This is the time of year when you are inundated with opinions on New Year’s resolutions. I have a problem with this ritual because we tend to get overwhelmed with information and give up.
Making changes to established patterns of behavior is tough. Giving yourself ten assignments for the new year is not realistic. In an effort to really have an impact, I have put together just 3 resolutions. Yes, it would be great if you would consider and implement all of them but if you pick one (any one), you will see measurable, positive changes. I am listing them in no particular order of importance, although I will admit that I feel most strongly about the first one.
Dump Your Market Beating Broker or Advisor
The daily grist of many brokers and advisors involves stock picking, market timing and mutual fund manager picking. This is called “active management” and generally refers to efforts to beat risk adjusted benchmarks, like the S&P 500 index. The bedrock of the securities industry is based on its touted ability to add “alpha,” which is a premium over the benchmark index.
There’s a better way. The evidence is overwhelming that determining your asset allocation (the division of your portfolio between stocks and bonds), and capturing market returns in a globally diversified portfolio of low management fee stock and bond index funds, is a superior way to invest. I summarize this research in The Smartest Money Book You’ll Ever Read, which is jointly branded with Mint. There are many other books validating this research. One of my favorites is The Little Book of Common Sense Investing, by John Bogle.
Following the advice of those who engage in active management is the primary reason why so many investors find themselves in desperate shape. You have made a critical first step towards financial independence and retirement with dignity by electing to use Mint.com to keep track of your financial life. Now, take the next step and dump your market beating broker or advisor.
Consider Whole Life Insurance
Life insurance is a complicated subject and no single type of insurance is right for everyone. Here’s advice you are unlikely to get elsewhere: Consider cash value life insurance (often referred to as “whole life” insurance).
The complexity of cash value life insurance and its higher premiums leads many financial advisers to say, “buy term and invest the difference.” The reality is that most people buy term and spend the difference. Here’s a fact you may not know: More than 90 percent of term policies never pay a death benefit and as you age, it becomes too expensive to maintain coverage.
Cash value insurance has many benefits: It encourages forced savings and you can borrow against the cash value. It can also play a role in your overall investment strategy because the right policies will rival a fixed-income portfolio and permit you to be more aggressive with the balance of your portfolio. The death benefit is usually tax free to your beneficiary and federal and some state laws, which vary, include the protection of the cash value of life insurance from creditors.
There is a type of whole life insurance largely unknown to most clients. It is called a “blended” policy, because it combines cash value life and term life into a single policy. A blended policy may generate higher near-term cash values and higher death benefits at life expectancy than other whole life policies because of lower sales costs. Your insurance agent might not mention these policies because the commissions are much lower than other options, but they are sold by many highly rated companies, including Northwestern Mutual, Guardian, New York Life and Mass Mutual.
One final thought on life insurance: Even the wrong type of policy is better than having no life insurance at all. If others depend on you for support, you have a responsibility to own life insurance in an amount that will protect them.
Mint.com provides a life insurance wizard, which uses your age, annual income, and whether or not you own a home and have dependents to estimate your needed coverage.
Accelerate Payment of Your Mortgage
I know the argument: If you can make more in the stock market, why pay off your mortgage, especially because you can deduct the interest? I don’t buy it.
Building wealth is about avoiding debt and a mortgage is debt. It appears on your net worth statement as a liability. Of course, the value of your house is an asset but, as we have seen, the value of that asset can vary dramatically.
Long-term (30-year) mortgages can be very expensive. A $200,000 loan at 5 percent interest would still have a balance of over $100,000 after 20 years of payments. By increasing your monthly payment from $1,073 to $1,582, you could pay off the entire mortgage in 15 years and own your home free and clear. You have now eliminated a big chunk of debt and increased your net worth.
Consider refinancing for a shorter term, which may permit you to pay off your mortgage more quickly, without significantly increasing your monthly payments. Take a look at Four Creative Financial Products that Got Us into Trouble by Joshua Ritchie (and readers’ comments) at the MintLife blog for interesting perspectives on home equity loans and bi-weekly mortgage payments.
You can also check out Mint’s Mortgage calculator in its “Ways to Save” section, which will tell you whether now is the right time to refinance based on your home’s current value and equity. If it is, Mint looks through several dozen mortgage providers to find the best rate based on your credit score.
That’s it: It’s as simple as “1, 2, 3.” Have a happy and prosperous New Year!
Do you have a question you’d like to have answered by Dan Solin? Join us on the Mint.com Facebok page on January 11th for a LIVE reader Q&A session with Dan. In the meantime, you can submit your questions to firstname.lastname@example.org
Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read and The Smartest Portfolio You’ll Ever Own. His new book, The Smartest Money Book You’ll Ever Read, will be released January 3, 2012. You can buy the book at several retailers and in various formats, including: Amazon, Barnes & Noble, Nook and iBooks
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.