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Emotion Work; Part 2 February 17, 2009

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In my last post I suggested that part of managing one’s emotions is to have a plan.  That certainly is a requirement.  But say you have a plan, what makes you stick to it?  Especially when your friends and neighbors are constantly telling you how bad things are, or if you get laid off a job, or if you run into problems with your investments, your having a hard time finding a renter for you rental property or your stocks has taken a dive?

Well (shameless plug here), a good plan, like what we do at the Shafer Wealth Academy, has inherent risk management loaded into the plan; like a sominex account or money market reserves set at a certain comfort level or highly liquid stock investments, all of which are there to help you through the hard times.  Now I know from personal experience that even with ample reserves there are going to be times you are tested.  But that is life, right.  No one gets out of here not being tested at some point in some way.

So, in every plan risk management should be inherent to the plan.  And if you came to the Shafer Wealth Academy you would have a wealth coach at your disposal which is the second part.  Master mind groups are as old as wealth creation.  But, not every one has the ability to put together a master mind group for every part of their life.  So having someone you can contact when you have questions or are being challenged emotionally is of critical importance.  So the second critical issue is having others that can help you through the challenging parts.  Oh, and the others should not be folks who are selling a particular financial products to you, like insurance or mutual fund or stock or financial planning sales people.  These  folks will almost always default to selling you whatever product they have to offer using your fear or confusion against you.

Finally, there is a third part of emotion work that really works for me.  That is the need to be self reliant even into retirement.  If you don’t have this drive, then you need to find it somewhere because to be reliant on the government or your children or friends during your retirement years is to be totally helpless at times.  You need to use that feeling of not wanting to be helpless or at least wanting to be self-reliant as long as possible to drive you.

If you have any doubt that is where you are headed download my e-book and read the facts about how over 90% of current folks are, and in the near future are going to be even more so, dependent upon the government.

So in review there are four areas of emotion work needed to be accomplished:

1.  Allow the thought that you could use some help seep into your system and act on that thought by working with someone that can build a real wealth building plan;

2. Make sure the person helping you with your plan builds into it comfortable risk management procedures.  Comfortable to you; and

3.  Have a mentor or wealth coach that you can communicate with when you have questions or get emotionally upset with what is going on with your finances or investments; and

4. Keep your eye on the prize, which should be financial independence throughout your retirement.

If you accomplish these four things, then you are well on your way to success by managing your emotions!

What does a Wealth Coach do? February 5, 2009

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Had that question a few (million) times!

I will keep this simple.

1. A wealth coach teaches about finance; teaches what is knowable, and what is not knowable;

2. A wealth coach is a financial psychologist; Emotions are the #1 reason folks don’t find success in building wealth (90% of folks retire dependent upon the government or family).  When someone is about to let their emotions drive their financial behavior a wealth coach can talk them through it;

3.  A wealth coach can help build a wealth plan; Without a plan, failure is the most likely result!

4. And finally, a wealth coach demonstrates that you are serious about your personal finance; Most people can ignore important items, losing them in the minutia of everyday life. A wealth coach will hold you responsible for the financial part of your life, forcing you to deal with issues as they come up.

Inauguration Day! January 20, 2009

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For a year now the national psyche has been down in the dumps.

Today, a new regime takes over the reigns of government.  With it the spirit of the American people will rise. What we are seeing is truly historical, but more importantly is the reaction of the American people.  The expectations are uncommonly high, making it a certainty that we will be disappointed at some time in the next 4 years.  We will start seeing some breaks of daylight in the current economic storm during 2009.  Hopefully, folks will put themselves in position to make the needed changes to take care of their financial lives.  Thanks for reading my blog over the last year.  If you haven’t seen it yet, please check out my new website!

Yours in hope,

David Shafer

Photo’s from the Holidays! January 18, 2009

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Thought I would repeat what I did last year and give the kind readers of my blog some pictures from my holidays in New Hampshire!  Also I am live on my new website, so check it out and let me know what you think!

