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Lauren's Blog

Lauren’s blog covers topics that impact your finances, your family, and your future. Is there a topic you’d like Lauren to tackle? We’d love your suggestions and feedback.

Ready to be a successful investor? It’s time to rewire your brain

Ready to be a successful investor? It’s time to rewire your brain

If I asked you to make a list of your biggest financial mistakes, what would be on it? Overspending today and not saving for tomorrow? Taking on too much debt? Pulling your money out of a down market, or being guilty of too much hubris when the market was up? Investing in that “sure thing” that wasn’t so sure after all?

No, I’m not psychic. (If I were, I’d most certainly have beaten the market into the ground years ago!) The sad truth is that everyone can add at least one of those mistakes to their list at one time or another. Why? Because so many of the most common mistakes stem from the fact that we are hardwired for financial failure. And hardwiring is extremely tough to fight.

Jonathan Clements does a great job explaining this phenomenon in his most recent book, How to Think About Money. I covered Clements’s Steps 1 and 2 in my blog posts Money really can buy happiness and How long do you plan to live (and are you planning for it?), and while those steps were certainly important, Step 3, Rewire Your Brain, deals with issues I see my clients struggle with every day.The good news according to Clements (and I wholeheartedly agree) is that it is possible to be more sensible about how we manage our money, but changing that wiring takes great mental strength. Rewiring does not mean you need to be smarter or more educated than anyone else—you just need to stay focused on the right things at the right time. Here are four things you can start doing today to start to change your thought patterns and truly begin to think differently about money:

  1. Save like crazy. It sounds so simple, doesn’t it? But unfortunately, our brains aren’t nearly as rational as we’d like to think. Many people lack the self-control not to overspend, so they take on too much debt. My friend Lydia was always one of the most “fabulous” people I knew. She always had the best clothes, the cutest shoes, and the fanciest car. But Lydia was a victim of her own fabulousness. While she was dressing to impress, she wasn’t saving enough for retirement. Now in her late 60s, she has to continue to work—not by choice, but by necessity. In contrast, there’s the story of Carol Sue Snowden, a librarian who lived modestly and then made headlines for gifting the library where she worked over a million dollars in her will. As Clements says, “Growing wealthy is ridiculously simple, but it isn’t easy.” It requires saving early, saving often, and focusing on becoming wealthy tomorrow—not appearing wealthy today.
     
  2. Embrace humility. Are you a victim of the Lake Wobegon Effect? In Garrison Keillor’s fictional town of Lake Wobegon, “all the women are strong, all the men are good-looking, and all the children are above average.” The Lake Wobegon effect is the tendency to overestimate your capabilities and see yourself as better than others, and it’s a common affliction. The antidote? Embrace humility—and require anyone managing your money to do the same. Because when it comes to investing, average is good! But our hardwired brains want so badly to be above average that we feel a need to beat the market, or we hire someone who says they can beat it for us. But historically, active investors lag the market indexes. That means that “buying and holding” almost always wins in the end. While your neighbor may be bursting with the news of an approach that helped him beat today’s market, you can bet he’ll be quiet as a mouse when his returns fall behind. “The meek may not inherit the earth,” says Clements, “but they are far much more likely retire in comfort.”
     
  3. Find value. If you find it difficult to ignore fluctuations in the market, you’re not alone. It can be a challenge to turn off that voice in your head that starts making noise when the market dips. Remember this: your goal is to seek long-term value in your portfolio. Ultimately, the market is efficient (really!), and that efficiency makes it extremely difficult for anyone—even the most seasoned money managers—to beat the market over the long term. Focus on investments that are poised to deliver value, and then stay put. (For more on how to win this battle with your brain, see my blog post Market volatility making you crazy? 5 tips to managing your emotions.)
     
  4. Stay grounded. When the market does bounce around (and considerable bounces are inevitable), think like a smart shopper: when the market is down, the companies who offer stock haven’t fundamentally changed, which means their stock is on sale! Avoid mental errors such as over-confidence, loss-avoidance, anchoring, confirmation bias, and more. Stay focused on the long term, secure in the knowledge that market prices of securities will fluctuate, often wildly, in the short term. Over decades, the trajectory has always been up. By staying grounded in the knowledge that you own shares in real businesses whose value is derived from dividend yields and earnings growth, you will achieve the investment success to which you are entitled.

It’s natural: every time you think about money, your hard-wired, reptilian brain tells you that your very survival is threatened. But in this case, following your instincts may be the very worst thing you can do, leading to financial mistakes that can truly threaten your future. It requires great mental effort to save, stay humble, find value, and stay grounded, but by challenging your thought patterns, you can train yourself to think differently about money and help drive your own success.  And if you need help with the rewiring, give me a call. I’m here to help!

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When risk is a good thing, embrace it!

When risk is a good thing, embrace it!

Risk. It’s a word that makes most of us feel uncomfortable—at best. Even if you’ve been blessed with an appetite for adventure, when it comes to taking risks with money, you may find your stomach feeling a bit queasy. While I can’t recommend skydiving or cliff jumping (especially for my retired clients!) taking the right amount of risk with your money isn’t a bad thing. In fact, it’s often the best way to help grow your assets to meet your retirement goals.

Anne is one of my favorite examples of a smart risk-taker. She loves (and I mean loves!) Las Vegas. She loves pitting the thrill of victory against the agony of defeat—even when it is her money at stake. And yet, despite her penchant for slot machines, she’s clearly not much of a true thrill-seeker. She has had the same gambling budget since the first day she walked into a casino over 30 years ago, and she’s never lost more than she can afford to lose. “I started with $100 of ‘play money’ in my wallet, and I promised myself I’d never let myself dip below my $20 reserve,” she says with a smile. And she does have something to smile about. Over the years, Anne has won (and lost) thousands of dollars, just playing the slots. “For me, it’s my favorite form of entertainment,” she says. “It’s a ‘safe’ risk that makes my adrenalin go crazy!”

A ‘safe’ risk. What an interesting term.

