Tuesday, September 6, 2016

Education Week Class Notes: Millionaire-like Financial Choices, Investing, and Estate-planning

Everybody loves to learn, especially in classes with titles such as the following:

More Money than You’ll Ever Need—Discover the Happiest Income in America! Living an Abundant Life While Developing the Tools of ‘Eternal’ Prosperity: The Financial Path of Choice—Actualizing Your Financial Goals, Insights, and Creative Energy through the Smartest Choices You Can Make ( by Scott C. Marsh)
The millionaire never thinks of themselves as rich or wealthy.
The place where people finally accept they are rich is at 7 million dollars. (From Fidelity)
Collaboration , mentoring, innovation, open source, curiosity
Keys from an unexpected source, concealed and accessible.   (Marsh uses the book The Millionaires Next Door)

***Millionaires have inconspicuous lifestyles.   
80% of millionaires don’t drive fancy cars, but buy used cars.

Millionaires have mentors.   (Don’t find someone who is getting a commission on a product they are selling you.)  Have prospective financial advisors show their financial statements. See how they are doing. If they won't show, don't hire them.
And find out who they use as mentors.

Millionaires are living in a modest home, usually the first one they bought. Never refinance unless it is an emergency.  (It is concerning that 60-year-olds are getting 30-year mortgages!  Bad!)
Starter home, middle-class neighborhood, pay off the mortgage as fast as possible.
Lots of advisors don’t advise this. But ignore them.
Elder Faust had a 4% mortgage (impossibly low at the time) he was trying to pay it off as fast as possible.  Faust ignored the naysayers and continued to pay it off. “That’s why Faust always has a smile on his face.” (one apostle to someone else)
97% Millionaires own their own home. High instance of home-ownership.

Millionaires have higher education.  80% are well-educated.
They will spend for their kids' higher education.

President Hinckley encouraged people to get better education to make more money.
But education doesn’t necessarily mean you’ll be smart with your money.
More education leads to>>more income leads to >>less accumulation.
When things are tight, you know what you can afford and you’re careful.
Physicians are known for being worst money managers. (Similarly, dentists, CPAs, attorneys, orthodontists, stock brokers, insurance agents, home builders, actors, artists.)
Providing professional services for a fee makes it very difficult to accumulate.
Professional athletes tend to go bankrupt after leaving their sport.

Difference between high net worth and high income. 
Net worth is everything you have (assets minus liabilities)
Income is what you earn.  It’s only a piece of the wealth picture. Don’t select your job based on how much can increase your net worth.
Center your financial goals around your net worth.
Some people plan their parents’ death into their net worth based on inheritance. (Don’t do this.)
Instead establish good goals, habits, systems.
Millionaires save at least 15% of their income.
Average millionaires will save 20%  Note that Joseph of Egypt recommended Pharoah save a 5th, which is 20%

Millionaires are self-employed.  2/3rds of them.  But it isn’t critical.

85% of millionaires are first generation millionaires. (1 in 4000 chance)   
3.5 households in 100 are Millionaires
Overnight and second-generation Millionaires are at a disadvantage.   Their plan A is a windfall.
Plan A should be wisdom and discipline (good money-handling systems).

50% of millionaires never receive $1 of inheritance.
Majority of inheritances are gone by the third generation. (People are always trying to figure out how to make it survive.)

Giving money to adult children, noticing it wasn’t helping, unable to stop giving them that money – That is Economic Out-patient Care. (EOC)
Millionaires will pay for kid’s education, then they stop afterwards.
Millionaires’ favorite chapter in the book. #2 was on EOC. #1 was Affirmative Action, family style.
Millionaires don’t tell their kids “I want you have a better life than mine” This feeds the wrong expectations.  Children will spend to meet the expectation.

Don’t lease a car. Avoid monthly payments at any cost.
To pay monthly is a curse, but to receive a monthly payment is a million-dollar choice (i.e. a decision was made, great effort was expended that led to a very nice consequence).