1.Garrett and new Christmas Sled!

2. Garrett and Shafer Financial back side of Bear Peak, NH

3. Garrett skiing Attitash Mountain

4. Garrett snow boarding Attitash Mountain

 

 

 

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More media attention to the failure of 401Ks! January 15, 2009

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First the Wall Street Journal and now the LA Times have published articles about the failure of 401Ks as a retirement vehicle.  You know the media, it loves to print articles about terrible events!  Yes, I have been telling folks this for a long time now, unfortunately the reality is so bad after 2008 that it can’t be ignored.  I’m sure there will be much teeth knashing about how corporations have screwed the  American public by ditching those defined benefit plans and putting the 401K plans in place.  However, companies that have the defined benefits in place are paying a steep price now (see GM) and are mostly underfunding those plans.  And the next wave to hit  is the public arena, where towns and municipalities are having huge issues balancing current taxing revenues with expenses.  Expect public employees to start to feel the pressure as states, towns and municipalities deal with the loss of tax revenue ongoing!

Social Security will become even more depended on by the baby boomer generation as they retire with even less in their retirement plans!  Seniors will need to get their cash out of their homes, so you can bet on more crisis down the line as seniors fall for the reverse mortgage products in a last ditch effort to not have to sell their homes.  No it is not going to be pretty for the baby boom generation’s retirement.  

This keeps the pressure on, to set myself up with enough assets to go it alone through retirement without depending on social security or other government programs.  Knowing full well that Wall Street isn’t going to bail me out, like we did them, and not wanting to be dependent on a meager social security check I am left with only one position, do it myself.  Ten years ago I started to become an active investor (instead of a passive mutual fund  investor), three years ago I was laid off from a job and truly became dependent on myself, so when I talk to people about changing their approach, I speak from experience. Ten years and I am 1/4 of the way to my goal, despite the poor 2008 and starting from a negative net worth.

If there was ever a time for the lights to go on for people, it is now!  Become an active investor and/or start a business, join the investor/banker crowd, it’s not too late. 

Hope to have the new website up for the Shafer Wealth Academy  by next week.  Remember my book launches at the end of the month!

Have a great weekend (its a long one for us with my son off from school), sit down and consider what you are to do about your retirement!  The time to make changes is now!

What should your wealth building system look like? January 14, 2009

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So far this week I have been talking about the failed retirement system.  Now I am going  to move to what a successful system should look like.

Here are the basic considerations:

1. Creation of wealth producing assets;

2. Minimize taxes, both present and future;

3. Active participation in the plan; and

4. Ability to react to a fast changing world.

Now there are many possible assets that will produce wealth for you from business ownership to real estate to stocks.  They have several things in common.  One they are never guaranteed.  Anytime someone sells you a guarantee in the finance world, you know they are not wealth producing assets.  Two, they require your active participation.  Whether it is managing your investments, or creating a business or buying investment real estate it all requires you to be consistently involved.  You can’t turn over this to someone else and expect to get decent results.  Now, you can find experts to help you, but you have to be wary of these “experts.”  Choose wisely!

Experts on my team include Warren Buffett (nice to have him picking investments for me!), Ed McPherson (real estate development), Bawld Guy (investment real estate),  my accountant, my attorney, my wife, etc.  But I am the person driving  the financial bus!  I am actively involved in all my investments, my business, and my strategies.

If you choose stocks as your medium, you can choose to be a trader or to buy and hold.  Either way you can make good returns, but they require very different mind-sets and time requirements.  Traders, have to do it as a business.  They have to be constantly aware of how each of their stocks are doing.  They must have a trading plan and stick to it no matter what.  To buy and hold requires much more fundamental analysis up front, but then less time after the initial purchase.  They must push off their fears when the market turns against them, remaining focused on the cash flow from the businesses they own stock in and other fundamental components.  They need to forego the idea of diversification for concentration.

