Investment Insights

There is no shortage of opinions on what went wrong with former blue chip companies GE and IBM. This week GE broke below $10 and slashed its dividend to one cent. Over 2 year’s GE’s stock is down -70%. IBM has fallen, but not as much. It’s only down -29% over the same period. On Monday, IBM acquired Red Hat in a deal that is valued at $34 billion. This hail mary deal equals the purchase price of almost 40% of IBM’s market cap.

My answer to the demise of these two companies can be found by studying their cash flow statements. Over the last 10 years, both companies gave all of their profits away and didn’t properly reinvestment back into their businesses. In the last 6 years, IBM has paid $30B in dividends and bought back around $43B in stock. The market cap of IBM is now only $105B. I bet they wished that they had that $75B in cash back on the balance sheet. GE in the last 6 years paid $48B in dividends and bought back around $35B. The market cap of $80B is now less than the amount of money that they returned to shareholders in the last 6 years!!! They could have taken themselves private.

The management of these companies did what was in the best interest of short-term shareholders and not for the survival of the company. At the other end of the spectrum is Berkshire Hathaway. They have never paid a dividend, and up to this point, never bought back much stock. Buffett has used the profits of Berkshire to buy other companies that can pay him dividends. For those of you that have read the book Rich Dad Poor Dad, know that the differences between his real father (poor dad) and the father of his best friend (rich dad) is that the rich dad created enough passive income so that people were paying him dividends. In my example, IBM and GE are the poor dads and Berkshire is the rich dad.

A strong case could be made that buybacks have been the main driver of the equity rally this cycle. Goldman Sachs wrote that companies are set to buy back $1 Trillion worth of shares this year. Much of these buybacks are being fueled with all the extra profits from the lower corporate tax rate of 22% from 35%.  Google searches of “buyback blackout” hit an all time high on Monday. For those of you not familiar with blackout periods, it’s when a company can’t buyback their stock because they are within a window of releasing earnings. As companies reported 3rd quarter earnings, they were unable to buyback stock as markets fell. Investors were hoping that stocks would rally as this blackout period ended. Maybe it’s a coincidence that stocks bounced this week, but the number of Google searches for “buyback blackout” is no coincidence The Wall Street Journal reported, net buybacks in the month totaled just $12 billion by Oct. 19, but jumped to $39 billion by Oct. 29, according to estimates from JPMorgan Chase & Co. That is more than the $30 billion recorded in September and just under the $48 billion recorded in August. Some analysts hope a resurgence in buybacks could help support share prices during a period of geopolitical and economic uncertainty. Others are skeptical that companies can continue purchasing their own shares at the current pace, particularly as the stream of repatriated cash that helped drive the year’s buybacks slows down. Critics say they are motivated by executives’ desire to boost the value of the stock options and allocations in their remuneration packages. Buybacks also channel profits away from the research and capital expenditure that could improve productivity in the longer term.

Steve Jobs was a critic of share buybacks. He preferred to keep all the cash on the balance sheet. He learned his lesson when Apple almost went bankrupt and he lost his job. Steve needed to go to Microsoft for a $400 million loan to survive. After this hard lesson, Steve’s strategy was to hoard cash for a rainy day. Apple’s new management has went in the opposite direction. They once had over $250b in cash and they are now down to $130B net cash. They are going spend another $100B and take cash to zero. I wonder if they haven’t been paying any attention to what happened to IBM and GE?

I believe the key to any successful buyback or dividend is that it is not done with issuing debt. It’s no different than a consumer spending on a credit card. At some point, the bill will be due and to make matters worse, interest rates will likely be higher. GE and IBM would have been much stronger companies today if they had channeled their profits back into the business. I’m very confident that in the next few years we will be reading about other companies that fell overboard buying back too much stock at over inflated values. I’ll continue to monitor buybacks closely as I expect markets to remain volatile with extreme moves in both directions.

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“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett

The S&P 500 hit a -10% correction level and most of the gains are gone for the year. It took 3 weeks to lose all the unrealized gains that were made over the last 40 weeks. Everyone in equities lost money, even Warren Buffett. He probably lost the most money out of anyone. His quote should serve more as an investing mindset on how to invest. If you invest or buy something overvalued your losses will likely be permanent. If you gamble or buy something you don’t understand, you will never dig out of the hole. What Buffett’s quote means to me is that you need to understand your risk profile, time horizon, and most important, what your capacity to take a loss is. Capacity is how much can you afford to lose without falling short of your goals. As bad as it as been, all of my clients are still on a path to meet and exceed their goals.

