Understand Your Baseline


We are all trapped by our baseline thinking. Think about this idea.  $1 billion is a lot of money.

How much is a billion?

It takes 32 years of continuous counting at one number per second to get to a billion. Just 12 days to get to a million. A billion is a big number. But is it always big?

It seems not.

Everything is context and a hard baseline will cause you conflict.

In the United States the federal budget in 2017 is $3.65 trillion. That would be 3,650 billion. That means they spend $10 billion per day.  Every day. $416 million per hour. $7 million per minute. A billion is spent before 2:10 AM every day.  Not so significant to them as it is to you and I.

If you had a billion what would you do with it?

Most of us don’t know and almost can’t know.  A billion in bonds earning 5% is an income of $50 million a year. Nearly a million a week. Even that would be hard to spend for most of us.

Giving away a million is not too hard.  There are many worthy projects. Assessing projects and giving away $1 million per week would be hard work. What fun would that be?

Maybe buy some art.

A Jean-Michel Basquiat piece sold for $110 million last week at Sotheby’s. It was part of a $319 million dollar day for the auctioneer. The entire sale amounted to $1.3 billion.

The Basquait piece is quite remarkable, but then so is $110 million. You would need a special place to hang it.

While the most pricey Basquait, $110 million is a fraction of the $303 million David Geffen’ foundation received for de Kooning’s “Interchange”

Money is sterile. It is nothing until you use it.

Some people enjoy art. Others fine wine. Perhaps a house in Aspen or Miami or the south of France. Maybe security against adversity or to help one’s child. Perhaps help another human somewhere on the globe.

People seem to seek money as a goal of its own. They sometimes fail. People who own great wealth have usually created great value and the money builds faster than they can use it. Eventually that changes and they work at using it. The Gates, Ford, Rockefeller, McArthur, and dozens of other foundations. Warren Buffet’s billion dollar a year charitable giving. 

Yusaku Maezawa’s Basquiat.

People who have trouble making and keeping money often have no clear vision for its purpose. Motivation flows from purpose.

Find your particular meaning for money

Making money is satisfying. Using money is satisfying. Owning money for no purpose often does not work. Clarify purpose. Use a baseline that is meaningful for you. A billion dollars probably doesn’t matter.

There is small advantage to being the richest person in the cemetery.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Cost Control In Employee Benefits


The 1989 movie Field of Dreams is similar to your employee benefit plan.

Field of Dreams stars Kevin Costner.  In it he builds a baseball field in the midst of Iowa corn causing family turmoil and financial pressure. The voice tells him “If you build it, he will come.”

And the voice is right. The field becomes populated with long deceased baseball players, among them his father.

Employee benefits

At one time an employer could control his employee benefit costs by shopping periodically. That choice is less available now. Many carriers have exited the business and the others pay careful attention to the demographics of your group and its previous experience.

Cost control is difficult. High priced biologic drugs get most of the press, but the cost to provide routine drugs and other medical services is much higher than it was in 1989 when Field of Dreams first appeared.

Cost control now begins farther up the ladder.

If you build it, they will come.

Plan design matters. Be careful with limits, definitions and the things you cover.

Employees, like everyone else, are pushed by incentives. If a plan offers coverage for things the employee does not use now, the existence of the plan will push them to use them. Most of the benefits don’t carry over from one plan year to another, so there is an incentive to use them as the year end approaches. Ask a massage therapist if business is up in the last quarter of the year. Strange the need is not year round. 

Be careful not to incentivize plan usage. You pay the claim plus the insurers overhead. The operative rule forming the insurers standpoint is, you send us ten dimes, we send back three quarters.

Small disincentives have a powerful effect

Deductibles matter.  Even a small one. A flat dollar amount on a prescription is not a very good deductible because it could disincentivize an employee from buying needed medication. Undesirable. 

If the deductible is the dispensing fee then the employee can have the medication and can shop for lowest fees. He keeps 100% of his saving. He saves nothing for his effort with a flat deductible. 

If the plan includes a $100 annual deductible, the annual premium will usually fall a little more than the $100. Many employees will not meet the deductible and that saves insurers the cost of processing tiny claims.