Real Estate is a much easier way to go.  The mental work is done up front to come to a price that makes sense.  Real Estate metrics are easy to understand and to figure out.  Expert advice can be found for little money because the seller of a property will pay for it.  But you have to first have a plan.  Then it is just a willingness to look around the country to find properties where the environment and the numbers make sense.  You let leverage and inflation do it’s job, not having to depend upon beating a market.  Price in the cost of management and you can use your time building your real estate portfolio instead of dealing with the renters.

Founding your own business is also easy to accomplish.  But the hard work is in making it profitable.  But if you succeed you can create extreme wealth fast and turn over the day-to-day operations to a manager freeing you to enjoy the cash flow!

Now, not everyone is interested owning their own business although by at least founding one you learn much to help you in the rest of your financial world.  But everyone needs to become an active investor because the alternative has proven to be financially fatal!  So everyone needs a wealth building system.  And everyone should be the driver of their wealth building bus.

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Why the retirement system is failing? January 8, 2009

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This is not some big mystery, nor some crisis driven result.  No the retirement system is failing because it was designed to work under very different circumstances.  Blame technology, because it is what has caused the system to fail.

OK, let’s give a little perspective to the situation.  Our current retirement system was envisioned starting in the 1930s with the great society programs.  The government introduced social security and the labor unions in concert with the major manufacturers decided upon a pension system that was funded with current workers and/or current profits. And it worked, initially.  But, there was an undercurrent already destroying the foundation of this system.  That is technological advancement.  You see, back then workers, if they made it to retirement, only lasted 2-5 years, in retirement.  Certainly, there were statistical outliers that lasted longer, but they were so exceptional as to not cause harm to the system.  But technology improved workers lives, by taking over the nastiest jobs and allowing the body destroying manual labor jobs to be done by machines.  And then in the 1960s health care technology started to help people to live longer active lives.  So what was designed to work in the 1930s and 1940s started to crack in the 1980s.  Suddenly, people were living much longer.  Instead of 2-5 years in retirement, if they made it that far, 10-15-20 years or longer were no longer statistical outliers, but the middle of the bell curve.

So what happens is social security is now provided to an ever growing group of retirees.  Company pensions,  the same.  What was a manageable cost is now totally over the top.  Certainly, in the 1940s and 1950s most people could be excused for not seeing this coming down the pike, but starting in the 1980s there is no excuse.  But government bureaucrats, corporate managers, labor union leaders, and, of course, politicians turned a blind eye to this happening.

So what happens is in the 1990s pension fund managers start to realize what is happening, so they demand higher investment returns.  The corporations in turn, take on more risks, in order to feed the pension beast.  And as this process plays itself out, we see the results of this additional risk.  Now in the 1990s corporate managers saw all this in their bottom line and convinced the government and Wall Street to go along with the idea of getting rid of the old fixed income pensions, replacing it with 401Ks and IRAs. 

And this change was accepted for a period of time, because of the rising stock market where most people ended up putting their retirement funds.  The stock market was rising because corporate profits were rising as a result of the increased productivity that came with the computer age.  But, this decade has demonstrated the folly of this arrangement.  Enter into this problem every con man in the world, selling their “fail safe” investment system to riches.  In my opinion the biggest con men are the mutual fund sales people, but that is my axe to grind.   

So, why is the retirement system failing?  Because it was designed for a economy were people died soon after retirement.  But technology changed that fact, and no one has gotten around to rebuilding the system.  Once again, we can monkey with the parts, but the system will never become efficient until we redesign it from the ground up.

Point all the fingers you want, at the government, at corporations, at Wall Street, but the bottom line is that it is totally apparent now.  The ball is in your court.  What are you going to do about it?

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Is your wealth creating system dysfunctional? December 30, 2008

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Most people never designed their wealth creating system, it was just brought on piecemeal as they aged.  This is why the system is so dysfunctional for most people.  They bought insurance from the insurance salesman, their 401K is set up by their employer,  their mortgage designed by a bank or mortgage broker,  their cash flow dependent on a series of employers, all brought on-line independently and at different times.  No wonder it is dysfunctional for most people.  At the Shafer Wealth Academy we start from the beginning designing wealth creating systems that adhere to the two main laws of systems.