Buffett can never lose. He bet on America and the only way he loses is if we all have to go out and buy guns. If markets fall, he has enough cash to buy at discount prices. If markets rise, his investments will chug right along. The key to his strategy is holding enough cash to buy investments for the long-term. These 10% corrections are very common. This is the second one just this year. The first one was already long forgotten and this one will be a distant memory, I’d say in about the next 6 months. The only way a portfolio will never recover is if this rule was violated or there isn’t enough cash to dollar cost average into a stock that was bought at too high a price.

For all my clients nearing retirement or that have lower risk profiles, I wrote a few weeks ago that I had increased cash and bonds.  I sold before the sell-off and bought t-bills. For a few clients that are in retirement and have a much lower capacity for loss, I reallocated into more bonds. This begs the question am I timing the market?

My strategy is not market timing, but having the mindset of Buffett’s quote. I can’t time the market because I have no idea what the market will do in the next day, week, or month. All I know is that I’m well prepared for whatever happens next. I have cash to buy at lower prices. For my younger clients just starting to invest, I always remind them that they prefer falling markets to rising markets. For older clients, they all want stability and to own solid investments. There is no stability to this market right now, but it should return very soon. There comes a point in time when prices fall so low that you will need much worse economic news to reach the dreaded -20% correction. We are at or near that level where prices are looking attractive as long as the economy continues to grow above 2%. At this time, GDP is the highest it’s been in years and unemployment is at its lowest level. Markets would have a much harder time recovering if people were out of work and companies were not hiring. I believe the reason for this sell-off is that markets became slightly overvalued and China and Europe’s economies are slowing.

The stock market is not the only real asset that is losing value. The same goes for the housing market. I expect that house prices will soon cool in price. The home-building stocks have been hit the hardest.  I’m not going to make a prediction for when the market will recover or even stop falling. The future direction of the market will be determined by what happens next in overseas markets. The losses need to stop piling up in Europe and Emerging Markets. These indices are now down -12% and -16% year-to-date, respectively. This could happen next week or next year, but it should be sooner rather than later. There could also be a boost after the midterm elections when that uncertainty is removed. We are in a  similar pattern to what happened after the last election. Markets moved higher once people understood what the policies of the government were going to be for the next two years. I’m ready for either a Democrat or a Republican to lead the government. My investments should do well long-term under either party. If you buy high quality stocks at rock-bottom prices, you will do well over time. The one thing that would turn me even more cautious is if I start reading about corporate layoffs. As long as people can keep paying their mortgages, this correction should prove to be another great buying opportunity.

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This week I’d like to share a personal lesson that I learned by comparing the choices of an existing client and someone who was unwilling to pay for investment help. This was such a real life contrasting example of someone who understood the value of advice and the other who didn’t.

It was sad so see one of my clients recently move into a nursing home. This client is very wealthy and has done a tremendous job saving throughout life. He was more of a do-it-yourselfer and planned well for anything that life threw at him. The book the Millionaire Next Door was written with him in mind. I had another meeting with an elderly gentleman who was not a client that had done everything well in life, but couldn’t give up control of his investments.

The best move that my client had made was hiring a team of financial experts before he became ill. He was willing to give up control of his finances.  He hired an accountant for taxes and a Chartered Financial Analyst (me) to manage his investments. My client researched and assembled his team well before he became sick and found the experts that he believed would carry on the types of financial decisions that he would have made for his family.

The elderly gentleman that went down the wrong path didn’t want to give up control and was unwilling to pay for advice. There are many people that become better investors as they age like a Warren Buffett type, but most will lose interest and begin to make unwise investment decisions. I wanted to write on this subject because this is now the second person that I met with that made this mistake. We all know an elderly family member or a friend that had to fail an eye exam to give up their freedom to drive. At least there is an eye examination test to determine whether someone can still see the road. For investments, the money will be long gone before you figure out that you have lost your cognitive ability. It makes a difficult situation even worse when the spouse is left with almost nothing.