The dictionary definition of risk—“exposure to danger, harm, or loss”—sends a pretty clear message that risk is something we should avoid if at all possible. And yet, as counterintuitive as it may sound, when it comes to investing, risk is the one thing that drives reward. In fact, in a capitalist economy like ours, investors are paid to take risk. It’s that simple. Every time you invest in a company you are, in essence, assuming ownership of that company and are entitled to the rewards that owners receive. When earnings grow, you reap the rewards. If the company fails, your investment will fail as well. That’s the risk.

In skydiving, the risk is pretty clear—particularly if your parachute doesn’t open! In investing, risk is a bit more complicated. To understand why investment risk is something to embrace, let’s look at the three basic kinds of risk:

  • Credit risk. When a bank loans money to a borrower, there is a risk that the borrower may default on the loan. If that happens, the bank loses the principal of the loan, and the interest associated with it. That’s credit risk. Your own credit rating dictates your ability to borrow money and the interest you pay, and the same is true for bonds. Lower-yield Treasury bonds are “safer,” so they pay less than high-yield or “junk” bonds. That means that, as a bond investor, when you take more risk by lending to less credit-worthy borrowers, you get paid more interest.  
     
  • Term risk.When you buy a bond or CD, you are lending money for a fixed period. When the bond is due, your money is repaid. When you lend money for a few days, that’s a short term. When you lend money for ten years, that’s clearly a longer term. Long-term is riskier than short-term because you don’t expect the borrower’s situation to change in a month, but in 10 years? Anything can happen. That’s term risk. That is why a one-month CD pays far less interest than a five-year CD. So, term risk is another way investors get paid more to take on more risk.
     
  • Equity risk.Every time you hold stock in a company, you accept the risks of ownership. As an owner, you are paid a share of earnings, and the value of each share increases with company growth. Because of the risk of ownership, investors are paid an equity risk premium to bear uncertainty, price fluctuations, bear markets, business failures, and other perils. Earning the equity risk premium is how investors get paid more for owning stocks.

As an investor, by definition, you must be willing to take some level of risk to reap the rewards. Whether you take on credit risk, term risk, equity risk, or a combination of all three, risk creates value. While risk and reward may not be a perfect relationship, if you add time and discipline to the equation, it’s nearly perfect. It’s what capitalism is all about, and it’s what gives every investor (including you!) the opportunity to leverage assets for continued growth.

Of course, just like Anne and her slot machines, the smartest way to play is to know how much risk you can accept. If you’re a younger investor with years of saving ahead of you, you have time on your side. You can breeze through a bear market, happily buying up equities at sale prices, and waiting for the inevitable bull market to come your way decades from now. If you’re already retired, you may still have years ahead to enjoy growth, but you’ll need a strategy to meet your changing income needs. Whatever your life stage, remember that risk is your friend. Unless you’re skydiving, in which case I can only recommend that you check that parachute just one more time before you jump!

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Climate, weather, and your money

Climate, weather, and your money

If, like I do, you happen to live—or at least spend time—in Southern California, you know that there are two topics on everyone’s lips at the moment: Donald Trump, and the torrential rain. Depending on who you happen to be talking to at the moment, either topic is sure to elicit one of two responses: optimism… or sheer panic. In both cases, taking a look at the differences between climate and weather can help quell the storm.

Here in Southern California, we live in a desert. Despite our earnest efforts to pretend we live in a climate that can support lush lawns and the greenest gardens, our Mediterranean climate is dry in the summer, nearly every summer. Our winters can be wet, but not always. And while shifts in the atmosphere may bring short-term changes to the weather, our physical location on the planet is what drives our climate—which, if it changes at all, changes extremely slowly over thousands of years. (To be clear, I do believe we humans play a critical role in climate change, and that it is changing, just not as quickly as the weather!) The recent rains have lessened the severity of our five-year drought, but because of our climate, there will always be a shortage of water. To survive, we will always need to plan for that reality.

The same is true when it comes to investing. Bull markets and bear markets battle it out based on changes in the economic weather, but our climate, which is rooted in capitalism, remains steady. The markets are always (always!) rising, which is why investors wisely choose to place their money on Wall Street rather than tucking their hard-earned dollars under the mattress each month. History shows us that the climate for investors in the US is favorable, and that reality doesn’t change, regardless of the current weather pattern.

I had lunch with Maggie this weekend. In her 90s, she still has substantial assets, but for obvious reasons, we’ve allocated a meaningful part of her portfolio to bonds. While she understands that that bonds provide stability in her portfolio, Maggie can’t help but wish her portfolio was busy taking even more advantage of the recent surge in equities. Instead of mirroring the DOW’s 16.6% increase since November 1, she’s watched her portfolio fall by 1% in the same time period. It’s not much of a drop, but when the headlines are filled with record-breaking highs in the equities space, it’s hard to sit on the sidelines. She’s never doubted our plan, but looking up from her coffee, she asked timidly, “Should we change course?”

I replied without an ounce of hesitation. “We shouldn’t change a thing.” As I said to Maggie, and what I believe with absolute certainty, is that while the weather has shifted, the climate remains the same.

You don’t need to take my word for it. Warren Buffett just published his always-anticipated Berkshire Hathaway (BRK.A, BRK.B) shareholder letter (you can read the full 29-page missive here). As usual, his thoughts are straight to the point, as well as pointed, and even humorous. This excerpt reiterates my thinking well:

“Early Americans… were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it. This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.”

He goes on to say this:

“American business—and consequently a basket of stocks—is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that… During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

Maggie isn’t the first person to ask me if it makes sense to steer in a new direction in light of the recent market weather. After all, the current bull market is already well past the average length of a typical bull market. But so is California’s rainfall for the year. Is the market overheating? No one knows for sure. Not even Warren Buffett. What we do know is that the weather is unusual. But though we may want to break out an umbrella every now and then, the climate itself hasn’t changed. Only the weather has shifted. That’s true when looking at the White House as well, which can impact the forecast for the economy and, ultimately, the market. Heed Warren Buffett’s words and trust that “our nation’s wealth remains intact” and “As Gertrude Stein put it, “Money is always there, but the pockets change.”” The key is to continue to make wise, rational investment decisions to help ensure the money in your own pockets stays where it belongs—even during the fiercest of storms.