What are these laws?  The first is that everything is interconnected.  And the second law is that you can optimize individual pieces only up to a point; if you don’t scrap the old system and put in a completely new system ultimately it will always be constrained or limited.

Think about the Toyota Prius designed from the ground up to adhere to one simple principal, make a comfortable car with all the bells and whistles, that optimizes the use of gasoline.  The Prius, like other cars has an engine, battery, brakes, etc.  However it was designed with the idea that everything is interconnected.  It’s brakes not only stop the car, but also creates energy stored in the battery for use.  The engine moves the car but takes its energy from both gasoline and the battery.  The battery powers the lights, radio, windshield wipers, etc. but also powers the engine.  The engine moves the car, but also shuts down when not needed, and switches from electric to gasoline as needed. 

But here is the really interesting part.  What we found out about the system is the driver is a critically important part of the system, more than ever realized.  Consumer reports and other groups that report on actual driving mileage created a huge outcry from the Hybrid drivers when they reported less than stellar gas mileage from these hybrid vehicles.  You see hybrid drivers monitor their gas mileage religiously, so they knew what kind of gas mileage they got and knew that these reports of low gas mileage were simply wrong.  What was happening was that these groups put in test drivers that weren’t hybrid drivers to test the cars.  What we now know is that drivers of hybrid vehicles actually learn to drive efficiently, subtly changing their driving habits as they keep an eye out on the gauges that all hybrids have, telling them about gas mileage efficiency and battery charging.  The drivers had become part of the system, interconnected, and an important part of the gas mileage efficiency story.  In fact, what was found when these hybrid drivers drove non-hybrid cars is they got better gas mileage than drivers who had never driven a hybrid.  When you talk to hybrid drivers they all mention the same characteristic of watching the gauges, especially during the first 6 months of hybrid driving.  A sub-group, calling themselves hyper-milers,  found they could get substantially above the listed gas mileage by fundamentally changing their habits and tweaking the system.  50MPG wasn’t good enough for these folks, as they pushed their machines to 65-85MPG! 

So what does all this have to do with creating wealth?  What we have found at the Shafer Wealth Academy is that we need to totally redesign people’s financial life with a singular goal in mind of producing enough wealth for a comfortable retirement.  We must design this system from the ground up, realizing that it is all interconnected.  But isn’t enough to just design the system, we must put people in the drivers seat and give them the ability to monitor their progress constantly, just like hybrid drivers.  We must make them an integral part of the system.  And it is only then, that we see the progress we are looking for.   It is the human mind that is the key to the system!

Yes, you have to become an active part of your wealth creating system.  There is no choice if you expect success.  Yet, most people fail to realize the two laws of systems.  All parts are interconnected (including you) and you limit yourself if you don’t design from the ground up.  No amount of tinkering with your existing system will get you to your goals.  

At the Shafer Wealth Academy we:

Build a wealth creating system for you from the ground up;

Put you in the driver’s seat;

Create monitoring systems so you can always see how well you are doing; and

Teach you how to tweak the system going forward.

Has anyone else done this for you?  Is your current wealth creating system dysfunctional because it was put together piecemeal as you aged?  Contact us so we can help you create a successful system!

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Truth is investing is more about psychology than anything else! December 22, 2008

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Our brain is a wonderful instrument, but it does not work like a computer.  It deals with information and logic in a very different manner.   Our brain takes in so much information every second, that there is no way it can make conscious all that it takes in.  The way it deals with this information is to limit the relevant information.  We can call this framing.  Now here is the key point, this limiting of information is not rational but based on emotional/intuitive aspects.  For example, we defer to authority.  This is called value attribution.  Simply, some stimuli is considered more important than others.  We attribute some characteristics highly, therefore believe the information from this source.  For example, studies have shown that highly drafted basketball players get more playing time than lower drafted players regardless of how they play.  Or that corporate hiring managers hire based on open ended questions (tell me your best and worst quality?, where do you see yourself in five years?, etc.) when it leads to hiring the best liar and actually has  a negative relationship with job success!  A side note on hiring decisions; research has demonstrated that the best hiring matrix is a actual test of the real skills needed on the job (not those psychological tests now given or an interview).