Millionaires are fastidious budgetters.  Intense focus on knowing exactly where the money is going.
Not extensive time and energy spent on shopping.  They are aware of where to find a good deal. They love not giving away their money.
Frugality is a life choice for millionaires.
Question: Do we delay gratification, or do we actually find a frugal lifestyle appealing? 
Millionaires find joy in prudence, frugality, and resourcefulness.  Be careful with over-doing. No woman wants to be married to a tightwad. 

Are you an underachiever accumulator, average, or prodigious?
(Current age * current income) / 10 = what your current net worth should be.
Then add up your actual net worth.  Compare.
If you’re under, you’re underachiever, if you’re at it, then you’re average, if over it, then you’re prodigious accumulator.

87% of divorces are caused by money.  Money causes more problems and all other problems combined.
Millionaires marry the right person.  84% of millionaires interviewed in the book felt marrying the right person contributed to their success. 
Divorce rate is half the national average.
Spouse rarely worked outside of the home and didn’t have a time-consuming career.
Marsh also cited “Pretty-women-make-men-stupid” research.
Women with more estrogen have hour-glass figures. They were not as good at financial decisions and not as steady as women with more testosterone.

Investment rules:  Long term, familiar companies and industries, dull/normal investments, 12% return, increasing dividend
Purchasing habits: no expensive brand-name items. 
(“I can’t get my wife to spend any money”) 

Most profitable businesses (see list on Marsh’s website?)   www.scottmarsh.com
Estate objectives are for children to have discipline, ambitions, and independence.
Non-beneficiary estate executors.  7 of 20 millionaires named a non-beneficiary to be executor because otherwise it causes lots of family war and court cases. 
Millionaires have in-law conflicts.  In-laws alleging unfairness cause estate distribution problems.  Marsh says, “So, all you in-laws, stay out of it!  Just don’t say a dang word.” 

Live WELL below means. Live WAY below means.  95% of people live from month-to-month.  Do everything you can to not be like that.
Life of discipline, sacrifice, and hard work.  Forget yourself and go to work.

Prophets of our day saw us and saw the cool things happening in our day and they rejoiced.
D&C 82 multiply your talents even 100-fold.  Help others do the same thing.

Million-Dollar Choices—Empowering a Lifetime of Maximum Personal Choice through Small, Insightful, Daily Choices: Five Compelling Investment Strategies—The Wisdom, Order, and Discipline of Prosperous Resource Accumulation (by Scott. C. Marsh)
What’s your reaction to investing today?  Class reaction:
 --Stock market seems unstable.
--Indexed annuities, is it a good idea or bad idea right now? 
--We’ve had a long rise in the market so we’re due for a drop…
--Real estate had a long run so it is time for a term of drops.

What is beating the street? 
Getting better returns than Wall Street. We peg our success on doing better than everybody else. (Requires winners and losers)
“Beating the Street” can be seen as a boxing match.

Try reading:
Beating the Street, Peter Lynch.
One up on Wall Street, Peter Lynch
The Intelligent Investor, Benjamin Graham.
The Essays of Warren Buffet”
Check Scott Marsh’s website for a bibliography list. 
See also BYUtv.org

Investments.  We can invest in: Equity, Debt, Derivatives
--Equity (purchasing share ownership in something, company stock)
--Debt (companies borrow money from you through a bond. Must pay back or go broke)
Highest yield from stocks because there is more risk.
--Derivative (a contract to buy or sell something later.) Ex: Pork belly contracts. (If price goes up, make money. Or if the price goes down, make money.) (Does not require buying the asset. Only betting on the price.) (A contract that if the value fluctuates, there will be loss or profit.)

Don’t have all your eggs in one basket. If the basket breaks, all your eggs are gone.   Invest in more than one company!
Have at least 21 different companies in your portfolio, according to some people.
Allocation.-- Have your money invested in more than one investment objective: bonds, large companies, small companies, health, tech, stocks, etc.

Investment company—Someone who helps people invest by investing with other people’s money. 
Index fund shares. Lots of different types: mutual fund, index fund, ETF, variable annuities, etc.

Listed from low investment risk to high risk:  Treasury, money market, corporate bond, high yield funds, large cap growth, real estate, international stock, hedge funds.

