dine at one of the participating restaurants, you earn either additional airline rewards or cash back for college savings automatically. These services are free and only require a one-time sign up on the program’s website, though you can only choose one of the programs for each card. You might be surprised at how often you dine at one of the participating restaurants and earn miles or dollars just for going through a one-time sign up.

The intent of this article is not to encourage the use of a particular card or type of card, but to make you aware of some of the lesser-known benefits of using a credit card. That being said, there are a few cards that are among my favorites, which include Fidelity Rewards Visa Signature, Citibank Double Cash, Citibank Prestige, Chase Sapphire Reserve, and American Express Platinum. If you fly often on the same airline and have checked luggage, it may also be worthwhile to have that airline’s credit card so that you can check bags for free and receive priority boarding. The yearly cost of the card may be more than made up for by the amount of money that would have otherwise been spent on checked baggage.

Feel free to contact Josh Mungavin CFP®, CRC® with any questions by phone 305.448.8882 ext. 219 or email:

False Security: When Stop Loss May Really Mean Guaranteed Loss

HRE PR Pic 2013

I was reading a story in one of my profession’s trade journals about a financial advisor’s solution to helping retired clients develop income strategies in a volatile market. The advisor has been in business since the early 1970s, but the 2008 financial crisis was his wake-up call to move to “tactical investing.”

I have to confess that I’m a skeptic about anyone’s ability to call market turns, so I was already biased when I started reading the article. But I lost it when the story said his major strategy was using stop-loss orders to avoid big declines.

For those not familiar with a stop-loss order, I’ll explain: it’s an instruction to your broker to put in a sell order if your stock price ever drops below a predetermined price.

To find out more about the dangers of this strategy, let’s eavesdrop on this advisor’s conversation with a customer.


Dr. Charles (Dr. C.): Hello, Joe [the broker]. This is Dr. Charles.

Broker: Dr. Charles, how can I protect your investments today?

Dr. C: I have a large investment in High Tech, Inc., after all, you recommended it to me.

B: A terrific investment recommendation, if I may say so myself.

Dr. C.: Well, yes, but the thing is I’m becoming a bit concerned about it.

B: Why? High Tech is the future.

Dr. C.: Maybe so, but the stock is bouncing around like a yo-yo. It’s finally back up over the high it reached eighteen months ago, but I’m afraid, given its history, it’s going to drop back down again on me.

B: Would you like me to protect you from your stock investments going down?

Dr. C.: Exactly! Would you?

B: Certainly. I’ve been practicing this safe investment methodology since, well—there really isn’t any reason to get into how recently I’ve changed my entire investment philosophy. The point is it looks as if you need a stop-loss order.

Dr. C.: A stop-loss order? Is that what it sounds like it is?

B: The point of a stop loss is to stop your losses and let you keep your gains. You like gains, don’t you?

Dr. C.: Yes. Yes, I do.

B: And what about losses?

Dr. C.: Not so much.

B: So let’s look at the old terminal here. I see that High Tech is trading at about $56½, which is a pretty nice run during the past couple of weeks.

Dr. C.: Right. But before that run, it was priced below what I paid for it.

B: It looks like the last trade was at $56. It’s been trading in a pretty narrow range, between $50 and $60, for the last few days.

Dr. C.: So what can I do to protect myself from the next drop?

B: Tell you what. I’ll put a stop loss in for you at $52. Your basis is $48 so, if worse comes to worst, you’ll lock in a profit of $4/share.

Dr. C.: Thank you, Joe. You’re the best. Now I can sleep at night.

[Nine months later]

Dr. C.: Hello, Joe.

B: Hello, Dr. Charles. How can I protect your investments today?

Dr. C.: Well, you may have noticed the screaming headlines in the newspapers or heard the cable television folks talking about the fact that the bottom dropped out of the tech market.

B: I did notice, yes.

Dr. C.: High Tech was clobbered worse than most. I just wanted to be sure my stop loss got executed.

B: Yes, sir, I see your position now. It did get traded.

Dr. C.: Thank goodness, I just saw it trading at $32! Sure am glad I got out at $48. With my 10,000 shares, I still made a nice profit of $40,000. Thanks, Joe. That’s all I wanted to find out.

B: Uh, hold on a minute. You’re correct that it’s now trading at $32.25. But when the initial sell-off hit, the stock actually dropped all the way down to $27.

Dr. C.: Now, I feel even better that I was able to sell out.

