Do Computers Help In Financial Planning?

Probably “Yes” but not until later in the proceedings.  Computers are especially good at certain aspects of financial planning.  For example, they can make good graphs, thus helping communicate complicated ideas.  They can recalculate quickly when you change an input variable like time until retirement or average rate of return or the tax structure or spending in retirement.  All useful!  But those things are unnecessary early on.

What they cannot do is make the adviser and the client think correctly about what it is that they are trying to do.  They cannot even help people find out if the client and the adviser are seeking the same goal.  That can be a problem.  They do not know your resources, your time frame or the people who are involved.  To put it simply, they are clueless until you instruct them. Instructing them is not a simple task

People must know what they are tying to accomplish before they seek a way to get it.  They need to know about resources and time and risk and reasonable expectations and more.  Computers don’t help much with that.  Sadly, some advisers don’t help either.

If you start out with the action steps you will be defeated.  You cannot reach Chicago at noon on Tuesday by driving randomly from Toronto leaving on Sunday.  I suppose you might, but if you did not know where Chicago was, you would need to be rather lucky.

Besides an airplane might have suited your needs better.  Tools matter but they don’t matter as much as defining the problem matters.

If you use computers to find options, to assess potential outcomes, to put variables and their effects in context, then they are your friend.

Computers are tools and don’t you forget it.  They help you solve problems that you define.  They do not solve any problem that you cannot tell them about.  It is like hunting.  Your dog is a help but when it comes time to shoot, you don’t give the gun to the dog.

If you use computers to prove the answer to an unknown or incomplete problem, then they will merely speed up the mess.  And, they are not especially good at tiding up afterwards.

A final warning.  Computers are very good at precision.  They don’t care if they work with 7.276% or 7%.  You however, are not good at precision.  You don’t think the same way.  Most people would rather know that if they get around 7% on the savings they will allocate, then they can retire at a certain time with a certain income.  They know that they will adjust if the yield turns out a bit differently.  The computer could show them what happens at 6% or 8% or even 43%.

Most clients would only understand what the difference is in terms of their lifestyle.  They do not relate well or interpret well changes in rates.  The computer helps them understand the meaning.

Use computers sparingly until the purpose, the options and the tools are clear

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Office Overhead Expense Disability Insurance

Most people who have thought about it own Disability Income Insurance.  That will protect your personal spending while you are unable to earn a living.  But, what about the business expenses that will carry on even while you are unable to attend?

Things like the lease, the bank loan principal and interest, the support staff, the heat and hydro, the association fees, the insurance, the municipal taxes and many more fixed expenses.  The telephone bill seldom can go away because you would like to keep the number.  The staff stays unless you want to train a new one when you get back.  The bank and the leasing company probably expect to get paid too.

Hiring temporary help might not leave enough margin to cover all the expenses, so you have implicitly selected other options.

After the fact, you have choices.

  • Kill off all the expenses quickly.  But that does not really work because in the short run you will not know for sure if you can come back to work.
  • Erode you savings.  Then what?
  • Sell.  At a good price?  Right.
  • Hire people to do what you do.  Difficult, more likely impossible.  Will you be up to finding them? How to terminate them when you come back?

Before the fact you have other choices.

  • Build depth so employees can run the business without you.
  • Have emergency succession arrangements so some other business can cover you for a while.
  • Own appropriate insurance.

Of the seven choices above, owning Office Overhead Expense insurance is by far the easiest to execute.  Better yet it does not get in the way of any of the other six should they develop over time.

It is relatively inexpensive and for self employed persons, it should be part of any well-constructed disability insurance plan.  This insurance protects your savings and the way you have constructed your business.  Both are hard to replace.

Ask your insurance adviser about it.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Happy Father’s Day!

Objectively, every day is Father’s Day. Children and eventually grandchildren are the meaning of life. Fathers get to contribute and enjoy. What could be worth more?