Some wrap several types of risk together and make a pre-set mix index fund.
Inside our 401K plans today they have pre-set mix index funds.  For the vast majority of people, this is the best way to invest without hassle.  (Marsh likes these for easy investing)

One-year rolling return--only looked back at the past year. Can choose other periods of time to analyze.
Different periods of time to look back to see how investments have performed.
The shorter the period analyzed, the more the fluctuations seen.
Short-term investments perform erratically, irrationally. Avoid anyone who predicts returns in the future.
Over one year, 73% of the market is up.  (The odds are mostly in your favor with a well-diversified portfolio)  (For S&P 500 % positive return from 1926-1999)
Over five years, 90% the market is up.
Over ten years, 97% of the market is up.
Over 20 years, 100% of the market is up.
Principle: Long term, the market is very consistent.

Look at an example portfolio allocation
50% in large cap stocks, 20% developed international, 10% large cap, 20% emerging stocks (one year rolling return)
1997 was very scary.  But most of the time, the market was above a 0% return.
Average annual return was 11% for the portfolio.
Average return since 1930 is still 11%.

Ten year rolling return.
Even if getting into the worst period, return is still 6%
2008 took away a decade of returns.

Is there a way to invest to not lose money in a down-market?
In a 1) well-diversified, 2) well-allocated, 3) long-term mindset portfolio, your investment won’t lose money.
Just don’t look at the newspaper at how the market is doing every day or you’ll freak out.  Never look at your statement, or only look at it once a year.
Just try to put more into your investments.

Harry Markowitz, Modern Portfolio Theory, Nobel prize in 1990 for “Portfolio Selection” 1952..
Shiller, Hanson, Fama, Markowitz, Sharpe, Miller earned Nobel prize in investing recently. On Asset valuation.
Eugene F. Fama.

Minimize Investment Expenses!
There will be some kind of expense on an annual basis for handling it.
Try to minimize those fees.
 3.5% expenses for 401K
3% Annuity ,
1% mutual funds 
.25%-1% index funds   (These are the best)<---best a="" expense="" for="" low="" rate="" span=""> 
BrightScope.com  Will rate your company’s 401K expenses.

Pre-set mix/index portfolios
Vanguard Lifestrategy Conservative growth fund has  .26% expense or even half of that.  Officially .13% expenses.
People in the financial industry don’t like Vanguard because they have made investments the least expensive in the financial industry.
Don’t worry about class A, B, C, D : those are mutual funds and indicate how much they are charging you to get into it.

Marsh doesn’t believe in target date funds; he thinks we should just put all our money in 45–year funds.
Your funds will be invested in about 5000 companies.

The worst possible yield we could have had over 20 years was a yield of 3%.

The 401K is not an investment; it is a way to invest in a tax-preferred way.
Invest past the company match of 401K.  It is the largest single investment of your retirement.  Put as much into it as you can.
If retiring before 59 age, if you elect to withdraw, if you get periodic withdraws for the rest of your life, then you can get access to it without 10% tax penalty.

Annuities—Marsh says don’t do them.  Annuities are vastly overblown. (details why in next class)

A Future of Transformational Developments in Personal Prosperity: Advanced Investing—Inspirational Insights for Seasoned Multipliers (by Scott C. Marsh)
Mutual funds versus investor performance
What to do if you need a place to invest?  Everyone has access to an IRA unless over-compensated.
Can put up to $35K in different investments each year of 401K and IRA.

Some people say “Do an annuity” but Scott Marsh says “In an annuity, each year you’ll earn income. 85%-90% will be dividend stuff that will be capital gains income.
If you’re in 401K, in the 15% tax bracket, 0% of it is taxed. (Taxes are the biggest investment expense) You’d have to have taxable income over $80K to get taxed.  All your capital gain income is completely free from taxes forever. 
But if you’re in an annuity, you have pay ordinary income taxes on all of it. Annuities turn tax-free income into abusively taxed income!  VERY BAD!!!”
Moral of the story: Avoid annuities.
Annuities should never be sold in a tax-qualified plan. Marsh emphasizes this: “NEVER NEVER NEVER.”    Only people who sell annuities say you should buy them.