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Rising above the noise to find the truth (and a little bit of sanity)

Rising above the noise to find the truth (and a little bit of sanity)

“And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. 'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past.’”

– George Orwell, 1984


I read a fascinating article in New York magazine about what happens when a lie hits your brain. It wasn’t new information—Harvard University psychologist Daniel Gilbert presented his findings more than 20 years ago—but it was new to me. And it just may be more important now than ever.

What Gilbert proposed was that our brains are forced to do some stunning acrobatics whenever we hear a lie. First, the lie is told. And when that happens, our brains have to accept that information as true to understand and make sense of it. That means that even if we know something is a lie, in that first critical moment, our brains tells us the information is true. Thankfully, we’re usually able to take the next step, which is to certify mentally whether the information is true—or not. According to Gilbert, the challenge is that the first step of mental processing is easy and effortless. The second? Not so much. It takes time and energy. Which means if we become distracted or overloaded, it’s all too easy for us to never take that second step. Suddenly, something we knew to be a lie begins to sound more and more reasonable. In fact, in a more recent study, researchers tested this hypothesis, asking people to repeat the phrase “The Atlantic Ocean is the largest ocean on Earth.” After repeating it enough times, the participants started to believe the statement to be true. Why? Their brains just took the easier route to closing the loop on processing new information. Scary, but true.

I’m embarrassed to say that I can think of too many examples in my own life when I’ve done the same thing. You probably can too. Every one of us is guilty. But in our defense, it’s not our fault. As humans, we all have a limit to our “cognitive load”—or how much our brains can process at one time. When we’re hit with a constant stream of information, our brains reach that limit, and we’re no longer able to take that important second step of mental certification. And, boy, is that cognitive load being challenged lately! Every day we’re inundated with noise on every topic. Television. Radio. Newspapers. Magazines. Facebook. Twitter. Every outlet is screaming for us to pay attention, and whether it’s the media or our friends flooding our brains with information, we’re spending an incredible amount of time trying to discern facts from “alternative truths.” The result: our brains are overloaded… and downright exhausted.

As an advisor, my mission is to help my clients rise above the noise to make careful, thoughtful financial decisions. In this environment, it isn’t easy! The media and everyone’s well-meaning friends are overflowing with information. Unfortunately, some of that information can be misleading. For example, the media has focused on the market indices for years. As a result, so do investors—even if they know that the fact that the Dow hit 20,000 yesterday has nothing to do with their long-term financial outlook. But for the media, this magic number is an easy target. They can report on it. They can speculate on it. They can create headline-grabbing sound bites about it. The result: a whole lot of noise that carries about as much importance as reporting on the path of a rollercoaster when all that matters (really!) is where the ride ends.

What’s the solution? We need to lessen our cognitive load. We need to slow down the noise, slow down our brains, and regain our mental strength. For me, that means turning off the television and the radio. I’m able to slow down and think more clearly when I read written information rather than listening to “talking heads.” This is true in finance and every aspect of my life. And when that doesn’t work? I meditate. (For more on how our brains can inhibit or ensure our own happiness, check out Daniel Gilbert’s bestseller, Stumbling on Happiness.)

Whenever I feel challenged by the noisy world around me, I remember Viktor Frankl’s famous quote: “Everything can be taken from a man but one thing: the last of human freedoms—to choose one’s attitude in any given circumstances, to choose one’s own way.” Perhaps by taking the time to slow down and rise above the noise, we can each make that choice and, indeed, choose our own way.


Comments? Please email me. I’d love to hear your thoughts!

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5 reasons why you shouldn’t worry about rising interest rates

5 reasons why you shouldn’t worry about rising interest rates

A funny thing happened on Wall Street last week. After all the hoopla around raising interest rates and how it would send investors into a dither, Janet Yellen and the Fed finally made a move, raising rates by .25%. The reaction on Wall Street? Nothing. Nada. Zippo. In fact, the Dow climbed even closer to 20,000 the day of the announcement.

If you were paying attention to the headlines for the weeks leading up to the Fed meeting, that certainly wasn’t the reaction the media was expecting. But if you look at all the factors behind why no one seemed to care, it makes a whole lot of sense. Here are five reasons why many investors couldn’t care less about rising interest rates… and why you probably shouldn’t care either:

1.     The hike was priced into stock prices.
The Fed’s decision had been widely anticipated, so investors were already trading based on the assumption that rates would be raised by at least a quarter percent. As the market continued to climb over the past four weeks, you can bet that every trade that took place happened with the hike as a forgone conclusion. And though rates did go up, no surprises at the Fed meeting meant no surprises on Wall Street the day after.

2.     When you invest, you’re investing in real companies—not “the market.”
When you go to the grocery store, you go to buy tomatoes and milk, not the grocery store itself. The same is true with stocks. Interest rates inevitably impact the market as a whole, but when you invest in stocks, you buy ownership shares of real companies. Apple. GM. Exxon. You own something tangible that continues to grow in value, no matter what interest rates are at the moment.

3.     Bonds are relatively stable assets.
The value of bonds dropped the moment rates went up, but that doesn’t mean you should suddenly switch to a 100% equity-based portfolio. Interest rates are inversely correlated to bond prices, which is why bonds are considered to be every portfolio’s safety net. First, they’re used specifically to hedge against much less predictable equity prices. Bonds are rationally priced based on term and credit quality. U.S. Treasury bonds are considered the world’s “risk-free” asset, with all other bonds measured by the “spread” between its credit rating and U.S Treasury bonds. Second, bond prices are mathematically quantifiable. That’s not the case for stock prices, which are determined at an auction between buyers and sellers and are impacted by fast-changing factors, such as the US and global economies, political instability, investor sentiments or sometimes seemingly nothing (like traffic jams). So don’t run from bonds. Instead, keep reinvesting in this stable asset class to balance risk and reward across your portfolio.