I cringed when I reviewed all of the poor investment decisions that this elderly man had made and I felt terrible for the spouse who was left with a broken nest egg. My general advice is if you don’t know what you are doing, then buy a CD or the S&P 500 index fund. You can’t find any better combination of investments. Do not invest in individual stocks unless you closely follow the company earnings calls, read financial publications, and closely watch the news. Contrary to belief, buy and hold investing does not work well for individual stocks. It only works for investments in the S&P 500 or another similar type of broad based indices. Most of the nifty-fifty stocks of the 60’s and 70’s are long gone. This advice that I give to buy an S&P 500 investment is more to the masses who don’t want to pay for any help. It’s very similar to Warren Buffett’s advice to buy only the S&P 500, but he hasn’t invested $1 of his own money into it. He hired two portfolio managers to manage his money when he is gone. Most people who don’t follow markets or don’t want to pay for advice should buy an index at the minimum.

I would much rather pay for advice from a qualified advisor. If something happens to me, my wife will receive the same investment help from the advisor that I have selected to help my clients as part of my business continuity plan. This advisor shares the same investment philosophies as me and views risk-return much the same way. The key is finding an advisor while you are healthy so that you can follow their investment decisions as markets change so that you can confirm your choice. As my clients well know, I enjoy communicating all of my investment decisions and partner with them on any important portfolio decisions.

I realize that many of the people that read my posts are existing clients and have already made their wise choice in advisor. 🙂 However, I thought if I could help save even one person from the type of losses that I reviewed from someone who was unwilling to give up the keys to their portfolio, then I would have helped save a spouse from losing everything.

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This weekend Europe will be hosting the 42^nd Ryder Cup. The 12 best U.S. golfers are up against the 12 best European golfers. On paper, the U.S. golfers are heavily favored, but playing on an unfamiliar course on foreign soil, anything can happen. Not only do we have more of the top golfers in the world, we also have the best companies. If you had to choose between the top 12 U.S. companies vs. the top 12 European companies, the U.S. would win hands down. If the U.S. companies were a Ryder Cup team, we could give the Europeans a few strokes and still win. Actually, forget strokes, we could give them a 5-match lead and win by a landslide. Even if President Trump took over the leadership of Europe he couldn’t make them great again.

In my clients’ portfolios I have had only slight International exposure, if any.  I don’t believe in international diversification for the sake of holding a place in an asset allocation. My preference is to own the best businesses and they all happen to be located in the U.S.. There will always be a few exceptions, and at some point in time, valuations might make sense, but not at the moment.

My two main concerns continue to be rising U.S. interest rates and the escalating trade war. These tariffs are starting to have a negative impact and are beginning to pressure some U.S. businesses. I’m sure that we will hear more about the impact of tariffs on profits as companies report earnings next quarter. These concerns were raised during Federal Reserve Chairman Jerome Powell’s press conference with reporters Wednesday, after the Fed increased interest rates for the third time this year. When asked about the impact of tariffs on U.S. businesses, Powell replied with the following comments that he has heard from corporate executives.

“We’ve been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains, materials cost increases, and if this, perhaps inadvertently, goes to a place where we have widespread tariffs that remain in place for a long time, a more protectionist world, that’s going to be bad for the United States economy.”

Despite the negative impact of these tariffs, U.S. companies are continuing to grow profits. Marc Benioff, the founder and CEO of Salesforce, said in an interview on Monday that the U.S. economy is still ripping. He said that he talks personally to hundreds and hundreds of CEO’s, not just in our country, but all over the world. He gave credit to President Trump’s lower tax rate for the gain in confidence and that more companies are investing because of it. While everyone is on the lookout for a market correction, my view is that it won’t happen until corporate profits begin to slow or if interest rates continue to rise.

If you’re a golf fan, enjoy the Ryder Cup this weekend. Go USA!

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It’s upsetting when I read about financial advisors that steal money from their clients. This week there were two different Ponzi schemes uncovered that targeted unsuspecting clients.

The first Ponzi scheme was a former math teacher that defrauded her clients. Most of the victims were teachers themselves. This advisor promised high returns if they invested in an unregistered company. The private company eventually went bankrupt and her clients lost everything. The second Ponzi scheme was the largest ever to hit Maryland at an astounding $364 million. These three advisors bought mansions, 20 luxury cars, diamonds, and other lavish items. This dirty bunch sold debt portfolios consisting of credit card, auto, and student loans among other things. Most of these ponzi schemes almost always have the same thing in common, promises of high returns for taking very little risk. The easiest way for an advisor to pry on new victims is to promise an easy way to get rich quick.

