Beware To Be Aware Of Replication

Most people who take advantage of a company sponsored tax-favored retirement or health savings plans often commit a cardinal sin of investing. They fail to research the investment options before allocating their contribution and the company’s match. It is not enough to research the mutual funds. You also need to look at the underlying securities. Much to my chagrin, many options within 401k and HSA plans often overlap the underlying securities, albeit at different percentages. What do I mean by that? Let me give you an example.

Not too long ago, an acquaintance asked me to help him analyze his investments across three accounts. He had the standard brokerage account, a traditional IRA, and a Roth IRA. After reviewing his current position, all of which were chosen by a “professional” financial planner, I discovered this sin of replication.

The following example includes actual numbers. I use this example to highlight the repetition in just one of the accounts. Based on the common top ten holding, if the industry takes a hit, so too does each of the four CEFs (Closed End Funds). The result is a magnifying effect of losses. Of course one could argue that if the industry does well, the gains will also be magnified in the positive direction. However, one needs to know the industry before committing this type of strategy.

This person’s financial advisor had him invested in 4 CEF's in his brokerage account. The top 10 holdings in these 4 CEF's duplicate each other as seen in the tables below. (Price is of 4/18/2018)

Notice the repetition of companies; over $90,000 invested in essentially the same companies although at varying percentages. This is not diversification. It is replication and is actually a risky strategy.

For those who participate in any company sponsored 401k or HSA plans, understanding the underlying securities that make up the mutual funds in which a person may invest is important. For example, in the HSA account offered by Health Savings Administrators, there are five Vanguard funds that replicate their top ten holdings. This is astounding. The following table illustrates my point.

If, for some well-intentioned reason, a plan participant distributed his or her contribution across these five mutual funds, he or she is at risk of magnifying any potential loss based on the number of times a security is replicated. If the If Facebook, Apple, Alphabet, and Microsoft took a hit, all five mutual funds would take a hit and the loss would be magnified.

My suggestion is before you invest in any mutual fund, regardless of the type of account, do some analysis on the underlying securities. True diversification means not replicating the underlying securities, especially not the top ten holdings. If you have questions about how to analyze mutual funds, leave a comment.

Ten “Do Nots” About Setting Goals

I put together this short list to highlight the mindset a person needs to be successful in achieving personal goals. There are times when the application of all of the rules will be required. There are other times when the nature of the goal will dictate the rules that apply. Although this list is a list of “do nots,” reading the rule in the affirmative will help guide you to taking the correct action when setting goals.

If you need additional guidance on setting goals, I have an entire chapter in my book, Simple Wealth Building Strategies. In this book, I go into great detail on setting goals from both an physical and intellectual perspective. I believe this resource will help you change the trajectory of your life, but you will have to do the work of learning and applying the information. I hope this short list of “do nots” help you focus on your future success.

Here is the list of things you should refrain from doing if you want to be successful at achieving your goals.

1.    Do not set goals that require someone else to change. I want my husband to love me more is not a goal YOU can achieve. People change because they want to, not because you want them to. Your goals should be about changing you, not others. Tying your goals to changing others is a sure way to become frustrated, bitter, and, in the end, a failure.

2.    Do not set goals that require someone else to accomplish something so that you can accomplish something. Goals that are dependent on someone else’s accomplishments often cause frustration because the goal becomes more about controlling someone else’s behaviors than it is about controlling yours.

3.    #160;Do not set goals that focus on changing the circumstances in which you live. Rather, set goals that change how you interact with the circumstances in which you live. Trying to change the circumstances is like swim upstream on the Mississippi River, you might make it, but you’ll waste a lot of time in the process.

4.    Do not set goals that compromise your character. In the end, you may have what you want, but no one will want you. Every life leaves a wake upon the shores of those with whom they interact. Compromising your character will erode your relationship and destabilize your ability to achieve future success.

5.    Do not set negative goals. Removing something from your life is not as important as adding something to it. Instead of setting a goal to lose weight, set a goal to eat healthier and exercise more. Instead of setting a goal to reduce spending, set a goal to save more. Focusing on the positive is far more fulfilling than always focusing on the negative.

6.    Do not set goals that conflict with other life priorities. Always keep the most important things the most important. When your goals compromise you commitment to your faith, family, and friends, the achievement is never worth the cost. Have rock solid priorities and your goals will always compliment them. 

7.    Do not set goals that lack discipline. Discipline is a combination of three elements: character, stamina, and wisdom. Goals that challenge your current abilities build character, develop stamina, and produce wisdom. Your character is who you are when no one is watching. Stamina is the ability to stay committed even in the face of overwhelming negative odds. Wisdom is the appropriate application of knowledge gained through experience and observation. Discipline is the capstone of achievement.

8.    Do not set goals that are too easily achieved. Goals that are too easily achieved produce a false sense of security and accomplishment. Training yourself to overcome trials and tribulations will sustain you when times get tough. Stretch goals force you to be uncomfortable. When you are able to achieve your goals in the face of adversity, you will have a greater sense of accomplishment and confidence.

