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Friday, September 25, 2015

The Money Marathon

Rule #1: Know how to win
Imagine you’ve signed up for your first marathon. You’ve trained hard, prepared. Fueled yourself for the journey. Imagine the multiple-hour long suffer fest, with the focus on doing things right, just putting one foot in front of the other. Imagine, after hours of running, finally crossing the finish line. Would you keep running, once you’ve crossed? What if you didn't know where the finish line was? Would you keep running, or stop?

Too many people (people who don’t actively plan) refuse to ever find their financial finish line. Some believe that they could never cross it, if they knew where it was. Some people are blindly confident that they will be alright on their own merits, planning their own training, and training when they want to, doing whatever feels good to them on that day. But marathons are long. 

Thankfully, there is no one forcing us to run a marathon - we have a choice. But when it comes to finances, we all must run the financial race. 

When it comes to money, we all set our own finish lines. We all can choose how much is ‘enough.’ But until we give ourselves an end, we won’t be able to know if we are using the best directions. 

Rule #2: Know the players
For better or for worse, there are other people on the course when you run. Some are others running their own race, some will help guide you along the way, and others yet will slow you down. The last category is the most dangerous – they are the ones that will upend your race plan. And these villains are different for everyone. For some people, these gremlins show up as debt payments, for others, unplanned emergencies or expenses. Some of the cleverest gremlins are the small expenses that drain us over time, subscriptions to services we never use, or habits we no longer enjoy. 

From an early age, we are trained how to buy. And we are very good at spending. Every time we turn on the TV, we are inundated with ads for the latest must-haves. But how can we succeed in sticking to our race plans when millions are spent every month to get me to veer off course? We must see the companies, products and services we buy for what they are, and plan for them accordingly. 

There is nothing wrong with spending. And I think we should all aspire to improving the quality of life for our families and ourselves. The challenge is when we mortgage our financial futures for today’s entertainment. And we are tempted to do so with the flashy ads, or the news segments signaling the end of the world. But when we realize that the marketing company’s job is to make you buy, and the newspapers job is to sell newspapers, we can then stay focused on finishing our own race, our own job of working towards financial independence. 

Rule #3: Have a strategy
What we leave up to fate, gravity tends to decide. 

One of the most important tools we have in our financial lives is simply to make a plan. This plan should be written. It should be based on facts, not opinions. It should outline a path to pursuing your most important goals. And it should be reviewed on an ongoing basis. 

But why?

To put it simply, every business, service and corporation discussed in Rule #2 already has a plan for you. They have spent countless dollars figuring out just how to part you with your hard earned money. And the less planning you have done for yourself, the easier it will be to get you to spend. Remember, wealthy behaviors are 80% emotional, and a big part of that comes down to how we spend. 

The purpose of a financial plan is best summed up with a sales axiom: “People love to buy, but hate to be sold.” We are trained to buy, and we love that feeling of gratification. But we also need to protect ourselves from being sold – and our best defense is by having a plan. 

We are forced to run the financial race. For those who run intentionally, with a plan, and with practice, the financial marathon can be rewarding and fulfilling. Having a plan along the way helps give us confidence, and allows us to enjoy the scenery as we go.

Wednesday, September 16, 2015

Socially Responsible Investing: How Capitalism Can Save the World

Today it seems that everything is divided into two camps, left and right, conservative and progressive, Pepsi and Coke. This seems especially true when it comes to the world of finance. Either you are a believer in the merits of capitalism, and believe that the Market will correct all wrongs, or you believe that big business is the root of all evil and social injustice. But is there a third way – a way that can use the power of the market to save the world around us?

The trouble with the status quo
For need of an example, let’s take the environment – specifically the creation of waste/trash. Leaving aside the debate on the climate, I hope that we can all agree that as a rule of thumb, our love of consumer goods has led to an incredible surge of production, leaving us with mountains of stuff. Now, if wanted to address that issue, the general consensus is that we should (1) start a grassroots movement, (2) lobby our government representatives, who will (3) make laws/regulations that (4) constrain the activities of business or the public which finally (5) reduces waste. The challenge in this approach is threefold. 

First of all – this process takes time, often years, in order to grow support, change government thinking, enact new legislation, and see results. And while each next step is being taken, support can fade into the background. 

The second sad reality is the political sway that businesses can have on legislation. Simply put, lobbyists can be well-funded by corporations who have a vested interest in the status quo.

Lastly, even if legislation is passed, businesses have the option to simply off shore waste-producing activities to other countries with fewer regulations. 

So at the end of the day, what have our efforts accomplished? Unfortunately, it hasn’t accomplished nearly as much impact as we hoped it would for the effort and man-hours that we put in.

But if you’re feeling helpless, there’s good news. 

Socially Responsible Investing: An alternative
The good news is that there is an alternative way to effect change, and more directly. The industry term for this sort of morally-motivated approach is “Socially Responsible Investing” or “SRI.” This is a method that allows investors to leverage the markets to reflect our values. More than just Risk versus reward, SRI adds an additional layer by evaluating companies on any number of different impacts – from environmental concerns (green companies, organics), treatment of employees (child-labor, wages), to consumer safety (avoiding alcohol, tobacco, etc) just to name a few. 

So how does it work? 

There are two basic ways that SRI can work – what I call ‘activist’ and ‘exclusivist’ methods. 

The activist method involves building a group of like-minded shareholders that use their collective ownership of the company to propose changes to the board of directors. This is where we see direct interaction between business and those striving for change. This isn’t to say that change will be easy, but with time and persistence, the same skills needed to build support for change on a political level can be used directly within a business. 

The exclusivist approach is much less demanding. Instead of organizing people and directing support, you can let your portfolio do you talking for you. By leaving out companies that violate ethical standards, a large mass of people can cumulatively send a message via the marketplace to corporate executives. Coincidentally, seeing that often times executives pay largely based on stock price, with enough support from investors, businesses can realize the need to for change long before legislation can be passed. 

Either of these models can help the average investor align their dollars with their values, and can supplement any action taken in the community as well.

One of the big risks to keep in mind with Socially Responsible Investing is that when you elect to avoid investing in companies by industry or other metric, your pool of possible investments diminishes. In investment jargon, this lowers your portfolios diversity, which can have on the overall amount of risk and volatility that you may see over time. 

If SRI is interesting to you, make sure you consult your financial advisor to make sure it can reasonably fit into your overall plan. 

If you would like to continue learning about SRI, a great resource is Investing for Change, by Landier and Nair. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The return may be lower than if the advisor made decisions based solely on investment considerations.

Investing involves risks including possible loss of principal.