This post is not about how to identify and avoid bad financial advisors. Most of my readers are clients, so they already understand the importance of a third party custodian and working with a qualified and experienced advisor. There is no doubt that other ponzi schemes are happening at this moment. But there are other ponzi schemes happening right in plain sight that are easy to spot. Cryptocurrencies come to mind as a massive ponzi “like” scheme that the government failed to stop. Most people that bought into cryptocurrencies knew it was some type of ponzi, but they thought they could get out in time after making profits.

There is another massive ponzi scheme going on in many popular marijuana stocks. I’m finding many similarities between the investors in cryptocurrencies and marijuana stocks. The common thread is that these speculators pay ZERO attention to valuation. These investments don’t fit the definition of a ponzi scheme, but I believe they are close cousins. You need to find another investor to pay more for an investment at a higher price. Both will collapse if new money doesn’t materialize and they are illiquid at the very core. It’s the classic greater fool theory.

There was a marijuana stock this week that went on a rollercoaster from around $115, touching $300 in a few days, only to finish the week at $123. At the high, the market capitalization of this company hit $27 billion. Gross sales last year for this company was only $20 million. To put this absurdity into perspective, a $27 billion company should generate around $1.2 billion in profits every year. For those investors that are buying in hope of striking it rich, they will need that company to sell a ton of pot!  This was so foolish that I’m surprised the SEC did not stop trading for a few days. I highly doubt that any of the speculators in this stock ever cared to look at the financial statements and could even tell the difference between a cash flow statement and a balance sheet. An analyst went on CNBC’s “Closing Bell” and summed up the insanity the best by stating that owners of this stock were effectively buying air.

There is a investment warning in all of this stupidity. It’s that all bull markets and market cycles come to an end when silliness takes hold. Massive speculation is the ultimate killer of all bull markets. You can begin to tell when the market party is getting into the late hours when you  start to notice all of the drunken fools. My advice for any speculator buying into a $27 billion marijuana company is to donate the money to charity before it goes up in smoke.

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I’m not a big fan of non-fiduciary financial advisors. I’m confident that all of my clients are not fans as well. This week I was reminded of how much I dislike them. I helped a new client who purchased a fixed annuity by a financial advisor who positively was not providing advice in their best interest. The annual rate of return on this fixed annuity will not be much higher than a 3-year CD. In this case, the financial advisor didn’t take the time to understand their full financial situation before selling them this product. The day before I met another client who likewise needed help with an annuity.  This 90 year old client purchased a fixed annuity by another advisor when she was 80 years old. The annual rate of return for the last 10 years has been a measly 2%. There is so much atrocious advice out there not being given in the best interest clients.

Nowadays people are on alert for bad advice. It’s akin with cable news, you don’t know what’s fake or real. This freezes many people into not taking any advice, even if the advice could make them a fortune. The utmost example of missing out on great advice happens regularly on my favorite TV show, Shark Tank. The sharks are some of the best business people in the world that are all self-made millionaires and billionaires. They offer their capital in exchange for ownership in an entrepreneur’s big idea. There are countless success stories of people becoming millionaires overnight by making deals with these sharks. If you want your children to learn about business, this show will teach them as much as a good MBA business class on entrepreneurship.

This month I watched one entrepreneur make the mistake of a lifetime. He just couldn’t pay up for advice. He apparently didn’t know that when the incentive structure is in-line with the advice that is being given, it will likely be in his best interest. Mark Cuban, who is worth around $3.7 billion, and is well regarded as one of the most astute business people, was the only shark willing to make a deal with this college student. Mark sought 30% of his business in exchange for $100,000. This company had no sales and all the other sharks couldn’t believe that he was even making an offer. This poor entrepreneur was somehow stuck up on giving up 30% ownership of his company. When the college student countered Mark’s offer of 20% ownership, Mark paused for dramatic effect, and said nooooooo. And that was it. This college student had just passed on a deal of a lifetime with one of the greatest entrepreneurs of our lifetime. If this amiss entrepreneur had a phone to call me, here is what I would have said.

If you give Mark 30% ownership, he will have a greater incentive for your business to succeed. Your interest will be aligned with his. Your remaining 70% ownership stake is going to have a much greater value with Mark as a business partner. He has a vast network of connections to launch your product overnight. You will also benefit from learning from one the greatest entrepreneurs of your generation.  Mark will also have access to more capital required to grow your business. Or you can go back to your dorm room empty handed without the $100k and still have no sales.