4.     Interest rates can be unpredictable.
Sure, the economy is getting stronger. Unemployment is low. The dollar is strong. Inflation is creeping upward, if slowly. But even with the small hike, interest rates are still at historic lows (remember the ‘70 and ‘80s when interest rates were in the teens?). While the Fed sets the benchmark rate, the market sets longer-term rates, and the resulting “spreads” reflect investors’ sentiments about risk. Since there’s no way to know when rates will rise or to predict the shape of the yield curve (even the “bond kings” often guess wrong about the future), it’s wise to use bonds to stabilize your portfolio and provide liquidity to meet your cash needs throughout your retirement.

5.     Higher interest rates don’t hurt your wallet over the long term.
Yes, rising rates hurt bond values, but as older bonds are sold and reinvested at higher rates, you can potentially increase your long-term returns. It’s also good to keep in mind that high quality, shorter-term bonds perform a lot like cash, providing necessary liquidity in a “safe” investment. (Note that this is not the case for high-yield bonds, which behave more like stocks.) Plus, while stuffing cash assets under the mattress has been a fine choice for the past decade, in a rising interest rate environment, your cash assets can finally start earning interest again. What a thought!

Ultimately, the Fed only sets benchmark interest rates. The increase only directly applies to the target of the federal fund's rate, which banks use to lend to each other overnight, by 25 basis points or .25% to a range of 0.50 to 0.75%. For the rest of the world, the market dictates the rates based on supply and demand (which is why mortgage rates can fluctuate no matter what the Fed rate may be). Of course, the market rate is often aligned with the Fed rate, so all interest rates are expected to continue to rise throughout 2017. Just remember that higher interest rates are the reward for strong policies that have been in place ever since the financial crisis. Those policies—including sustained low-interest rates—fueled growth, and today we have a stronger economy to show for it. That’s good news for anyone who is doing more with her money than stuffing it under the mattress.

Want to understand how your own portfolio can sustain rising rates?  This email address is being protected from spambots. You need JavaScript enabled to view it.  to schedule a time to chat. As always, I’m here to help.

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Yom Kippur, forgiveness, and the joy of letting go

Yom Kippur, forgiveness, and the joy of letting go

As I write this, the sun is setting, Yom Kippur is about to begin, and I’m struck by the sheer joy of letting go. Forgiveness and self-compassion are powerful things, and it seems there’s been so much negativity in the world lately—particularly around the upcoming election—that it feels wonderful to be wrapped in a greater sense of peace.

I’ve been seeking a lot of that lately. I mentioned in my last blog that I’ve joined a Sangha meditation group that meets on Tuesday nights, so I’ll miss that tonight as I celebrate Yom Kippur. I just received this note from the woman who leads the group:

We will miss you tonight in our meditation group, but I wanted to extend to you the wish that you receive the forgiveness that is in your heart as sunset arrives. You and I spoke about the meaning of Rosh Hashanah and Yom Kippur when we met last. Meeting a New Year with atonement for the faults of the past year is both a cathartic and compassionate practice.

Her words mean a lot to me for two reasons. First, sharing my Jewish beliefs with her made me realize how all faiths share the same sentiment. Judaism has created a ritual of forgiveness in the Days of Atonement. The Christian faith includes a personal, forgiving relationship with God. And Buddhism’s ideas of Zen and Karma are rooted in the same idea: that we must love ourselves first before we can expand that love to others.

As a financial advisor, I’ve found that I have to take this idea very much to heart—especially before sitting down with a client. Not only do I have to be at peace with myself to provide the best possible care and service to the person in front of me, but I also have to be at peace with the world around me—including the financial market. That peace of heart and mind allows me, and hopefully my clients as well, to rest emotionally. And I believe this is the only way to make wise decisions about money, investing and, ultimately, life.

Back in August, I read Carl Richards’ New York Times blog titled The Cost of Holding On. It opens with this story from Jon Muth’s book “Zen Shorts”:

Two traveling monks reached a town where there was a young woman waiting to step out of her sedan chair. The rains had made deep puddles and she couldn’t step across without spoiling her silken robes. She stood there, looking very cross and impatient. She was scolding her attendants. They had nowhere to place the packages they held for her, so they couldn’t help her across the puddle.

The younger monk noticed the woman, said nothing, and walked by. The older monk quickly picked her up and put her on his back, transported her across the water, and put her down on the other side. She didn’t thank the older monk; she just shoved him out of the way and departed.

As they continued on their way, the young monk was brooding and preoccupied. After several hours, unable to hold his silence, he spoke out. “That woman back there was very selfish and rude, but you picked her up on your back and carried her! Then, she didn’t even thank you!”

“I set the woman down hours ago,” the older monk replied. “Why are you still carrying her?”

How many of us spend our energy and precious resources carrying around problems from the past? And how often does that impact the decisions we make moving forward? We’ve all seen it in our own lives. A friend who is afraid to love again after a nasty divorce. A colleague who pulled out of the market and lost his savings during the recession and is too scared to invest again. Another who can’t forgive an adult child and is ripping her family apart at the seams. All because they’re carrying on to old pains, old fears, and old burdens.

We’re all human, which means we all have faults. Yom Kippur—whether you’re Jewish or not—is a perfect time to accept our humanity, accept our faults, and forgive ourselves as well as others. We may always be thinking about the past and the future, but by making a choice to live in the moment as much as possible, I hope we can all find joy in letting go.

Need guidance to help let go of old financial burdens? Let’s schedule a time to chat. As always, I’m here to help.

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Riding the surge: a diver’s approach to managing expectations

Riding the surge: a diver’s approach to managing expectations

The older I get, the more I realize what a powerful impact my expectations—or lack thereof—can have on my state of mind. Last weekend was a great example. A friend and I had scheduled a dive trip on a boat called “Truth” (no, I am not making this up. Our destination: San Miguel Island, just off the coast of Santa Barbara. However, when we booked the trip, we were told quite plainly that 1 out of 3 trips to the island are rerouted to other nearby islands due to weather. Luckily, the Channel Islands (of which San Miguel is one) include more than a handful of other beautiful spots, so when we went to Santa Rosa and Santa Cruz instead, there was peaceful acceptance—not disappointment. I wasn’t attached to the idea of getting to San Miguel; I had no unmet expectations. “Truth” delivered on its only promise: to take us somewhere we’d never been. We had a fantastic experience. But I have to wonder... would I have enjoyed it less if I’d had my heart set on seeing San Miguel?