9.    Do not set goals that are unable to produce a return on your investment. Time is the single greatest resource of which you have no ability to create more. Why waste it on pursuing goals that do not add value to your life? There is a distinct difference between goals that build wealth and those that waste resources. Your goals should move you towards a financial target, not further away from it.

10. Do not set goals that fail to have a sustainable target. That is, once the goal is achieved, it has the ability to self-sustain a pattern of continual growth or improvement with little or no effort. The best measure of a goal is one that eventually becomes a way of life. Once you have overcome the major roadblocks to achieving the goal, you are able to sustain the activity without struggling to continue to achieve the goal.

If something here has helped you, please share this post with your contacts. Don’t forget to pick up your copy of Simple Wealth Building Strategies and keep your eyes out for my new soon to be released book 10 Roadblocks To Successful Investing, And What You Can D0 To Overcome Them.

Reframing How You Think About Money

How many of you have heard of the income distribution strategy? I am sure many have heard of a budget, but not many have heard of income distribution. That’s because income distribution is a strategy, not an allotment of money separated into small piles dedicated for specific expenses. There is a vast difference between a budget and an income strategy.

Let me give you a short history lesson on the word budget and its origin. The word budget is delivered from the Latin word bugla which translated means “little bag.” Therefore, think of a budget as a series of little bags where money is placed for future expenses. The concept is one of setting money aside with the expressed intent of spending it.

In contrast, a strategy is designed to accomplish a specific goal, usually one that has positive results for the person executing it. In reality, expenses are only a small part of the income distribution strategy, as you will see below.

There are four basic goals to achieve when executing an income distribution strategy. Those goals are to meet the requirements of Obligations, Necessities, Commitments, and Everything Else. Since some of you might be reading this for the first time, let me explain these four requirements of the income distribution strategy.

Obligations are those things for which a person should consider top priority. These include income taxes, retirement savings, healthcare needs, and additional savings and investments. These are not listed in any order or precedence.

Necessities are those things for which a person requires in order to remain healthy and secure. These include food, clothing, shelter, utilities, and transportation. These too, are not listed in any order or precedence.

Commitments are those things for which a person, either through decision or force, must comply or adverse consequences would arise. These can be court ordered, such as alimony, child support, or other legal judgements or self-imposed, such as credit card debt, mortgages, and personal loans or other financial commitments. Order of precedence would be legal first and self-imposed last.

Everything Else are those things for which a person desires to have that do not fall within the parameters of the first three requirements. The list is endless, therefore if it is not mentioned above, consider it everything else.

Let’s quickly see how observant you are. How many times would you have to adopt this strategy before your financial future began to change? I’ll let you ruminate on that question as I continue to highlight the details of the income distribution strategy.

Although each requirement has its own bulga within it, the difference between a budget and a strategy is a strategy is going somewhere, whereas a budget is waiting to be spent. A strategy is setting a priority structure that can only be violated at the peril of the one executing it. A budget typically is reactionary to the shifting sands of other people’s demands upon it.

Visually, the income distribution strategy appears as the following.

This image shows the priority structure in the proper order reading from left to right. You should always try to maintain the priority structure. However, there are times when you will be forced to suspend the priority due to the contraction of your own personal economy. When that happens, suspend only those parts that do not cause detrimental personal impacts, such as retirement savings, additional savings and investments, and if possible, healthcare savings.

These should only be suspended after you have restricted spending on everything else and some self-imposed commitments. If your contracting economy is not due to a job loss, then take on a second job until the threat has abated. The goal is to keep the strategy flexible so it can provide you with the maximum benefit in all economies.

The “necessities” requirement is where you would find a basic budget or the Bulga of your strategy. The money committed to this requirement is set aside to be spent on known or expected expenses. In the beginning it is a large part of your overall strategy, but in time, it will become a smaller and smaller portion. Resources in the “obligations” requirement keeps you safe from the IRS and protected in retirement as well as in emergency situations.

Resources in the “necessities” requirement provides a level of security and comfort, which is necessary to maintain good physical and mental health. Resources in the “everything else” requirement allows you to experience some of the pleasures of life without jeopardizing your security and comfort. This strategy creates balance within your financial economies that actually reduces the stress associated with maintaining a traditional budget.

Remember this question: How many times would you have to adopt this strategy before your financial future began to change? The answer is found in the first letter of each requirement. O.N.C.E. Once you implement this strategic income distribution process, your financial future will forever be changed. If you are successful at the implementation and continual application of the principles of this strategy, you will forever change the way you approach financial decisions.

The ultimate goal of an income distribution strategy is to move from O.N.C.E. to O.N.E. You want to eventually get rid of the third requirement known as Commitment. No legal judgements and self-imposed debt. Then your life and financial future will be forever changed. All of the financial resources that were used to support your commitments can be directed to your obligations first, because that is priority.

If at some point in the future you decide to live a little better than you have been in the area of your necessities, then you will have the ability to do so. However, increasing your retirement, healthcare, and additional savings and investments will ensure you have the things you want, when you want, without worrying about if it will impact your near-term future or retirement.