I felt as bad for this college student as I did for my clients who purchased the annuities. What they both had in common was they didn’t understand the incentive structure of the person providing them the advice. In the case of the advisor, the incentives were clearly in favor of him making an immediate 7% commission. If there was no commission, I doubt there would have been a sale. In the case of turning down Mark’s offer, the incentive structure was perfectly in-line to make him wealthy beyond his wildest imagination. This lesson was a good teaching moment on incentives for my own kids (don’t ever turn down an offer from Mark Cuban or someone like him) and to be cautious when taking advice from a non-fiduciary advisor who is selling products.

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Major technology companies are in a race to develop artificial intelligence (AI). There is also a rush between countries to gain a first mover advantage in this area. Developing AI is a top priority for the Chinese government, and they have been investing heavily in this burgeoning field. This week, a Chinese company called SenseTime, raised $620 million, giving it a valuation of over $4.5 billion.

UBS has declared AI the fourth industrial revolution. The first revolution being steam power, the second, electricity, the third, information technology, and today, it’s AI. UBS describes AI as tools and programs that makes software “smarter” and leverages self-learning systems by using multiple tools like data mining, pattern recognition, and natural language processing. Deep learning allows machines to analyze a vast amount of data in a short-time.

The Harvard Business Review wrote that AI is the most important general-purpose technology of our era, particularly machine learning (ML) — that is, the machine’s ability to keep improving its performance without humans having to explain exactly how to accomplish all the tasks it’s given. Within just the past few years machine learning has become far more effective and widely available. We can now build systems that learn how to perform tasks on their own.

AI is in its infancy stage and the big opportunities have not been tapped. AI has yet to surpass human performance in certain areas, but it’s around the corner. The Harvard Business Review ended it’s article with the following line – If managers aren’t ramping up experiments in the area of machine learning, they aren’t doing their job. Over the next decade, AI won’t replace managers, but managers who use AI will replace those who don’t. I would add that if entire companies do not leverage AI, then they will lose market share to those that do.

Elon Musk, who is the visionary entrepreneur that founded PayPal, SpaceX, and Tesla, is one of the few voices against advancing this technology. He believes that AI is more dangerous than nukes. As one of the early leaders in this area, Musk has seen first-hand, the power of AI. He invested in a company called DeepMind that was purchased by Google in 2014. There he saw how AI was accelerating at a breakneck speed. If you want to learn more about Musk’s crusade against AI, here is the entire article on this topic last year.

I expect that big data will be one of the biggest growth drivers in the coming decade. This mega-trend is part of the reason why growth stocks have vastly outperformed value stocks this year. This new competition is fueling profits throughout the technology sector. This is an area that I will continue to research more to discover new investment opportunities.

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There are many different types of investment risks. I thought a good exercise would be to apply the different investment risks to Bitcoin. This is not a recommendation to buy or sell Bitcoin. It is not considered a security and the SEC does not regulate it (yet).

Bullish case for holding Bitcoin

• Inflation risk – This is the risk of losing your purchasing power because the value of your investment doesn’t keep up with inflation. Bitcoin has a limited supply of 21 million coins, which is one of the main reasons why the price continues to rise. 80% of all bitcoins have been mined. If there was an announcement that another 100 million Bitcoins were being offered, the price would crater (this won’t happen).  There is no better inflation hedge than an “asset” with limited supply and increasing demand. To date, Bitcoin has been the perfect hedge against central bankers printing money and keeping interest rates too low.

• FOMO risk –The Fear of Missing Out risk reaches its climax when investment returns are the largest. An unheard of 2,100%+ return in one year can do psychological damage to people in search of easy money created out of thin air. Warren Buffett calls Bitcoin a mirage. Many people have gotten rich with a small amount of money. There is a story of a pizza delivery driver accepting payment in Bitcoins back in 2010. If he held on to the Bitcoins, he would be worth over $100 million. People can do some crazy things when FOMO risks peak. State regulators have commented on people maxing out credit cards and taking second mortgages to buy Bitcoins. Some people have also sold their houses to buy bitcoins.  FOMO risk takers have been well compensated. As Bitcoin keeps rising, there will be more home equity lines taken out, until the FOMO risk suddenly transforms into the fear of losing everything (FOLE) – I just made that one up. 🙂

• Disruption risk – If global currencies are getting disrupted by virtual money, then you better hedge against your U.S. dollar weakening. For instance, if a Venezuelan citizen converts his or her Bolivar into Bitcoins, and their money goes up 3,000%, then there has been a global wealth redistribution. This is a good reason why third world countries and people with low standards of living are flocking into Bitcoin. The astronomical rise in Bitcoin is due to international buyers, especially the Japanese.