It’s possible that my insight has less to do with getting older and more to do with what I’ve been learning in my Sangha group, a study of Buddhist thinking where we’re working on discovering compassion and happiness by training our minds to shift the focus from ourselves to others. Perhaps my newfound interest in Zen has already given me a whole new perspective on the difficulty of expectations—in life, in relationships and, yes, in investing.

As I’m sure you heard, the Fed met last week to decide whether or not to raise interest rates. What I found most interesting about the meeting wasn’t the actual decision to keep rates where they are (it was a given that the Fed would either raise rates just a quarter percent or stay put), but the market’s response both pre- and post-announcement. How did the market react? It didn’t. Sure, there were some small fluctuations in the market in the days leading up to the meeting, but nothing like we’ve seen recently when investors were anticipating a rate hike. I believe the reason for that relative calm was the lack of expectations. There were no surprises, so the waters were calm.

Unfortunately, in situations when our expectations aren’t aligned with reality, even the littlest changes can often feel like quite a storm.

Before my dive weekend, I met with my client Laura. She was facing a financial decision: Now in charge of her aging parents’ finances, she asked me for help deciding if she should continue to pay premiums on her father’s life insurance using the policy’s cash value or pull out the cash to reinvest the money elsewhere.Her father is 88, and the death benefit of the policy is $1.5M. I did the math and recommended she maintain the insurance policy, but her expectations told her otherwise. First, she stated that she expects her father to live to the ripe old age of 102. If he does, she would need to pay the policy premiums, and some of the cost would not be covered by the available cash value of the policy. Second, she said she expected she could earn at least 8-9% on the reinvested assets, which would exceed the $1.5M payout in 10+ years. Were her expectations of dad’s life and investment returns realistic?  Probably not. With different expectations, the decision would have been different.

Years ago, I had a client with the opposite expectation. Allen was 45 years old when we sat down to build his retirement plan. As part of the process, we decided to work from the assumption that he would live to be 87. We spent the next two hours putting together a solid, long-term plan that included some needed catch-up contributions to his IRA. All the pieces were in place, and we were both happy with the final plan. But 10 minutes after he left my office, my phone rang. Allen had changed his mind. “Can you refigure the numbers? I’m pretty sure I’m only going to live to be 78.”

Of course, longevity isn’t the only expectation that can steer us in the wrong direction—or rock our boat when expectations are unmet. If I go to Vegas expecting to spend $250 of my “fun money” at the casino, I’ll still be smiling when it’s gone. And if I happen to win $50 or $100, I’ll be overjoyed. Why? Because my expectations were exceeded. In contrast, if I bought a house in 2006 for $650K expecting to sell it at a profit in a few years, I would have been devastated to see its value drop to just $450K by 2012. My perspective in both cases is rooted in my expectation of the outcome.

Expectations turn up everywhere. Investing. Relationships. Life. In diving, there’s a phenomenon called a “surge.” If you’ve spent any time in the ocean, you’ve probably felt it yourself: when the waves hit the rocks, the energy creates back and forth movement in the water. If you’re swimming, that force can push you away from where you want to go. Experienced divers know that fighting the surge is impossible, and if you try, you’ll end up wasting valuable energy. But if you ride the surge—relaxing with it when it pushes back, and then swimming with it when it propels you forward—it can be a beautiful thing. You may feel like a tempest-tossed, but you’ll eventually end up right where you want to be. How liberating.

When it comes investing, managing your expectations is key to keeping your emotions at bay when the market or your financial situation fluctuates, and it’s vital to staying on track toward your long-term goals. The best way to do that: have a plan based on research and knowledge—not just your gut—so you can trust that “riding the surge” will, ultimately, get you where you want to be. And if you find it difficult to set a course and free yourself from expectations, we can chat. As always, I’m here to help.

P.S.
Speaking of expectations: Did you happen to see Stephen Colbert’s commentary about the lopsided expectations for Monday night’s presidential debate? In his words, the expectations were that Hillary had to be “confident but not smug, knowledgeable without being a know-it-all, charming but not affected, commanding but not shrill, also likable, warm, authoritative—and not coughing. Meanwhile, Donald Trump had to not commit murder…on camera.” Oh my. Here’s the clip if you’d like to bring a little levity to the less-than-light quandary we’re facing on November 8!

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Market volatility making you crazy? 5 tips to managing your emotions

Market volatility making you crazy? 5 tips to managing your emotions

I like to say that if my clients are worried when the market does somersaults, then I’m not doing my job. And yet, I know that no matter how much I talk about prudent portfolio risk and why our focus on the long-term mitigates the impact of short-term market fluctuations, it can be a challenge to turn off that voice in your head that starts making noise when the market dips. The nagging questions can persist. How will this affect my income? Should I be making any adjustments? Will I really have enough to retire or take care of myself?

While those questions may always rear their ugly heads when the market is in the red, here are 5 tips to help you stay on top of your emotions—and on track toward financial success:

1.     Admit you’re human
In fact, embrace it! Why? As humans, we are never (ever!) free of emotions. That means that the majority of our decisions—as much as 90%—are based on our reactions to events and, yes, our emotions. Which also means that a measly 10% of our decisions are based on technical realities. If you can accept your humanity and realize that emotions play a huge role in everything we do, then you just might be ready to be an investor. (For more on juggling being human with the rollercoaster ride of investing, take a look at my blog Finance and feelings: Navigating life’s twists and turns.)

2.     Get clarity about your personal values and goals
Since emotions drive our actions, it’s important to realize that each one of us has “money scripts”—absolute truths that seem to have come from our mother’s milk and that dictate how we think about money. We’re taught to be generous… or thrifty… or that “charity begins at home.” We’re given rules like “tithing is required” or “the children come first” or “children should stand on their own two feet.” We’re told that our “net worth” is our “real worth.” (For more on this topic, see my blog Money Rules.) But in the real world, these learned truths may not be so true after all.