B: Well, that’s the thing. When your stock dropped below $48, that triggered your stop-loss order, all right. Then your shares were sold at market. Unfortunately, the price you sold at was $29.50 not $48.

Dr. C.: What?! How could you have sold me out at $29.5?! I said I wanted $48 minimum.

B: Well, I’m afraid that’s not how a stop-loss order works. I just assumed you knew that when we set it up. All a stop loss does is trigger an open-sell order when and if the stock price drops below the stop-loss price. What happened with High Tech is that with the huge volume of sell orders pouring in, a few trades were done at $48, resulting in your open order to sell “at market.” Unfortunately, there was already a ton of sell orders on the books ahead of you. So by the time your order was executed, the price was $29.50.

[One week later]

Dr. C.: Hello, Harold.

Harold Evensky (HE): Pardon me. Who is this?

Dr. C.: My name is Dr. Charles. I saw you were quoted in the Journal, and you had some skeptical things to say about stop-loss orders. I’m looking for a new financial advisor, and I was hoping you could tell me more about what you think of stop-loss strategies.

HE: On the surface, they look great. They cost nothing, and they preserve all the possibility of further gains, and if you don’t know how they work, you might think that they eliminate the potential of loss beyond the stop-loss order price. Unfortunately, that’s an illusion.

Dr. C.: Tell me more.

HE: The major problem with stop-loss orders is they’re executed mindlessly. There is no guarantee what price you’ll sell at once the stop-loss order is triggered. If the market’s falling rapidly, you may end up selling at a price well below your stop-loss price.

Dr. C.: Actually, I found that out the hard way.

HE: I’m sorry to hear that. But you’re not alone. Here’s a quote from John Gabriel, a Morningstar strategist:

One type of trade that we vehemently avoid more than any other is known as a “stop-loss” order. Consider yourself warned: if you perform an online search for this term, you’re likely to find some misleading definitions. For instance, you may come across an explanation like, “setting a stop-loss order for 10 percent below the price you paid for the security will limit your loss to 10 percent.” Our main problems with this statement are that it is blatantly false, imparts a false sense of security, and can lead to truly disastrous results.


Dr. C.: I wish I’d seen that a month ago.

HE: Gabriel went on to say, “We often quip that a more appropriate name for a stop-loss order would be a guaranteed-loss order”—strong stuff and I couldn’t agree more.

Dr. C.: Do you know of any strategy that does work to limit losses?

HE: You can somewhat mitigate the risk of selling way below your targeted stop-loss price by using what’s called a stop-loss limit order. It’s a little more complicated, but it tells your broker to enter a sell order if the price drops below the stop-loss, but also tells him not to sell if it falls below an even lower limit order. The catch is, if that happens, it means you still own the stock after the price has dropped.

Dr. C.: So, in other words, safety is an illusion.

HE: My bottom line is: If you decide to be a market maven and pick your own stock, then you should decide when to sell, depending on the market environment at the time. Don’t fall for the false security of a mindless automatic trigger. In fact, you may not want to sell at all.

Dr. C.: What do you mean?

HE: When you go to the grocery store and something goes on sale and the price is really cheap, does that mean you go home, rummage around your refrigerator, and offer to sell stuff back to the store at a price that is lower than you bought it?

Dr. C.: Of course, not. I’d probably take advantage of the low price and buy extra.

HE: Then why do people do just the opposite with stocks? When stocks go on sale, the first thing people think about is selling. To my way of thinking, a big drop in price may be a terrific opportunity to buy more, not a reason to sell.

Dr. C.: I never thought of that.

HE: If you want to come in and talk with me, I can set up an appointment. But I’m going to warn you in advance: I don’t have any magic formula for protecting you against the ups and downs of the stock market.

Dr. C.: Believe it or not, at the moment, that’s music to my ears.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Budgeting: A Roadmap to Your Expenses

Michael Walsh

Michael Walsh, CFP® Financial Advisor

Understanding how much your lifestyle costs on a yearly basis is an essential first step toward planning for your financial future. It is not uncommon for prospective clients to visit us, having accumulated a large amount of money through years of diligent savings, and not have any idea what it costs for them to live on a yearly basis. Typically, we hear from these folks, “I guess we spend somewhere between $150,000 and $300,000 per year to live the way to which we have grown accustomed.” With such a large range in actual cost, we must sit down with them and come up with a realistic number. The way we identify this number is to start with a budget.