New fathers need to lighten up. Here’s a way to think about it.

There is a big difference between leader and commander. Leadership works.

Try to avoid many rules. Simple standards work. Rules teach children that others control them and they need to learn how to control themselves. I did what you said is a correct but wrong answer.

Besides if you have rules you need to enforce them and children have far more energy to avoid them than adults have to enforce them. Pick your battles carefully. If they don’t matter avoid them. If they matter, win.

Mistakes help them. Don’t cover them up or bail them out. Leave enough that they can learn from the error. If you take responsibility for consequences they may lose track of the lesson. Do you think the American big banks learned much in 2008? Be gentle.

Encouragement works. Criticism seldom does.

Share your feelings. It validates theirs.

Share your work. Helping you gives them a framework for how long things take to accomplish. It teaches persistence too.

Keep in mind that good leaders are good followers. Learn to let your children lead sometimes.

Young children behaving badly in public are normal. They are merely learning the limits. Help them learn.

Nurture them. They are little experimental scientists. Explorers, learning their way in a complicated, new world. Guides are useful, but only help them choose the way. No demanding your way if their way and their mistakes would help them learn.

Challenge them with new ways to look at common things. Of course you can wear your glasses upside down. Inside out hats are interesting. Try painting with your other hand. What if dogs could play basketball or cats could fly?

Help them deal with failure. I know that hurts, but sometimes you can’t play on the slide without a slip. Life is like that too.

Help them deal with unreasonable others. Some people are mean. Teach them that they don’t need to be mean too, but they do need to stand up for themselves.

Protect them when they need protecting, but give them the benefit of the doubt first.

When they are young, read them stories. Better still, with their assistance, make up stories. They can learn imagination or maybe better, they can avoid losing it.

Learn to draw. Even if it is stick figures only.

Two-year-olds and teenagers are not hard to get along with just to be mean. They are learning difficult limits and sometimes they go too far. It goes away.

Be sure your teenagers have enough money to allow choices. The only way to learn about money. If you have only enough to live on, you learn little about saving.

You earning extra money is nice, but if the necessities are looked after, it will only buy more choices. Don’t give up much time to get extra money.

Children know far more than you would think and they make better decisions than you would think. Give them a chance to use their own experience.

Let them go their own way when it is safe for them to do so. That’s the hard one. Walking your daughter down the aisle is among the hard things in life. Learn to trust.

Pity you only know all this stuff after the children have grown up. They should help people learn this in school.

Fatherhood is not a burden. Fatherhood is the best. Fathers can learn from their children as much as or more than the children learn from the fathers.

Enjoy it today and every day.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

An Edge Is An Edge

Should you, without other information, always bet that the sex of a new born child will be male? Yes, according the the CIA Fact Book. At birth, males outnumber females 106 to 100. or 51.46% of births are male. 48.54% are female. After 100 bets, your expectation is that you would be ahead by 3 bets.

That’s why Las Vegas works. It is easy to search the internet for house odds advantage and find that at any game, there is a house edge. Usually not large. Blackjack is as low as .2% in some case, roulette is around 5.5% and craps varies from 1% to 11% depending on the proposition bet. Low price slot machines are called “one-armed-bandits” for a reason. 15% edge and more.  Interesting aside. The deeper you are in the aisle of machines, the worse the odds. Visible machines pay better. To lure in new players I suppose.

The law of house odds is this.  “If there is a small advantage applied many times, profit is inevitable.”

It’s the many times that makes the difference. As the player, the bigger the size of the house edge, the shorter your time to reach zero.  If you are playing a 4-deck Blackjack game with odds in favor of the house at about .51% the expectation of your stake after 100 hands is 60% of the beginning amount. After 1,000 hands it is less than 1%.  With roulette at 5.5% house edge you can expect to reach .3% of your stake after 100 spins.

You better believe gambling is entertainment or you may not enjoy your stay.