Look carefully at your values and goals, and understand your personal truth. Throw out anything that doesn’t fit your reality. Define your personal values and goals, and then determine how much money you need to support them. Start with how much you need for the basics—food, clothing, shelter, medical—today and in the future, and then decide how you want to use the excess. What’s most important to you? Consider things like funding your grandchildren’s education, traveling, starting a business, supporting a cause, or leaving a family legacy. The options are limitless, and they’re highly individual.

3.     Be humble
There’s an Old English proverb that says it well: Enough is as good as a feast. When it comes to investing, your ultimate goal should be simple: save enough to support your goals. Remember, when investing, average is good. If your goal is to beat the market, you’re bound to assume an unwise amount of risk. A more humble approach is to trust the rules of investing, carefully balance risk and return, and set a goal of accumulating  enough assets to support your life. You may not experience the “thrill of victory,” but you’re also much less likely to suffer the “agony of defeat.”

4.     Get help
Getting the help of an objective third party can help remove the emotion from investing and support smarter, more rational decisions. My clients Doug and Marie used to have terrible arguments about money. They had very different values and goals, and that disconnect created highly emotional conflicts. When we started working together, I asked them each to write down their feelings about money, as well as their values and goals. Now, even if they don’t agree, they at least understand each other’s perspective. And when they do disagree—or their emotions start to override smart financial decision-making—they “just call Lauren.” 

5.     Stay true to your goals
Judy had been retired for just over five years when the market crashed back in 2008. It was a dramatic time when many investors were letting their emotions dictate their decisions. Pundits posited that the market would never be the same and that staying put would be a sure path to financial ruin. Judy watched friends pull everything they had out of the market and put their assets into “safe” places—short-term CDs, bonds, and even savings accounts. They all said they’d “get back in” when and if the market recovered. Judy knew her plan was sound; she knew her goals, and she stayed invested.

It took a while, but the market recovered. In the past two months, it’s set new record highs, with the Dow jumping past 18,000. As a result, when we reviewed Judy’s portfolio last week, she was thrilled to realize that she has almost the same amount in her account as the day she retired over 12 years ago. That’s the strength of the market. That’s the power of long-term investing.

When you have a solid plan in place that’s designed to support your values and goals, short-term shifts in the market don’t have the power to deliver financial catastrophe. In fact, if you’re still contributing to your savings, market dips will help your long-term outcome by giving you an opportunity to buy more for less. Even when you’re in the distribution phase, we design your portfolio to insulate you from volatility. And if you start to doubt yourself? Go back to step one and remember: you’re human. Then review your values and goals, and trust that you’re on track to have enough to live the life you were meant to live.

Need help building—or sticking to—a solid, long-term investment approach? This email address is being protected from spambots. You need JavaScript enabled to view it.  me to schedule a time to chat. As always, I’m here to help!

[Photo credit: Daniel Ito]

 

 

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Investing 101: creating the right recipe

Investing 101: creating the right recipe

My Kindle is always filled to the brim with new e-books—many of which I read simultaneously. And while Dorothy L. Sayers’s wonderful and classic Lord Peter Wimsey mystery series is perfect for lazy beach reading, what has my attention at the moment is the much more mind-bending How to Bake Pi: An Edible Exploration of the Mathematics of Mathematics by Eugenia Cheng.

Wait! Don’t run! What’s fabulous about Cheng’s approach is how she uses cooking (and, more precisely, recipes) to explain some pretty complex mathematical theories, some of which I think I’m fully grasping for the first time. Of course, it’s no surprise that my mind immediately began to translate this idea to the world of investing, and I’ve already found the analogy of following a well-balanced “recipe” to be a great tool for introducing some important financial concepts.

Cathie, a brand new client, came to my office for our first meeting, and before I even had a chance to begin the conversation about her financial needs and goals, she blurted out a big barrier to success: “I don’t like the stock market.” She went on to tell me why. “My father taught me the value of real estate, and that’s the only way I want to invest.” Whoa. I had to put on the brakes and throw our whole discussion into reverse. And with the help of How to Bake Pi, I found myself talking about the importance of recipes. And cooking. What I shared was this:

Investing, quite technically, is “the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.” And yet investing is just a means to an end—to reaching your personal goals. Everyone’s goals are unique. They might include retiring early, opening a business, putting your children or grandchildren through college, or traveling the world. The options are endless. Whatever your goals may be, it’s important to follow the right recipe, blending all the available “ingredients” in a way that produces the desired outcome.

Think of it this way: flour by itself isn’t very appealing. The same is true for salt, a raw egg, vinegar, and baking soda. But when these ingredients combine with others, we can create a vast menu of outcomes—anything from pancakes to a buerre blanc sauce to a chocolate pudding. It just depends on the recipe or method we use to get there. Each ingredient presents an opportunity, and the more complex the menu, the longer the grocery list. To determine the best recipe to reach Cathie’s goals, we needed to consider every ingredient in our investing “pantry.” Stocks, bonds, mutual funds, real estate, and more. And it was most important to focus on the desired outcome—not the individual ingredients.

There’s chemistry involved in cooking and investing. Taking away stocks would be a lot like throwing out the flour and trying to bake a great loaf of bread. Can it be done? Yes. But it surely won’t create the same outcome as the recipe with flour. Of course, time plays an important role as well. If the loaf of bread doesn’t have enough time to bake, we end up with an inedible, gooey mess. But when we combine the right ingredients and bake them at the right temperature for the right amount of time, the result may even exceed our expectations.

By the end of our discussion, Cathie agreed to keep our pantry of ingredients full, and I had a clear understanding of her short- and long-term goals so I could determine the most appropriate recipe. I’ll certainly include real estate as part of the equation since she has a “taste” for that particular ingredient, but by agreeing to let me toss in the right amounts of stocks and bonds plus a dash of low-cost mutual funds, we’ve created a time-tested recipe that should deliver just what she’s looking for.

Ready to explore a recipe to help cook up your own financial freedom? This email address is being protected from spambots. You need JavaScript enabled to view it.  to schedule a time to chat. As always, I’m here to help.

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Volatility, escalators, and yo-yos

b2ap3_thumbnail_underactive_escalator.jpgEarlier this month I spoke to a group of women on choosing to choose (the brief version was included in my July 28 blog), yet in the question and answer session, I was asked the inevitable: “Is the market going back up?” My answer: “Yes. Absolutely. Without a doubt, yes!”