Pareto’s Law applies to claims

You may be surprised to find that 80% of the claims paid arise from 20% or fewer of your employees. I am aware of one group where 1% of the employees generate more than 80% of the claims. The marvels of biologic drugs.

Understand your plan demographics and match benefits to needs. Ask your provider for information on usage and understand how that matches the value to your employees. If it does not match, change the plan design.

No one values things that are free

Employees often think only of their salary. Employee benefits are a surprisingly large share of an employer’s total cost of personnel. Some are mandated, like government plans, workers compensation, vacation, statutory holidays, and the like. Other are more controllable like pensions, health, dental, long and short term disability and life insurance.

Be sure the employees know that salary represents only about 75% of the total pay package.

Learn about how they use the benefits and how they fit

Ask for input as to what they value. Have someone familiar with the group plan and individual insurance coverages, meet with employees with a view to fitting their employee benefits with their overall needs.  In many cases, the coverage offered in the benefit plan fits no one.

There is no reasonable expectation that the cost of benefit plans will fall in the future. Cost control involves shopping, claims control and plan design. 

Be sure you address each.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Steve Jobs


My friend Bob read Steve Jobs biography and suggested I do too.  It is wonderful. Read it. Walter Isaacson is a masterful writer and Steve is a character an author could hardly invent. Truth is stranger than fiction because fiction must be plausible.

If he did not exist, we would not see Steve Jobs as plausible.

He envelopes nearly every positive trait and blemish known to man. Brilliant, curious, driven, persistent, passionate, cruel, spiteful and kind. He was dutiful, wrathful, and grateful.

What can we learn?

Maybe not much. Perhaps all of Steve Jobs must exist before the end product is visible. Like a chocolate cake is more than the ingredients. Maybe none of his uniqueness is transferable. Nonetheless, it is fun to theorize.

  1. Everything you can learn might be valuable. He audited a calligraphy course while skipping college and that insight provided the fonts for the Mac. An electronics guy with an artist’s eye.
  2. He valued what he did more than the money. I suppose that’s easier when you are wealthy, but despite his $20 billion accumulation, he could have had immensely more if he had wanted to be greedy when he returned to Apple.
  3. He wanted the best people around him. He might have driven them hard and hurt some feelings but he knew the value of bright people.
  4. He believed in himself. Almost to the point of being insane. No rational person could have believed that blowing up the massive telephone business, and the ancient and entrenched music business was possible.
  5. He was a visionary. He knew most people did not know what they wanted until someone showed it to them. Most entrepreneurs have that skill. Henry Ford once said that if he had asked people what they wanted, they would have said faster horses.
  6. He was focused. Saying no to almost everything is a well developed skill of entrepreneurs. A vast enterprise does not grow from two half-vast ideas.
  7. Design is how it works, not what it looks and feels like. There are many who don’t know that yet. Functionality first, then beauty.
  8. Innovation is error prone. Admit mistakes quickly and move on. I doubt he enjoyed mistakes but I think he learned from each. 
  9. There is a big difference between developing something and innovating.  One is creation the other evolution.

Time is short. Make it count.

Steve Jobs like characters may appear in future. In the interim we all have the ability to make the world better our own way.

“We don’t get a chance to do that many things, and every one should be really excellent. Because this is our life.”

RIP Steve.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

 

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How Brave Can You Be?


The question is really what prevents you from doing what you need to do to get what you want. There are many approaches to that question and they don’t all work for everyone.

Let’s deal with a simple block – Fear of Failure

There are two ways it can arise.

  1. I want to be successful and will feel badly if I cannot
  2. I don’t know what to do

I want to be successful

I think we can agree most people prefer success over failure, but we reach an impasse when decide to define success. I could be a huge success in a recreational hockey league for senior citizens and fail badly in the National Hockey League.

Do you want to do well, or do you want to be the best-best you can be?

If you want do well, then you can probably avoid most of the possible failures and be content. That may prove too limited later and when you try to move farther you will find you lack the experience that earlier failure may have taught you. That leads to the I don’t know what to do problem.