What about life? Are there actions you can take that provide a slight edge. For instance, is “do it now” slightly better than do it later?

Suppose your present state is characterized as 1. Further suppose it is slightly better to act immediately instead of putting things off. Call that advantage half of one percent. (0.50%) If you have 5 choices a day, you have 1825 in a year. Your initial condition of 1 will grow to 8,975 by year end using the half of one percent advantage. It will stay at 1 if putting things off is neither positive nor negative. A nice gain for doing the things now that you will end up doing anyway.

Edmund Burke has said, “No one could make a greater mistake than he who did nothing because he could do only a little.” By extension. “No one could make a greater mistake than he who did nothing because he could gain only a little by acting.”

Obviously this is just an arithmetic construction and real life is different, but the point is still clear. Tiny advantages applied many times provide huge overall gains.

You didn’t think Las Vegas hotel owners built those buildings with the profits from the coffee shop, did you?  Use small advantages to build a great life.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Why, Why Not, And Because

Edward Charles Francis Publius de Bono knows about thinking. He believes it should be taught as a subject in schools. A bit of a surprise for some. While you might think that you learn to think in school, it appears that he believes you are wrong. He is more probably right than you would like. There is a big difference between accumulating facts and thinking.

DeBono has written 57 books and has been on the faculty at Oxford, Cambridge, London and Harvard. A passable resume.

What does he have to say about thinking and in particular creative thinking? Quite a lot as you can imagine, but let’s look at one aspect you have noticed but perhaps not put into context. What he calls the three ages of reason.

From Age 2 to about age 5 – the age of “Why?”

From Age 6 to about age 11 or 12 – the age of “Why Not?”

After age 12 – The age of “Because”

“Because” is the age of having accepted things as they are, not as they could be. It is not creative like the age of “Why Not.” It is passive and resistant to change. I suppose it is better than the age of “Because I said so.”

When you hear yourself saying “because,” it may be an indicator that something from the past is being carried forward. As discussed before, not everything from the past, even things that worked, still have relevance today. Context changes even while you do not and all solutions are relevant only in the context of the question they address. If the question or problem goes away or changes the solution becomes obsolete too.

While you have been using “Because” others have been saying “Why not?” And some of the others stayed in the “Why not?” well after they became adults. Do you remember Steve Jobs. The poster boy for “Why Not?”

Learn to treat “Because” as a warning. It is not always wrong, but neither is it always right. Here’s why.

DeBono points out that we have a built in “Open Block” that prevents us from seeing new approaches. Think of it like a long water pipe with a small hole in it. Most of the water flows through the pipe and out the end. I suppose because it is the easiest way to go and we have always done it that way. The “Because.”

But a little of it goes out through the small hole and that is the creative part. The “Why Not?”

You will know it when you see it. It will be the new thing that seems obvious. It has all the characteristics of the old flow, but is different.

In 1900 a supermarket would have been unthinkable. The open block required that there be separate businesses. A butcher, a baker, a candlestick maker, a dry goods store, a produce market and a hardware store. The first supermarket was a creative leap that few could have accomplished but once done, it is self-evident. Also much cheaper to operate and for suppliers to service. Now we have WalMart a brilliant extension of supermarket or perhaps the general store.

How about a phone that can be a computer or is it the opposite? Or a big box mall?

Other inventions are just inventions. They are brilliant but they don’t seem self evident. I have never thought I could have built a laser. Or fuel injection, or an MRI machine, or Google.

Notice how often you say “because”as the prelude to an answer. It is a measure of your age and belief in your experience. You can stay young by challenging some of the “Because” thinking.

Pay attention to the young fellows. Listen when they are asking why not. Encourage them. Fill out their questions with something other than because.

You will both win.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Medical Power of Attorney

I recently spoke with a client with a view to revising an estate plan.  He had recently been party to an expensive and bitter divorce and the time seemed right to reconsider his long plan.  After examining all of the normal things, credit cards, guarantees on loans, trustees and heirs under his will, beneficiaries under various insurance plans, private, government and business pension plans, and joint ownership of investment and other accounts, we came away satisfied that the logistics were complete. 