If there’s any doubt in your mind about how I can be so emphatic with my answer, it’s probably because the recent market volatility has you, like many others, feeling like you’re on an emotional rollercoaster when it comes to your invested assets. Here’s why I’m not worried:

Volatility is, literally, the up-and-down movement of the market caused by investor sentiments that drive trading activity. Technically, volatility is measured by the standard deviation from expectations, or “normal” market movement. “Normal” is about 5.8% a month and 20% a year. That’s not much change, especially on a daily basis, and we get happily used to those nice, tiny fluctuations. But just like when we’re riding on a real rollercoaster, those little bumps aren’t so bad—it’s the monstrous drops that make our stomachs turn over!

As we’ve seen recently, volatility causes downward stock price pressure as anxious sellers drive down market prices. The current sell-off is being driven by amorphous fears about a slowdown in global growth. In the early 2000s, the cause was poor earnings and devaluations of tech companies. Then came the turmoil of 9/11. In 2008, it was the financial crisis. More recently, Greece and China have been the culprits. Each of these events brought uncertainty, which spurred volatility, which created fear. Of course, fear then impacts the market, which creates a vicious chicken-and-egg situation. The bank rush of the 1930s is a great example. Some banks collapsed, and the fear of more failures caused a run on the banks. Were all banks in trouble? No. But people who had their money in the institutions that did fail lost all their savings (deposit insurance didn’t exist at the time), and that fact caused widespread panic. Clearly fear—especially when it comes to money—can be much more contagious than any plague. The good news is that uncertainty eventually passes. Each crisis, whatever it may be, resolves itself one way or the other. Fear dissipates. And volatility levels return to normal. For investors, the most important thing to remember is that market volatility is temporary while the overall movement of the market is long-term.

Dan (an acquaintance, not a client!) was one of many who let fear drive his decisions back in 2008. He pulled everything out of the stock market to “cut his losses.” His plan, of course, was to put his money back in as soon as things returned to normal. But Dan’s strategy had a major flaw. Now, at the end of a seven-year bull market, Dan asked me if it’s safe to get “back into the market?” My answer, of course, is that investing requires discipline and education. And that if he thinks he has the skill to “speculate” on price fluctuations, well…he’ll likely end up on the wrong side of every trade. If Dan would only take the time to understand investing and the story of the escalator and the yo-yo, then he’d be ready to be a wise investor.

Picture it: you’re on an up escalator playing with a yo-yo. The yo-yo is going up and down on a small scale, while the escalator is going one way—up—on a large scale. Yes, the yo-yo continues to move, but it (and you) continue to move in one direction: up! Now imagine the yoyo is market volatility, and the escalator is the market itself. Even if you’re a really bad yoyo-er (like me) and the yo-yo falls all the way to the end of its string before you wrap it back up again, you’re still continuing to move in the right direction.

Martin Brower is considered by many to be a real estate expert in Orange County. A former Irvine Company exec, he currently writes the column Along the Coast in Orange County’s Coast Magazine. As an expert, he’s often asked, “where is the real estate market headed?” I’ve heard Martin answer, “I don’t know where it’s going, but let me tell you where it’s been.” He then tells his own story of the Westchester home he purchased in the 1950s—what he paid then and today’s price. He didn’t talk about yo-yos, or the collapse in 2008, but he did point out that the trend is clearly up and the change is exponential. Over time. The lesson learned is this: As an asset class, real estate is good, but it’s no greater than any other asset class. The perceived over-performance is the result of the typically very long hold period associated with home ownership. Holding on to your investments—whatever they may be—is the key to long-term success.

So yes, the yo-yo has been going up and down for weeks now. And just as it started to settle down, the Fed opted not to raise interest rates. So we’re back in yoyo territory. But just remember that the escalator is still going up. Maybe not as quickly as we’d all like, but that movement, over the long term, will eventually get us where we plan to go. And if you need a small daily reminder to keep you smiling, just print out a copy of this old newspaper I came across the other day and imagine what a fortune those who invested in 1962 have today—as long as they stayed put and ignored the yo-yo. I hope you’re one of them!

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Still wondering how the yo-yo will affect your long-term outlook? Email me to schedule a time to chat. As always, I’m here to help.


 

 
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Beyond the headlines, it’s an up market

b2ap3_thumbnail_Klein_Advisors_Blog.jpgIf you’ve been anywhere but on a desert island this past week (and I can only hope that’s precisely where you’ve been!) you know it’s been a wild week for the market, and a wild week of headlines focused on Greece, Puerto Rico, and the resulting market volatility. “Greece’s Debt Crisis Sends Stocks Falling Around the Globe,” announced the New York Times. “Greece debt talks: EU chief feels 'betrayed',” according to the BBC. CNBC stated, “Stocks ignored Greece, now pay the price.” On Puerto Rico, the New York Times headline read, “Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable’” alongside The Wall Street Journal’s story, “Puerto Rico Releases Report Calling For Concessions From Creditors: Report’s release sends some Puerto Rico bonds to record lows.” Clearly the world—and the markets—are reacting.

But should you?

While there were a ton of alarm bells going off in the media Monday, the news that struck me the most was CNN Money announcing the “worst day for Dow in 2015.” It seemed to hit the core of my thinking…or at least to beg the question, “What does that even mean?” I’m an investment advisor, and I can tell you this: for long-term, prudent, and informed investors, it shouldn’t mean a darned thing. 

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I’m seeing something very interesting happening right now that shows my clients and other educated individuals are rising above the“cycle of investor emotions” that’s so common. When the market is up, people pay attention and get excited about the opportunity. When it’s down, they get nervous or scared and want to run the other way. What’s fascinating right now is that, despite the recent volatility, everyone seems to be talking about investing again—in my office and everywhere else I look. The fear of the recession seems to be over. Yes, the potential Greek and Puerto Rican defaults are concerns that create uncertainty around the global financial system. But they shouldn’t be casting doubt on how good companies and the economy are valued.