I don’t know what to do

If we examine life to date, we will all find that there is nothing we know how to do now that we did not learn somewhere along the way. With the possible exception of music appreciation. It seems that we come with that. Newborns notice discordant presentation.

How do we learn? By trying things. 

Adult supervision when young prevented us from trying things that might be seriously harmful and as we grow older we learn to identify those things ourselves. The trick is to know when we are avoiding truly harmful situations. Perhaps we must define discomfort to be not harmful.

Discomfort and embarrassment are not lethal although by watching some people you would come to believe they think they are.

Experience is crucial

Experience is the key to good decisions and bad decisions seem to be the basis for experience. Isn’t that odd. You succeed or you gain experience.

If we saw the gaining of experience to be the goal, what would be outside our ability to try?

You can’t lose, you either win or gain experience

Consider Einstein on the value of experience:

The only source of knowledge is experience.

When to try something relates to risk

People relate to risk poorly. They usually fail to notice there are just three metrics to assess:

  1. Risk tolerance. The emotional part. We hate to lose, and sometimes prevent reaching a great goal by fearing a minor setback. You will never get stock market returns if you buy 30-day t-bills because the market might go down. If we measure risk by the amount lost, there is risk in doing nothing.
  2. Risk exposure. People who businesses are exposed to different risks than people who are employed by the government. Competition is a serious problem. An easy business can disappear quickly these days. Do you think the retail business is affected by Amazon?
    The reality though is risk goes both ways. Risk of failure of risk of success appear together.
  3. Risk capacity. Two part issue. Can you afford the loss financially and emotionally? If yes, then you will gain experience if nothing else.

Simplifying some risks

If you can afford to reverse the decision there is little risk. A decision to buy a house is near riskless. The decision to sell the family farm is riskier even though the other factors look benign. First children are high risk. Later ones not so much.  Your lifestyle is already changed.

Time matters. The stock market is highly variable but if you don’t need the money for 20 years why do you care what happened today. If you bought the S&P 500 index in May 1980 and kept it to the end of April 2015, with reinvested dividends you would have made nearly twenty-one times your investment. There would have been some serious down draft along the way too. Like 2008-2009 down about 50% briefly.

Just do it.

Understand yourself and the environment of the decisions you are making. The choice will become win or learn. Not so bad.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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When Gold And Flawed Statistics Overlap


We are most easily manipulated when we use skewed information to reach our own obviously right conclusions. The easiest way to do that is to present verifiable information that leads to a weak conclusion.

End point bias is the most effective tool to manipulate people

Consider this Twitter feed

“Gold yields time preservation, not interest. Fantastic chart displaying ‘s “Store Of Value” function.”

I have not tried to verify the 1971 values, but the ones I remember are not far off. Gold was about $40 and a house about $28,000.  Oil about $2.50. Car about $2,500. Family income about $7,500. Not crazy. I don’t know what “one unit of the Dow Jones” means.

The suppliers of the data look reliable, even though they have nothing to say about your inference.  You could easily decide, “Wow, income has gotten hammered. Gold buys twice as many cars and houses. I should have bought gold a long time ago.  Maybe I still should.”

The answer is maybe you should buy gold, but the information above won’t help. Lying with the truth is powerful.

Gold Prices were and likely still are manipulated

Gold Price were controlled by the United States until 1968 when a two-tiered system was introduced. They sold gold into the market and that kept the price close to their target until 1971 when the price began to rise uncontrollably and by 1975 they abandoned the entire idea.

Here are prices in that period in $US per fine ounce.

  • 1968 – $43.50
  • 1969 – $41.00
  • 1970 – $38.90
  • 1971 – $44.60
  • 1972 – $63.84
  • 1973 – $106.48
  • 1974 – $183.77
  • 1975 – $139.29

Choosing 1971 as the beginning confuses us

Presumably it is intentional. It conveys a false message, abut looks real. If 1974 had been chosen the income ratio from the chart above, instead of being 182 to 65 showing a huge loss, would have been more like 50 to 65 indicating no advantage to gold. I know house prices were higher in 1974 than in 1971 but not four times higher as the gold price would require. They did not fall 25% in 1975 either.