Life insurance options:  1) whole life or 2) term.
Just buy term life insurance and invest the difference.

Roth IRAs.  Why not do Roths? 
Marsh says, There’s only one reason to do Roth—if you’ll pay higher taxes in the future, and if you’re scared income taxes will go up in the future. 
But what if taxes don’t go higher?  The IRS isn’t going to give you money back if you make the wrong bet.
Historically, tax rates have gone down in the last 20 years. Also, 85% people in the country are at a 15% tax bracket or less, so odds are they will politically vote to keep taxes down and taxes are going to go down.
Only one exception—students who aren’t paying any taxes at all could do a Roth.
Don’t mess things up for yourself just to help your kids.  (Pretends to spit on the ground to show it is a distasteful idea)  Roth might sound good if heirs can get it out tax-free, but don’t bother about that. 

Stock Mutual Funds
Average stock fund return is 8.2% 
Average stock fund investor return was 3.5% How so low?  The loss is all because of emotional reactions when stock drops and investors freak out and sell.
Penalty for not being in the market is missing the best ten days right after it goes way down.  Missing out on $20K. 

So your money has a death wish..  (Stupid things to invest in)
--Derivatives – weapons of financial mass destruction, according to Warren Buffett
--Hedge Funds – returns do not cover investment expenses, according to Harvard research.  Average expense is 4% + an extra percentage (Insane!)
--Precious metals. Gold has no real value, according to Brigham Young and Warren Buffet. Anthropologists are going to wonder why people put all that effort into it. Less than 1% of gold is being used productively.  Fear is the only thing that makes gold grow in value.
--Insurance company investments – Investment life insurance and annuities – FINRA warning.
--Roth IRA and Roth Equivalent
--“Qualified” Investor/“Accredited” Investor Investments (These are offered to you once you’ve got a certain level of money)--- These are more evidence of pride investing than profitable investments (It is meant to make you feel special, but won’t make you money)
--12 Daily Pro  - This investment offer claimed to give 2% return a day.  Do the math.  $1 invested would be $2,973,593,804,833,860,000 at the end of 1 year.   It’s larger than the national debt!  NOT POSSIBLE  >> Fraud.  BYU students reported them.

There is no such thing as an investment that guarantees a return of 14% a year.

The Death of Equities.. (supposedly but not really)
Some people think the market has been doing too well over the last 10 years.
S&P 500 from 1972 to 2013..  First 10 years was disappointing. 1982 was called the death of equities.  People thought stocks were not where the action was at.
Inflation was awful then.
But then things really went up for the next 15 years. 
An then 1997 to 2012 was another “Forget about investing in equities!” period.
Moral: There are cyclical markets with long cycles of 15-20 year stretches of alternating on-or-off modes.
What to do?  The smartest guy is putting money in even when the market isn’t doing very well.
Marsh shoved more money in during Brexit.

We’re the most prosperous we’ve ever been. There are so many reasons to have hope.
Negative news gets more attention and reaction than good news.

Barbell Portfolio

Look at what the consumer market is doing, not the stock market indicator.
Where is fear today? At its highest point in history.  (People then sell and get out)
But where are the consumer markets today? Are we spending in a way that reflects fear? No. We’re spending at all-time record levels.
Baby boomers and Millennials are two largest consumer markets in American history.  Anticipate companies that will benefit the most from those consumer markets.  That will beat the index.  Average extra year is 5.29%
Moral: 1) Don’t get caught up in the fear, and 2) analyze consumer markets.

Analyze demographics.  
We’ll have 100 million new workers by 2050 and we’ll be at the peak of prosperity.
Be a good American and start having babies (like those Mormons in Utah!)
First kid makes happiness go down, according to studies. (challenge)
After the fifth kid, you start getting more happy. Greater happiness after having 8th child.

Marsh makes a statement he knows will be controversial: American immigration things happening right now are silly about sending people away. 
Reality is: People are markets. Overall, immigrants are more resourceful, saving, engaged, sacrificing than Americans.
Examining immigration financially (without considering the legality or morality of it), it is smart to allow immigration.