People typically hate keeping track of all their expenses for two main reasons. The first is that it is challenging to keep all the receipts and a current running tally of their expenses. Between credit cards, debit cards, checks, and cash, there are a lot of moving parts on top of which to stay. Aside from the clerical aspect of the exercise, there are months when most folks are scared to look at how much money they spent. This is not to say that they are financially irresponsible, but there are times when more money was spent than anticipated. People often do not realize that they have a large amount of their yearly expenses lumped together such as insurance premiums, tuition payments, or various taxes/assessments.

For years, I talked with my peers about an easier way to keep track of what I am spending on a yearly basis. After doing some preliminary research, I found the answer in the form of an application that keeps a running tally of all my cash inflows and outflows (I use, but there are numerous other services available). I set up an account through a secure server and the aggregating system feeds information from my credit and banking institutions daily. Once each quarter, I log in and track my spending over the previous three months, which helps me understand how and on what I spend my money. It helps me understand both my necessary and discretionary expenses. Note that before you begin using any system, you should make sure it is safe and secure. Speak with your financial advisor, banking institution, and credit card company to start the process and see if they can make any recommendations. In today’s world, you must be extra careful when it comes to putting your financial information online as there are predators out there trying to steal your information.

It is essential to understand the extent of your necessary expenses, as these are things without which you cannot live. These would be expenses such as your rent or mortgage, vehicle expenses (insurance, gas, and general upkeep), food, electricity, water, gas, and for many people, their student loan payments. Anything that you can live without falls into the discretionary category, as in a pinch, you could do without these things.

Once you understand what you need to cover basic expenses, I suggest you budget for an emergency fund, just in case something happens and you need to maintain your lifestyle. Typically, a good rule of thumb is to have three to six months worth of expenses in cash should something happen to cause you to lose your source of income. At the end of each year, I look back at the different categories of spending and cash inflows (i.e., money from my bi-monthly paychecks) to see what my current lifestyle costs. This knowledge allows me to set up smaller budgets that are used for specific things. My parents are planning a big family celebration for their fortieth wedding anniversary. They have developed an anniversary budget and deposit a certain amount of money from each paycheck into this bucket; these funds will help offset the cost of the celebration. Another example of a specific budget is for people who are planning to travel and want to set aside a specific amount of money for that trip to Europe (or anywhere else) they are going on next year with their friends. No matter what the money is used for, before you can start on your path to financial freedom, you need to understand your current spending habits and set up a plan with which you are going to stick.

Feel free to contact Michael Walsh, CFP®  with any questions by phone 305.448.8882 ext. 213 or email:

Getting Your Money: The Difference Between Liquidity and Marketability

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Having the option to sell an investment whenever you want and getting all of your money back is not the same thing.

Dr. Elizabeth Boone is a surgeon, a long-time friend and client. I’d been looking forward to chatting with Elizabeth about how my alma mater just trounced hers in basketball.

Receptionist: Hello, Harold; it’s Dr. Boone on 88.

HE: Hello, Elizabeth. Did you see the game?

EB: Forget it, Harold. Our best rebounder was out with a broken collarbone, the referees had to use braille to read the scoreboard, and our coach had the flu. Besides, I’ve got a problem.

HE: Sorry, Elizabeth. What’s up?

EB: I need some advice for my mom.

HE: About?

EB: She just received an inheritance from my aunt’s estate and she’s asking me how to invest it. I told her CDs are safe, but right now the rates are so low that she’d get more return if she buried her money in the backyard. She doesn’t have to pay much in the way of taxes and since she mostly needs income, her broker suggested one of those government bond funds and preferred stock that pay high dividends. I wanted to check with you to make sure that was all right.

HE: Good grief!

EB: Excuse me?

HE: Elizabeth, I’ve heard this same story about six zillion times. Let me ask you a few questions: first, how worried would your mom be about principal fluctuation?

EB: What on earth does principal fluctuation mean?

HE: Will your mom be worried if the value of her fund goes up and down, as long as her income is fairly steady?

EB: I don’t even need to ask her. She and Dad had big tax-free bond portfolio years ago. When interest rates went up, they’d watch their bond prices go down with each statement! I thought they’d die from bleeding ulcers. Harold, I also had lots of those long-term bonds and I still have the ulcers. Never again! You know how I feel about that. You’re the one who restructured my portfolio.

HE: Okay, Elizabeth, okay. Just checking. Second question: how carefully have you or your mom checked into the suggestion of government funds and preferreds?