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What does this have to do with investing?  Well, it turns out that asking the right questions will frame the investment decisions in a way that allows folks to obtain best results.  But, most people don’t ask the right decisions, even professional money managers.  A common question that frames most folks investment decision is the question of losing one’s money or risk.  Like the hiring managers asking of what one’s best and worst characteristics are, this question also has a negative correlation to success.  The reason is two-fold.  First, risk of loss is such a strong emotional issue, that if allowed it will create the total frame of the decision.  In other words, if this question is the first thing that comes to mind, no other considerations will be allowed to enter the decision making.  Hence, you have people purchasing CDs from banks or insurance products with guarantees.  No amount of pointing out the fallacy of investing and not overcoming inflation and taxes will ever get through, because the frame is about not losing money.

Secondly, investing is about receiving cash flow in exchange for one’s investment dollars.  By framing investments around risk, you miss this valuable point.  Now, I am not saying that risk should not be considered, just that it shouldn’t be the main frame of the decision making process.  Once, there was an experiment done in Washington D.C.subway where a violin prodigy, Joshua Bell, with a Stradivarius entertained the crowd.  He wore a baseball hat and jeans and played one of the most difficult pieces ever written for a violin.  No reaction from the subway crowd, except for one women who recognized him.  Few people even acknowledged his playing.  Here they were getting a 45 minute concert from the best violinist in the world, and no one even stopped for five minutes to listen, or even one minute.  Had there been cameras present or had he worn a formal tuxedo maybe it would have changed, but folks just thought he was one of the many mediocre street performers because of his dress.  This was an example of value attribution.  Had they somehow been told that the world’s best violinist would be playing in the subway that day, do you think the outcome would have been different?  But they took one look at his dress, and assumed he was nothing special regardless of the music coming out of the violin.  

We ignore our senses in that way all the time, just as NBA coaches ignore the data coming from the basketball floor and play players based on their prior draft status, just as hiring managers ignore actual skills and hire based on answering questions nobody is truthful answering.  Getting back to the investment world, no one can accurately assess the future, yet many base their decisions on doing exactly that, ignoring the real data available.  Just as prior draft position is a terrible indicator of present basketball playing skills among NBA players, our predictions about the future is a terrible indicator of the success of any investment. 

We all become better investors when we drop the frames of “lossand “our predictions of the future” and frame the investment decisions around the real data available on cash flow, demand of product, etc.  Of course, this takes a concentrated effort, and even the most experienced investor needs to be reminded of this periodically.

More reality training! December 18, 2008

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Thanks to Doug Short at dshort.com for this chart:

sp-composite-since-1871-nominal-real-overlay

This chart tracks stock prices (S & P Composite) from 1871 to now and accounts for inflation.

Shockingly when inflation is taken out of the rate of return (demonstrated by the blue line) the total return is 1.7% annually.  The red line is the normalized return turned into a constant slope.  Now do you realize why I get so upset at those charts mutual fund sales people use to demonstrate potential rates of returns for mutual funds?  That’s 1.7% return before expenses.  The average mutual fund has over 2% expenses, so you would have lost purchasing power investing in mutual funds over the long haul!!!!

This is exactly the same effect I discovered back 10 years ago when I grew concerned about my lack of financial progress.  I was doing the exact thing Wall Street told me to do, save 15% and invest in mutual funds, pay off my mortgage, control expenses.  The numbers were just not adding up for me. 

The problem is, of course, I had no wealth creation strategies in place, mistaking mutual fund investing for wealth creation.  As this chart demonstrates, mutual funds don’t even account for inflation!

Ready to take a hard look at your financial education now?  Ready to join the Shafer Wealth Academy to transform your financial life?