Bearish case for holding Bitcoin

• Liquidity risk – This is the risk of selling and getting a fair price when you want to sell. Bitcoin has 100% potential loss of liquidity.  If everyone heads for the exits at the same time, it’s safe to say you won’t be able to log into your Coinbase account to sell. It has been very common for wallets and exchanges to freeze withdrawals with only limited volatility. A run on the banks was common when there was a fear that banks were running out of cash. I’m 99.9% confident that there will be a run on the exchanges at some point. Even if Bitcoin appears to stabilize in price and consolidate over time, the risk will not disappear. The poor Thanksgiving turkey always has a great year of feeding up until the holiday.

• Concentration risk – Most of the crypto-currencies are held by a very few fortunate people. If they decide to sell to “diversify” into real money, those buyers who are late to the party will be the ones that suffer the greatest losses. The lucky few that were early are the ones that will sell first to the late comers who do not believe that they are putting their hard earned money into the biggest bubble of all time. The later comers will have no idea why their money will evaporate overnight when the Bitcoin millionaires covert to real currency all at the same time.

• Political risk – Central bankers around the world are warning about holding Bitcoin. At Janet Yellen’s press conference, she called bitcoin a highly speculative asset, not a stable store of value, and it is not legal tender. I believe the SEC at some point will step up and begin to regulate trading on the exchanges or ban credit card payments for Bitcoin. They are well aware of the abuse and wild west trading environment where any thing goes. The amount of criminals that have been attracted to this wild west type of trading environment increases the probability that this will not end well.

• Credit risk – Bitcoin has no intrinsic value and doesn’t pay interest. The credit risk is a 100% loss because Bitcoin is worthless. The only thing backing Bitcoin are the largest holders of Bitcoin. They support the price and manipulate the market price. They have programmed computers, which are called bots to continuously buy and sell. If you had billions to lose in Bitcoin and there were no rules in place, you would make sure the price appeared safe. As long as there is public demand, the larger holders can make more money. As soon as the general public gets smart and comes to their senses that this is the greatest scam of all-time, then the bubble will stop inflating. The miners of Bitcoin who run the network need a high price to afford their electric bill and to buy new equipment. One bitcoin transaction now uses as much energy as your house in a week.

Nuveen Asset Management’s Bob Doll said on CNBC this week that a cryptocurrency crash could have a spillover effect into markets. I’m in complete agreement with him that, “the longer bitcoin mania goes, and the bigger it gets — the worse it is for the stock market.” I never thought that I’d sell stocks because of Bitcoin, but it is a new possibility in 2018. The government has been non-existent in stepping up regulation of Bitcoin and if Bitcoin crosses the $1 trillion threshold in market cap, it might be too late to police it. Over time, I believe the conversation will change to Bitcoin being a systematic risk to the entire global economy. If there are more and more people who prefer to hold non legal tender currencies over legal currencies, then capitalism and the stock market will have real problems.

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Last week I was quoted in the Sun Chronicle by a local reporter. The reporter needed a few quotes for an article that she was writing on long-term care. She had read a recent study that showed more people were putting off buying long-term care insurance. Her conclusion was that people were too busy and planning wasn’t at the top of their list.

My quote that made the paper was, “When you should start planning depends on a number of factors,” he said. “The process today is a lot more complicated now than it used to be.” “You definitely want to start early, looking at financial plans,” Zikes said, “but you have to weigh the benefits for yourself.” Yes, that is not a typo, she called me Mitch Zikes throughout the article. 🙂

My wife thought my answer wasn’t all that informative and sounded a bit uneducated. I explained to her that was the first thing that I said before giving the reporter a lengthy answer. It wasn’t that I was misquoted, but all the important details from our conversation were left out of the article. I disagree with most of her conclusion that people don’t have the time to think about planning for sickness and death.

I believe that people don’t buy long-term care insurance as much because it is getting more and more expensive. Only a few companies now offer insurance and the premiums are very high. Premiums can continue to rise even after you buy the coverage. Women on average can pay up to 30% more than men. Years ago, long-term care insurance was very cheap and underwriters underestimated the costs of nursing home coverage. This put many insurance companies out of business paying out claims.

Many financial advisors make their clients sign forms that they decided against buying long-term care insurance. Family members often sue financial advisors when they learn that mom or dad didn’t have long-term insurance.  What the family doesn’t realize is that the premiums have become unaffordable. If you read the fine print of these policies, there is also a maximum number of days or years that it will be covered. It is only likely to save on average $125,000-$250,000.

The reporter wrote that I said planning depends on a number of factors when considering long-term care insurance. She left out all the factors from her article. They are cumulative savings, health, expenses/budgets, income, goals, and the most important is attitude towards money. People have different attitudes towards money, and many would rather invest the premiums in the stock market rather than buy the insurance. If you get sick early in life, the long-term insurance is a better choice. If you get sick much later in life, your investments should be able to cover the cost of care.

Another consideration is many long-term insurance polices don’t start until you’re almost permanently disabled for a certain time period. You need to demonstrate you have lost the ability to engage in at least two activities of daily living: eating, bathing, dressing, toileting, walking and continence. Many buyers of long-term care are surprised to learn that recovery from major surgery is not covered. It might be better to have the money accessible in an investment account to pay for these costs.

I always recommend a long-term care quote for clients that are interested in learning more about their options. The conclusion that they usually reach is that they are either rich enough to cover the nursing home care, or too poor to afford it. There are also other strategies to cover nursing home care such as buying life insurance. Heirs can get a nice inheritance if it is not used for nursing home care. These insurance premiums will also not rise later in life unlike long-term care insurance.

I’m glad that I was able to help the reporter reach her deadline, but the article would have been more informative if she added all the details about why less people are buying long-term insurance. I might have overwhelmed her with my lengthy response to her question, when all she wanted me to say was that people should start planning earlier. My quote to her that the financial process is more complicated that it used to be and everyone should weigh the benefits themselves, would have been much better at the end of this article.

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Personal finance expert Suze Orman wrote this week that the new retirement age is 70. Not a month or a year before. She pointed to the retirement risk of longevity. Expected longevity for men and women has risen 10% since 2000. According to the Society of Actuaries, men who reach 65 are expected to live to the age of 86.6 and women to the age of 88.8. The numbers are even higher for more affluent households.

Suze wrote that the first 15 years are easy, but you need to support 30 years and not 15. She also pointed to a Fidelity study that a 65-year old couple retiring in 2017 will need $275,000 to cover their health-care costs in retirement. Health expense has become an ever-increasing risk to a successful retirement.

Other risks during retirement include inflation, long-term care, stock market, and interest rate risk. I would add that a new type of risk is political risk. Regardless of your political affiliation, the rules of the game are changing. I prefer that politicians don’t meddle with Medicare, retirement plan rules, and Social Security.

A successful retirement is maintaining your standard of living until the end of your days. Suze’s advice that the new retirement age of 70 really doesn’t ring true with me. The reality is 50% of people expect to keep working past age 65, but only 15% actually do so. The average retirement age is 61, up from 57 in 1991. There are 31% of people entering retirement before age 60. The main reason that I see why many people don’t work past 65, is that employers have forced them into early retirement. There are not many companies looking to hire a 69 year old for a full-time position. I find that many people who continue to work into their 70’s and even 80’s do so because they enjoy many aspects of their jobs.

My major concern is that the government might play a hand in pushing out the average retirement age. Fiscal deficits will eventually force politicians to raise the age of full retirement for collecting Social Security. The full retirement age used to be 65 for everyone born in 1937 and earlier. The government then moved the full retirement age to 66 for most baby boomers.  They further climbed it to 67 for everyone born in 1960 or later. It’s only a matter of time until they move the full retirement age to 68 or older.

The biggest consideration for any retiree is Medicare eligibility. Medicare can be the deciding factor for when people retire. Medicare coverage starts at age 65 and is the best health insurance on the market. Early retirees learn quickly that private health care before the age of 65 is very expensive. Personal savings are usually drained paying for these premiums.

The health and quality of life is most important to retirees. This is where Suze’s advice falls short. Her argument is based on life expectancy and not the quality of life. Life expectancy statistics are meaningless to me.  All of my retired clients would support the fact that their best retirement years will be spent in their 60’s and not their 90’s. Suze’s advice to the general public is just that, a blanket statement written to capture headlines. No two financial circumstances are alike and the final decision to retire will always be a personal decision.

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