Statistical information will say anything you want

Choosing an endpoint is one of the easiest ways to manipulate people’s thinking. If I wanted to show that gold is a meaningless relic from ancient times, I would choose to present information beginning in 1980 when it peaked at over $800 per ounce and averaged $594.90.  In 2015 the average was $1,060. Up 78%.

Isn’t up 78% a good thing?

Maybe.  It depends on what other comparisons can be found. From December 1980 to December 2015 some other factors were these:

  • Dow Jones up 622%
  • Cost of living up 185%
  • Household Income up 136%
  • Crude Oil down 15%

Context always matters

Gold behaves more like a commodity than it does like a super secure source of enduring wealth. Don’t get me wrong, I like gold, and silver even more, but I don’t think it has real value for purposes of investing.

The value is all in our heads. We mistrust governments more than we mistrust the market for gold. If it works to preserve wealth, governments will confiscate it. If it doesn’t they won’t care. Emotional mistrust is not a basis for objective value.

Pay attention to what people use it for

Over the last five years 50% to 60% of production went into gold jewelry in India and China. If gold becomes relatively expensive per ounce, or if those people need money capital because they have new faith in their economies, the jewelry use will disappear and some of the old jewelry will end up in the melting pot.  Prices will be adversely affected in either case.

The future is unknowable

If you want to own some gold as an insurance policy, please feel free to do so. It could help. Your question is only how much of your portfolio should be precious metals? At anything over 15% or so, you are likely becoming a trader and betting you know more than the others and will therefore win big. Again, it could be true, but….

Always keep in mind that you are not the smartest trader in the world. You likely have less relevant information than you think. There are yet unseen variables that can come into play. 

And you probably don’t need the money anyway. 

In an unknowable market, never risk money you need to make money you don’t need.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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Financial Planning Is Merely Organized Common Sense


Like speed, hype kills. The hype is always about a technique. Understand the simple part first.

The Reality of Financial Planning Is Simple

  1. There are three time periods that matter. Now, the past and the future. Planning requires that you deal with each.
  2. Consumption defines lifestyle.  Food, clothing, transportation, housing, recreation, vacation, and a hundred more. All consumption occurs in the present.
  3. Income is earned in the present. Salary, interest, rent, dividends or whatever. Capital appreciation and such may appear in the present but it is not yet money. Different rules apply.
  4. Debt payments reflect the fact that you bought something using someone else’s money. The payment you make results from your promise to use your future income to make the lender whole.
  5. Saving transfers money you earn in the present to a point in the future where you will consume it.

Everything else is technique

From debt instruments like mortgages or student loans, to car leases, credit cards and lines of credit. They are just a way to spend money before you earn it. They become a budget item that covers many months in the future. They reduce your spendable income in the future when it hurts and make spending now feel okay, because it does not.

Saving is the process of transferring money from now to the future. There could be many possible uses for it, but one that never goes away is retirement. In terms of retirement, some day your money must work as hard as you do now. Think of retirement planning as just a system of deferred groceries.  How much will you need then and for how long? 

The transfer to the future is done by investing. Investing is mind boggling. Taxes, style, diversity, inflation, products, securities, indexes and the lot. They mostly get in the way of making good decisions. Saving is the key. If you don’t save, none of the investment material matters.

Investments and debt are both time machines that move money from when it is earned to when it is spent.

Balance In Time

  1. You earn money in the present.
  2. Each dollar you earn is first shrunk by taxation and other deductions like union dues and government plans of one kind and another. We call that the money you earn for “them.” It is slightly manageable and you or someone else should address it.
  3. What remains is manageable. It must work over three time periods. Now, then the past, and then the future. You must decide the allocation and you can do so fairly easily. Break your total annual income into four components. The money for them, the money for the past, the money for the future and the money for now. You will notice that consumption, the now spending is a small fraction of the total. That is the part you must replace for all time.
  4. Don’t incur debt unless you are willing to live with the payments out of your current consumption money.
  5. Money for now, ahead of money for the future is problematic. Saving what is left over is weak. Spending what is left over after calculated saving is strong. Not as much fun though. We are a difficult species to deal with. Saving pays off in the future and spending pays off now. Our emotional reward system does not value the future very highly.