EB: Pretty well, Harold. You know my mom—she’s sharp. She asked a lot of good questions of the broker and jotted down the answers. Let me read you the gist of how the conversation went:

Broker: Mrs. E., based on what you’ve said, you want income and safety, right?

Mrs. E.: Right.

Broker: Well, I think we should split your investment between our government fund and a portfolio of well-selected preferred utility stocks.

Mrs. E.: Mr. Broker, this is almost all of my money and you’re right, I’m really concerned about safety and income. How safe are these investments?

Broker: Mrs. E., the preferred stocks we’ll buy are all from highly rated companies—real blue chips—and the government fund invests in bonds guaranteed by the United States government. We’re talking safety!

Mrs. E.: What happens if I need my money?

Broker: Why, Mrs. E., don’t you worry, there are safe investments.

HE: That’s it? That was their conversation?

EB: Mom also said he was really comforting. He even got up from his desk and walked over and patted her shoulder and said, “These investments are exceptionally safe and you can sell whenever you want. Just call me and I’ll put in an order and you’ll have your money in a week.” Then he said, “Now, if you’ll just sign here—”

HE: But she didn’t sign, right? Tell me she didn’t sign and I’ll be a lot happier.

EB: Mom told the broker she wanted to talk to me first. She asked him to mail some information and I have it now.

HE: Let me guess. The prospectus on the government fund says “guaranteed by the federal government.” And the brochure has American flags all over it.

EB: You know this fund?

HE: No, but I do recognize the marketing strategy. And the rating sheets for the preferred stocks he wants her to buy say that the company balance sheets are so strong they could win an Olympic weight-lifting championship.

EB: Something like that. So we should go ahead? I started to tell her to go ahead, but remembering those great tickets I got you to the big game, I figured you owed me a bit of free advice.

HE: Elizabeth, I’ll give you the free advice, and I won’t even mention the current price of the other four hot tips I talked you out of.

EB: Touché! So what’s your diagnosis?

HE: I don’t think you want me to give you a lecture on good financial planning. Suffice it to say your mom shouldn’t do anything but put the money into a money market account until she reviews her entire financial situation, including her needs for cash flow and emergency reserves, tax planning, insurance, and her estate planning as well as her Social Security and pension income. All of those will make a difference in deciding what she should buy.

EB: All that?

HE: When you do a diagnosis, do you just give advice off the cuff based on what the patient says she wants, or do you probe a little bit?

EB: I probe a lot. What kind of a doctor do you think I am?

HE: A good one. So you can see my point. But if you want me to diagnose your mom from afar, then let me at least introduce you to two important ideas that will help you evaluate the investments Mr. Broker suggested: liquidity and marketability—the big L and M.

EB: I need to write this down so I can tell Mom.

HE: Don’t get hung up on the fancy words—focus on the concepts. Both liquidity and marketability refer to attributes of investments. You’ve heard me say that investments don’t have morals; they’re not good or bad. They have attributes, and those might be right or wrong for you or your mom, just as an antibiotic might be good for a patient with an infection but not so good for helping a patient who’s in a lot of pain.

EB: Maybe you should leave the medical analogies to me.

HE: Liquidity measures how easily your investment can be converted into cash whenever you want to, no matter what’s happening in the economy or to the stock or bond market, without losing any of your original investment. Marketability measures how easy it is to sell an investment when you want to. With me so far?

EB: I’m not sure. Those sound the same.

HE: You’re right; they do. Both relate to converting your investment to cash. Both measure how fast and how easy it is to do that. And neither is good nor bad. The problem is that they’re not the same.

EB: So tell me how they’re different.

HE: There’s one big difference. Liquidity refers to getting the full amount of your original investment back at any time. Marketability is about getting fair market value when you sell. And there’s the catch! You know yourself from your ulcer experiences with the bond funds that full amount and fair market value are often very different.

EB: So if the market goes down, and Mom tells the broker she wants her money back—

HE: The amount she gets could be less than she invested originally. And she’s back on ulcer medicine—or worse. She could be in danger of running out of money.

EB: So she wants something liquid, right? What kinds of investments are liquid?

HE: The most common liquid investments are checking and savings accounts, money market funds, Treasury bills, and that wad of cash she was going to bury in the backyard.

EB: And marketable investments are?

HE: There are lots of marketable investments. The list includes stocks and bonds, mutual funds, and government bond funds. Got it now?

EB: I think so, but so what?

HE: So knowing what you know now, take another look at that government fund with the flags on the brochure and the preferreds with their balance sheets on steroids. Suppose your mom wanted to sell her government fund or preferred in a few years. How much would she get back?

EB: I guess I really don’t know. How could I?

HE: You can’t unless you have a working crystal ball. You don’t have one, do you?

EB: No.

HE: I always ask, because I hope that one day I’ll find someone who has one and I can ask to borrow it for a while.

So we know the government fund is secure from a credit standpoint, and for now let’s assume the preferred stock issuers remain in good financial shape. But with both investments, you still have interest rate risk. That’s what the broker should have talked about, and probably would have, if he or she wasn’t so focused on making the sale.

EB: You mean the risk that interest rates will go up?

HE: Exactly. The broker is selling your mom two investments paying a fixed interest rate. Right?

EB: Right.

HE: When interest rates go up, people can go out on the market and buy investments with fixed rates higher than what you mom is getting. So do you think anybody would want to buy her investment, with a lower yield, at the price she paid for it?

EB: No.

HE: You’re right. To take an extreme example, let’s say she buys a bond with a twenty-year maturity today and gets a fixed 4 percent, and ten years from now, interest rates have gone up to the point where a bond with the same credit rating, and ten years to maturity, by the same issuer, is paying 8 percent. If she wanted to sell her bonds, she would be offered about $7,000 for her $10,000 investment. She’d lose money and get an ulcer.

EB: Okay, but she still has the preferred stocks, right?

HE: Let’s talk about those. From the talk about interest rate risk, you can see that the longer the maturity of the investment, the more interest rate risk you’re taking. Rates probably aren’t going to double in one year, but they just might in ten. And during twenty years, you have no idea what’s going to happen, right?

EB: Right.

HE: So tell me: what is the maturity date on the preferred stocks the broker was recommending?

EB: I don’t know. Ten years?

HE: What if I told you it was thirty? Would you be comfortable then?

EB: Not very, no.

HE: What if I told you it was 100?

EB: That would make me extremely uncomfortable.

HE: And if I said that those investments would mature in a thousand years, what would you say to me?

EB: I’d say you were joking.

HE: Actually, I was underestimating. The answer is that those preferred stock investments never mature.

EB: Never?

HE: Not even when the Earth crashes into the sun. So your mom is subject to a seriously whopping interest rate risk. And it gets worse.

EB: How can it possibly?

HE: If you own a bond issued by the company selling the preferred stock and the company fails to pay on its bond obligation, it files bankruptcy. Guess what that same company does if it can’t pay on your preferred stock?

EB: What?

HE: It sends an apology letter.

EB: So maybe the broker’s advice wasn’t as great as I thought it was. Mom says he was really nice.

HE: I’m sure he’s a very nice person who pets his dog. But the bottom line for your mom is that those government bond funds and preferreds may have a good story, and they pay what today seems like an attractive rate, but they come with a boatload of risks and they are, irrevocably, not liquid. They certainly may play a role in many portfolios but not 100 percent of your moms.

EB: So what do I do? What would you recommend?

HE: First, let me ask: why didn’t your mom buy CDs?

EB: I told you. Those one- and two-year CDs just don’t pay enough.

HE: Did you look at the five-year CDs?

EB: Actually, we did. They were a little more attractive, but mom’s afraid to buy anything locked up for more than a few days.

HE: Elizabeth, that’s exactly the point! She was confusing liquidity with marketability.

EB: Yet again, I don’t follow you.

HE: It’s not that complicated. Tell me: if your mom purchased a five-year CD today and in three years she needed her money, what would happen?

EB: Actually, we asked about that. They said if we liquidated early, they would charge a six-month interest penalty.

HE: And that means?

EB: Mom would get her investment back and a little less interest than she had expected.

HE: Right; she would get her entire initial investment back and maybe even a little interest. Sounds like a liquid investment. Not very locked up, is it?

EB: Not when you put it that way.

HE: Your mom needs to be sure not to be misled by marketing that confuses liquidity with marketability. “Getting your money back” isn’t the same as getting all of your money back.

EB: Okay, I’ll talk to her.

HE: Maybe she can come to the game with us.

EB: What game?

HE: The game you’re going to get me tickets to, the one where your leading rebounder is going to be out, and our coaching staff has checked with the local institute for the blind to bring in some qualified referees.

EB: I’ll see what I can scare up. Thanks, Harold.

HE: I’m glad I could help.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.