When it comes to investing, it’s important to remember that we’re investing in the economy in general—and in the strong companies that support the economy. Looking around me today, I see many very tangible indicators of that strong economy. Everyone I know seems to be headed to Europe this summer. New cars are everywhere. ”For sale” signs seem to turn into “sold” signs overnight. And it’s not just my own perception. Car sales are the highest they’ve been since 2001. Housing starts spiked more than 20% last month—the biggest increase since 2007. In reality, the US economy is going strong. And the fact that millennials have finally outnumbered baby boomersfor the first time in history can only help sustain the momentum. More than 80 million millennials are exploding the population, and they’re buying everything. Houses. Cars. Computers. Washing machines. Dinners out. You name it, the single biggest generation in history is buying it today or planning to buy it tomorrow.

Yes, the headlines are right.

Greece and Puerto Rico default fears wreaked havoc on the markets this week. But beyond the headlines, when you invest for the long term, the trend is always up. Way up.

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So, if you can, forget about Greece (except perhaps as a vacation destination). The market has been anticipating this default for years, so this “news” shouldn’t be a driver over the long term. Forget about Puerto Rico…that default has been assumed for a very long time (one reason why our bond funds don’t hold any Puerto Rican debt). Forget about the media (except for infotainment), forget about the headlines, and focus on the economy. Less than five months ago, the headlines were shouting the news that the S&P 500 hit a new highand clients were coming to me ready to invest—or re-invest—in the market. The informed investor rises above the cycle of investor emotions and continues to stay the course. Today, the market has settled down, though all bets are off if Greece does actually default this week or next. No matter how the markets react to the situation, my advice is to remember Warren Buffet’s words of wisdom: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

 

Does the stronger economy have you excited about investing again? Contact me any time to discuss what today’s market may mean for your own long-term investment strategy.

 

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Lessons from Dad

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With Father’s Day just around the corner, I’ve been thinking about my own Dad and how he influenced my life. Was he a good financial role model? Did he teach me lessons I still value? And how much of a role did those lessons play in making me who I am today?

Harold Sachs was born in 1920, so he was young enough during the Great Depression that he didn’t have money worries of his own, though I’m sure he witnessed the strife of the era. But I know from hearing the family stories that even as a child he was everyone’s favorite. He was an energetic, athletic, and happy-go-lucky young man. He and my mother married young (after he died, I learned my parents had actually eloped—not the story I’d been told growing up!). He attended Georgia Tech, but enlisted to fight in the war before he graduated. When he returned from overseas, he immediately got a job as an engineer at the Port Authority of New York (I have a mental image of him working away at a drafting board, sleeves rolled up, planning the NY subway system), but it was not the career he’d hoped for; he’d done the math and figured out that even if he saved every penny of his earnings, he’d never be a wealthy man and the family steward he wanted to be.

When his own father suffered a stroke and died, Dad was happy to go into the family business as the owner of M&S Tavern in Paterson, New Jersey. An ambitious man (to say the least), Dad didn’t stop there. He was committed to building his wealth, and he saw opportunity in the post-war housing shortage. He began buying up neighboring properties as quickly as he could, subdividing them into smaller rental units to meet the demand for housing. And he did anything and everything to earn more money and make his money work for him. As the owner of the tavern, he put his accounting skills to work, filling out tax returns for his customers—factory workers who turned to him for help. I remember boiling eggs in our family kitchen so he could sell them at the bar. With that money and more, Dad even bought a local bakery. I remember him getting up at 4 a.m. to make dough, running the bakery in the mornings, napping in the afternoons, and then heading to the tavern for the ‘late shift.’ He was always full of energy, and he was always on the lookout for the next opportunity. At the same time, he longed for the often unrecognized freedom that came with working for someone else. “Never work in your own business,” he told me. “It’s much better to work for someone else and let them go home with the headaches!”

Dad also loved the stock market. When we ate breakfast together, he would read the paper and tell me all about the market. Together we’d pretend to pick stocks (do you remember American Can, US Steel, and National Cash Register?), and then we’d watch our fantasy fortunes grow. When Dad invested with real money, he learned along the way, selling some winners and holding some losers. He did his research, tracked what worked and what didn’t, and he knew, like Warren Buffett, that owning great companies was the key to building wealth. By the end of his life, he’d realized his dream of becoming wealthy. It was a long, circuitous route, but he got there.

Not long before he died, we were talking about his business ventures. At the time, I had just hit the 15-year mark in a corporate finance position, and I was definitely coming home with headaches. I reminded him of the advice he’d given me years ago about the value of working for someone else. He laughed. “Not once you’re an executive LJ. Once you’re the boss, you come home with the headaches anyway!”

Looking back, I have to wonder how many of us learned key financial lessons from our parents at a time in their lives when they were still learning themselves. Many of the behaviors our parents imprint on us happen when we’re very young. Which means, of course, that we’re learning from parents who still have much to learn themselves. If I hadn’t sat down with my Dad that afternoon, would I have gotten that perspective of an older, wiser father? Would I have had the courage to open my own business a few years later, or would I have continued to feel obligated to hold down a position working for someone else? It’s funny how those childhood lessons stick with us over time.

b2ap3_thumbnail_Lauren_Klein_blog.jpgYears after my Dad had died and I had opened the doors to Klein Financial Advisors, my Uncle Joe said to me, “Your father would have lovedthat you’re in this business. He would have loved that you help people invest in stocks and make their money work for them.” I guess those breakfasts poring over the stock sheets taught me more than how to build a fantasy fortune. Wh

ether he intended to or not, my father taught me the potential of investing, the drive to build a business, and the importance of being passionate about what you do every day. If he were still around today, I wonder what other lessons would be in store—financial or otherwise.

If your own father is still living and you have the chance to call or visit on Father’s Day, you may want to talk about the lessons he’s taught you over the years. And if age has given him some new perspectives, you may end up learning some brand new lessons from your older but wiser Dad.

Has your father been a financial role model? Were the lessons you learned valuable? Email me your thoughts. I’d love to hear them!

 

 

 

 

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Index

09 November 2016

Contact Us

4299 MacArthur Boulevard
Suite 100
Newport Beach, CA 92660
Phone: 949-477-4990
Fax: 714-464-4481
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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >