Below is a blog entry I wrote on May 6th, 2010. If you do not remember, this was the day of the infamous “flash crash.” As I was thinking about what to send out this evening in preparation for what could be a very volatile (prices go up and prices go down) period in the market, I found this article said it all. I encourage you to not panic and to make decisions based off of emotions. If you have a long-term plan in place, there is the high likelihood you do not need to do anything different than what you are doing now. If you do not have a long-term in place, you may want to consult with a professional to help put a thought-out and objective plan together. As you read the article below, please remember how you reach financial security. You do not reach it overnight but rather by taking “one step at a time!”
By: Kevin F Jacobs
Written: May 6th, 2010
Today was an unprecedented day in the stock market. At one point the Dow Jones was down nearly 1,000 points (I can’t believe I am even writing that number).
I want to stress that the best thing to do is to remain focused on the things you can control, i.e. your savings rate, your asset allocation, your debt-to-income ratio, etc. You can not do anything about what the market does day to day, but you can do something about those things mentioned above. You are going to hear many “talking” heads on the radio and TV give various explanations for why things happened the way they did. However, the real question is how these events are going to affect you and the ones you love. We have a tendency to get lost in the stress of everyday life and we forget to make note of the blessings we have each day.
I am not telling you to be oblivious to what is going on in the world but that you need to work on the things you can do something about and let everything else take care of itself. It is important you do not overreact to short-term market events. During times like these it is important to remember the basics regarding your financial life:
1.Live on less then you make
2.Have $0 consumer debt
3.Don’t buy more house then you can afford
4.Pay as little in taxes as you are allowed
5.Have proper cash and emergency reserves
6.Save for the short-term and invest for the long-term
7.Spend time with your family and those you love instead of watching the latest stock market charts.
As for the rest of it, take a deep breath and remember to control the things you can and let go of those things that are outside of your power.
I am frequently asked: what is a “fee-only advisor” and why should I work with one? First, a fee-only advisor’s compensation comes directly from the client. The advisor does not receive any commissions or referral fees from selling financial products (such as annuities, insurance or investments). A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate. I focus the majority of my business on retainer fees.
In contrast, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and from commissions on the products recommended as part of the “implementation strategy.” Many times the financial plan is offered at severe discount. Their real profit comes from selling you the products they recommend. Their belief is that by charging you a fee for their “objective” advice you are more likely to “implement” the strategies they recommend.
A commission-only advisor makes his compensation strictly from selling you financial products that have a “load” or commission attached to them. In my humble opinion, I tend to trust “commission-only” advisors more then “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan.”
I personally believe each of these advisors has a place in the financial service industry. However, the main thing I ask from each one of them is to disclose to the client how they are going to get paid. The main reason why you should work with a fee-only advisor is they can give you objective, unbiased financial advice free from the potential conflict of interest inherent in product sales. Yes, the fee-only advisor is still selling to you, although the “product” he is selling is an education and trustworthy advice.
When it comes to your money follow this common sense rule: “When you know how your advisor is getting paid you will know who he is really working for!”
When I first started this blog, I wrote an entry about defining and achieving financial security. As I talk to more and more people about their experiences over the last 18 months during what the popular culture has called the “Great Recession,” I am witnessing some common themes of concern:
1. The stock market is up considerably since its low in March of 2009, but how do we know it won’t “crash” again tomorrow? We don’t know! It used to be common knowledge and belief that you knew you would have some ups and downs in your investments, but in the long run you would achieve profits by investing in market. From the conversations I have had with many people, it seems like there is this general sense they are waiting for the “next shoe to drop.” It reminds me of the weeks and months after 9-11 where I was glued to the cable news networks waiting to hear about the next terrorist attack. I sense an underlying fear in most individuals and business owners. They are waiting to see how everything works itself out. The danger of this view is that you become a market timer and try to “guess” what your latest stock holdings and the economy as a whole will do. The danger is you get so consumed with things you can’t do anything about and fail to make a difference in your life and the lives of those you care about the most.
2. What will higher taxes do to my future plans? I have been hearing this one especially since the passing of the health reform bill. There is a general confusion of what is and what is not in the legislation and I think people are skeptical of what may happen to their individual tax situation in the future. For the clients I work with, I tell them there is one thing for sure: their taxes will go up! How much their taxes will go up we do not know yet. I tell them it is important we continue to plan and make the best tax and financial planning decisions we can at the time with the information available to us.
3. How do I know I have reached financial security? I hear this quite often. An individual may also say, “how do I know I will not run out of money?” These are important questions to address no matter what the economy and the stock market are doing. Where many people fail in their quest to achieve financial security is they fail to define what financial security is for themselves and instead they allow the “talking-heads” on TV or the magazine covers to define it for them. Until you define what is most important to you and lay out a plan to achieve it, you will never reach financial security.
So these are some of the concerns people have right now is these difficult times, however, with all the chaos it is important to remember you are in control of your situation more then you believe. You need to control the things you can, such as how much you save, how much you spend and what you invest in and let everything else take care of itself.
It looks like the IRS has finally put together some proposed recommendations for tax preparer continuing education and competency requirements. These requirements are for unenrolled tax preparers. If your tax preparer is an Enrolled Agent, CPA or attorney they are already required to fulfill similar requirements based of their professional status.
Kevin Jacobs, doing business as Step By Step Financial, LLC, is registered with the State of Oklahoma as a Registered Investment Advisor.
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