Tax Analytics – Proactive Strategies. TAPS
Largest expense is taxes on investments.
Find a good tax advisor.  Ask them if they give advise for tax strategies.
72 different Proactive Strategies
IF home is paid off, you can prepay charitable deductions in one year, then get standard deduction the next year.
DO IT Yourself

Don’t go crazy because of flat returns. Good returns will follow.
Try to figure out how to minimize taxes.

Estate Planning and Asset Protection: Estate Planning in the 21st century (by Robert Bolick, attorney)
Everybody has a will. The state will write one up for you, but it’s better if you plan it yourself.
--Providing for an orderly distribution of assets when we die.
--Avoiding civil war among descendents.
--Avoiding probate. Probate is going to court.
--Protecting beneficiaries.

Trusts versus wills
Will drawbacks:
-Beneficiaries have to go through probate if your estate is over a certain amount. (over 50,000 for AZ)
--Assets open to public scrutiny.,
--Children from prior marriage aren’t protected,
--Previous marriages involved

Living trusts. 
--Created while you are alive.
--Trustor, creates it, Trustee in charge. 
--Beneficiary benefits
--Trust is revocable.
--No tax consequences for going in or out.
--No annual maintenance fees,
--no register. 100% private, No one knows it exists unless you tell them.
--No one gets to see a copy unless you show it.
--Real estate owned in trust., you maintain 100% control throughout your life.
--Trusts give no asset protection. Doesn’t protect a house.  LLCs help, but don’t put houses there.

Irrevocable trusts can be gotten out of, they keep out the bad guys.

Purpose of trusts
--Make sure kids don’t fight,
--Protect kids from themselves,
--Avoid probate; trust acts as a will substitute,
It’s still the best choice for disposing of assets.

Probate is that bad.  
--It is costly. 5% of estate.
--It’s pubic record (everyone knows what’s in it).
--It takes 1 year,
--It is a hassle because you have to go to court to administer the estate.

Requirements for probate. 
--Assets held in decedents name only, not in trust, joint tenancy or beneficiary designation. 
--Assets exceed a certain amount.
--You’re dead.

Do I really need a trust?

What about joint tenancy?
It never works that way in life.
It still needs to be probated.
There are always problems.
Not a good idea.

Joint tenancy: Whoever lives the longest gets it all. 
Two or more humans, cannot be with an entity. (entity doesn’t die)
Defers probate until death of the second person
Doesn’t help when there are simultaneous deaths,
Always messy with multiple marriages. Children of the surviving spouse end up with it all, and previous spouse’s children gets nothing.
Even wills with joint tenancy can get ignored.

What about IRAs and 401Ks that can’t be joint tenancy? 
They can’t be held in a trust.
They are for individuals.
They are considered a taxable event.
Name the individuals beneficiaries , not a trust.  Name spouse as beneficiaries (or next the kids)
If the trusts are the beneficiaries, the payouts come in 5 years and trigger taxes.

Spouse doesn’t have to withdraw yearly, and no taxes.
Joint tenancy loses tax benefits of community property states.. It separate property that isn’t community property.
Arizona is a community property state. (Illinois isn’t a community property state)

Several states allow for real estate to be held as community property with right of survivorship.
With children on title, the creditors of a child can attach mom’s interest—divorce, car wreck, business failure, liability.   If a child dies before mom, his children are disinherited. Can’t have asset protection.
True story of daughters who disinherited their siblings who weren’t in the joint tenancy.

Summary – joint tenancy loses tax benefits, creditors of others can attach property.

Stuff with beneficiaries don’t go into probate.

Family trust makes stuff avoid probate and costs nothing, goes fast, no pubic record, no forum to contest.  Much easier. In the trust, the trust would name beneficiaries. Contingent beneficiaries added.

Some states have a uniform probate code that makes it faster and easier.  But if you can avoid court, use a trust.

There is an advantage to naming life insurance beneficiaries as trust.  Helpful when there is simultaneous deaths.  Life insurance is tax free.
If you have property in multiple states, then putting property in a trust will help you avoid probate in each of those states.

Trusts can have incentives.
Having a trust matching earned income can encourage working. 
This can be a bit of a burden to administer when too many conditions are put in.