Now Then Them

If you develop a strong sense of this balance, financial planning is nearly done. This is a strategic view. Once it is clear, the tactical view evidenced in available technique will become easier to assess and usually ignore. Hype is not persuasive when you know what you are doing.

It is about what your money means for you. If you learn to balance consumption over time, you will be debt smart and save the right amount too.

Best of all, you will know why you are doing it and that motivates.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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When Should You Buy Life Insurance?


There is a theory that says you should buy life insurance when you are young because it is cheaper. That assessment contains a cost-price-value error.

The cheapest time to buy life insurance is the day before you die.

Understanding problems is a key skill. In homage to the cost-price-value question, buying life insurance the day before you die is a different question than buying when you are young.There are two more variables to achieve that arithmetically correct answer.

  1. You don’t know which day that is
  2. You don’t know if an insurer will treat you as insurable on that day

Much of the insurance premium is to cover those two variables

The right answer is to buy life insurance when you recognize a financial shortfall should you die without it.

Young people are easy. They have a huge career value to lose and no way to pay for real and implied obligations should they die too soon. Buy a lot and buy term. Many people outgrow their need for insurance. But not all do.

End of life costs can be large and inconvenient

People who own businesses face enormous losses at death, regardless of the timing. Taxes are one. Loss of key skills and relationships another. Value lost because purchasers know it is an estate sale a third. Costs to administer the estate another, yet. 

For those who have not prepared for the inevitable with perfect succession plans, the cost can sink the work of a lifetime. Cash needs and losses to get the cash can drag value down by 50%.

Life insurance is a conditional option on cash

If you knew some day you might need the land beside your factory, would you tie up capital now, or acquire an option to buy the property? Most would choose the option because the capital working in their business will earn more. Same deal for the cash to pay taxes at death.

Your death triggers the option and the cash is delivered when it is needed. No capital tied up. The option price is the annual premium.

An example

A 55-year-old male non smoker in reasonable health owes $10,000,000 in taxes if he dies today. Succession plans include a freeze and trusts and every other artifact known to man.  $10 million is the irreducible minimum need.

He has already dismissed the two executor controlled choices of borrow and sell something. These are provably too expensive and needlessly risky. He is deciding between life insurance and own the cash before death.

Variables

  1. Average life expectancy is about 25 years
  2. Probability of death before age 80 about 50%, Before age 90 around 90%
  3. Riskless investment in government bonds yields at about 3% and 1.5% after income taxes.
  4. Level term to 100 premium is $180,000 per year

The outcomes

At 1.5% after taxes, investing $180,000 annually in bonds would accumulate $5.5 million by age 80. To get to $10 million, the owner must live to 95. Low probability. Well, maybe he can find a riskless investment at 5.75% after taxes. No problem now.  $10,000,000 in 25 years. 5.75% after taxes is nearly 12% pretax. Again low to no probability of achieving the result.

Live to 95 or earn four times the market rate on riskless investments still leaves the problem of what if he dies next month?

The Decision

Term to 100 is not the only choice and sometimes participating insurance would work better. Higher premium though. Every need and resource set is different.

In context of the person’s estate and income, roughly $45,000,000 and $2,000,000, the premium is not material. The estate liabilities would be material because the estate is not liquid both by nature and design.

The life insurance solution is cheaper than any other and is chosen.

Harvey MacKay’s Lesson 62

Reread “Swim with the sharks without being eaten alive.” It has wonderful intuitive wisdom for business owners.

Lesson 62 is a masterpiece

“If you have a problem you can cure by writing a check, you don’t have a problem, you have an expense.”

Cash cures estate problems

There is no such thing as a tax problem in an estate. The problem is finding the cash to deposit in order to clear the check to the government. There are just four ways to get the cash and each has a cost. Life insurance is the least expensive.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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