February 2013

How Behavioral Finance Biases Can Cost You Money

Many of you may not have heard of the term behavioral finance biases, but it is hard to find a point where our minds do not get in the way of our money. It happens all the time. We try to kid ourselves that we are rational human beings who make rational decisions, but history and our stock market has proved us wrong time and time again.

In fact, we let our emotions take hold of us more often than we would like to admit much to the detriment of our finances. Below are three classic examples of behavioral finance biases and how we behave irrationally with our money and let our minds get in the way and cost us.

Behavioral Finance Biases Says We Have An Aversion To Losses

When we are investing for our financial goals, whether it is buying a home, retiring early, sending our children to college, or any one of the hundred others, a rational person is supposed to step back and look at the big picture. You are supposed to consider your total investment portfolio, and the goal is to increase your wealth to accomplish these financial goals.

But, far too often, we look at the individual wins and losses. I’m sure that most of the readers can quickly name a stock or mutual fund that has cost them a significant loss over their investing career. Investors have a loss aversion, and we tend to focus on our losses as opposed to the other investments that are in the black.

We would rather avoid a loss altogether than risk it for a chance at again. Investors often sell winning stock in order to lock in a profit and hold losing stocks as they sink further and further in an effort not to have to actually accept the current loss on paper.

Are You Saving Enough For Retirement In Your 401k? Probably Not!!

by Hank Coleman

Are you saving enough for retirement? How much is enough? Is there really such a thing as saving enough for retirement?

While there are a few rules of thumb that you can look at to find out how much money you need to save in your 401k for retirement, the sad fact of the matter is that we are simply not saving enough for retirement. Click here to learn more about Motif Investing

We Are Not Saving Enough For Retirement

Earlier this month, Fidelity Investments released its quarterly analysis of the 401k retirement plans that it manages. The report showed that the average retirement investor at Fidelity had an average 401k balance of $77,300. This is up 12% from the previous year if you count employer matching contributions. The problem is that this increase is simply not enough. The balances for most 401k retirement plans are far too low for the investors’ ages.

Life always seems to come along and knock people off of their retirement savings plan that they have set for themselves or have had a financial planner establish. That would not be too bad because we all know that Murphy is out there just waiting. But, we have compounded our problems by not saving enough for retirement in our 401k retirement plans like Fidelity found.

So, How Much Are We Really Saving?

According to the Fidelity report, here are the average 401k retirement plan account balances broken down by age group at the end of last year. Ages 50 to 54 had an average 401k account balance of $111,900. Ages 55 to 59 investors had $134,600. Those ages 60 to 64 had saved $133,100 in their 401k plans. And those investors who were 65 to 69 years-old only had $136,800 in their 401k plans.

These amounts are obviously not enough to retire on. For example, a typical annuity of $250,000 earning a 5% rate of return for a 20 year payout will only produce about $1,600 of income per month.

Even if you were to earn $2,000 from Social Security and/or a pension, you would still struggle to maintain the same standard of living that you have grown accustom to during your working years with only $250,000 saved for retirement. And, the savings are far lower according to Fidelity as we’ve seen.

According to the 2012 Annual National Survey Assessing Household Savings produced by the America Saves organization and the American Savings Education Council:

66% of Americans spend less than their income and save the difference
Only 66% of Americans have sufficient emergency savings to pay for unexpected expenses
Only 42% of Americans say they have a savings plan with specific goals
52% of non-retired Americans think they are saving enough for a retirement

When Should You Hire an Accountant to Help You with Your Income Taxes

by Hank Coleman

Determining when should you hire an accountant can be a hard decision to make. I know that I put off hiring an accountant. I thought that I could continue to do all of the work myself. I soon found out that I was missing the skills and time needed to do the job right. Hiring an accountant or a tax professional can be a tough decision because chances are you are like me and have been doing your own taxes for quite a long time. However, hiring a professional can make a lot of sense in certain situations. The money they save you in taxes could potentially make up for their costs. You could receive a larger income tax refund in … Read more

What to Do Right Now Before You Lose Your Wallet

by Hank Coleman

Have you ever lost your wallet? Of course, it can be a traumatic event in anyone’s life. But, there are steps you can take right now to help you before you lose your wallet. I can remember when my wife lost her’s at Walt Disney World of all places. She was lucky and someone had turned it into guest services. I’m probably going to jinx myself when I say this, but I have never lost my wallet…not once. But, as most people can attest to, it may just be a matter of time. According to a report from CNN, less than 20% of all wallets that are lost are returned to the owner. So forewarned is forearmed. Here are tips … Read more

Top Tips For New Trustees

by Guest Contributor

In the high-pressure, high stakes world of the pensions industry, scheme management is never an easy job. Pension scheme trustees face administrative and legal pressures, along with an obligation to act with honesty, transparency and complete impartiality in all their dealings with the trust agreement.

Before trustees can assume their roles, they must be conversant in the details of the scheme they are charged with governing – and any relevant legal or administrative demands. While some trustees will have years of financial experience to draw from, many lay-trustees will lack this advantage – fortunately, there are plenty of training schemes available to help individuals become comfortable with the position.

What type of training should new trustees go for?

New trustees and anyone without a financial background should approach the role from a general perspective. Training courses, seminars, conferences and literature are available for a range of educational needs, but an ideal starting point for lay-trustees is The Pension Regulator’s online ‘trustee toolkit’. The toolkit is a free resource and can be browsed by trustees at leisure. The toolkit involves essential information in both theory and practice, along with case studies and tutorials – the kit serves as an excellent supplement to any additional ‘off-line’ training the trustee is undergoing.

While online resources may be useful, combining them with other methods can be particularly effective. Workshops and seminars provide opportunities to meet other trustees in the same position and discuss concerns or problems specific to particular schemes. To get the most out of any training strategy, it’s important that trustees ‘self-asses’: identifying the areas which they’d like to receive guidance, and weaknesses in their own skill-set.

Tips to achieve a sufficient level of trustee knowledge and understanding include:

Regular briefings: these can be broadly-themed or scheme specific, but involve bringing in a professional advisor to consult with trainees in a formal capacity.

Development programme: implementing a long-term plan for the training of trustees – and keeping records of their development as a way to build and consolidate knowledge.

Self-review: scheme trustees should provide their own feedback on their performance and the training they receive in order to tailor future training to their needs.

Top 10 Ways to Break Your Texting While Driving Habit

by Hank Coleman

Distracted driving is 100% preventable. At the core of the issue is texting while driving. Distracted driving killed 3,092 people nationwide and injured approximately 416,000 in 2010. America is addicted to texting while driving. To stop texting and driving is proving to be a hard habit to break. But, there are ways that you can work to break your texting while driving habit. As you drive, consider when you become bored behind the wheel and inattentive. Try to take notice when you pick up the phone to start texting, surfing the web, or updating your Facebook status. You may not even realize that you are doing it because it has become second nature. Once you realize that you are engaging … Read more