But for one thing!   His former wife was still his medical power of attorney.

His reaction.  “I can see her now.  Jim has a hang nail?  Put him down!”

Might not happen that way, but he did change the attorney.

For the rest of us, it makes sense to have this document if we do not already and it makes sense to review it periodically.  You may need it and it better work when you do.  There is no guarantee that your health will fail eventually, but that is the way to bet.

If you are young enough, you might consider long term care insurance to make sure you do not lose your dignity because of financial constraints.  You do not want to end where some pet owners get to.  Their companion animal becomes subject to financial euthanasia.

Choose you attorney carefully.

I have heard of a case where a person appointed his three daughters as his attorney, but failed to take into account that they had animosity towards him.  He endured six months or so of a painful condition and intrusive testing and treatment.  Apparently to make up for abuse he had inflicted upon them when they were young.  Who could have seen that coming?

A hospital is a place where the general rule is that you must check your dignity at the door.  Be sure those you appoint know the limits to how much of your dignity you are prepared to give up and for how long.  You might need to have uncomfortable conversations to make it work to your wishes.

You have lived your life to here with certain over-arching personal rules about your life’s value and your personal dignity.  Do not risk turning yourself into an expensive experiment at some hospital or a chronic and dependent invalid.  Make written provision and choose a competent person to hold medical power of attorney to protect your dignity under adverse conditions.

Talk to an competent lawyer and check your wills while you are at it.

Be kind.  Provide clarity.  The job is difficult enough without ambiguity.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

Overview of Risk

Risk comes in two forms and the method of dealing with each is fundamentally different. It is easy to get confused and it is easy to take wrong actions.

A simple definition of risk is: “A situation involving exposure to danger, harm or loss.” That is probably about how we intuitively understand risk, but it is not very helpful when we seek to manage it. Every situation, for every person, and at every time, has an element of risk, so we need to delve a bit deeper if we want to do something about it.

First notice that exposure to harm is not the same thing as being harmed. We each see risk our own way. Risk has a probabilistic component. It might happen or it might not. Knowing how to evaluate probabilities is a useful skill. Some we know intuitively but others are more opaque.

We know, but do not emotionally believe, that air travel is safer than driving. Why? Because 1) airplane crashes make the front page and car accidents do not and 2) we have little control over airplanes and much more over cars. We are biased against spectacular uncontrollable events and lose track of the other and many small ones.

For a person acting alone, objective evaluation of risk is almost impossible. Thus the need for an adviser or other confidant.

There is a good deal of material that addresses risk but not in a way that relates to an untrained person. For example, economists believe risk is statistical variability. The range of outcomes is their measure. If I invest $1,000 today and have a projection of future values that is wide, then the investment is risky. If the future value range is narrow, then risk is low.

It is interesting to see that an investment that loses 1% every month, with certainty, is not as “risky” as one that loses 1% some months and makes 2% other months, but in no particular order. Your common sense claims that a certain loss is more risky than widely variant outcomes. Your common sense is wrong. Investment risk is a mathematical creation, not something you can relate to intuitively. Based on a lot of modern thought, it is in addition almost certainly wrong.

Warren Buffet has an interesting point. “Risk happens when you don’t know what you are doing.” That resonates with me.

Investment risk, as defined, may not really be risk in the intuitive sense. The reason: People adjust; they are not part of a formal equation. People manage the risk is variability question by changing inputs like time and capital.

They may be able to do better by diversifying. The jury is out on that one.

In most cases, you do better if you understand what you are trying to achieve, when, and with what and then ask what tools are available to get there. In many cases, things like paying off debt work better than “investing”

Notice that the traditional risk measurement is on an annual basis and few of us invest on a one year at a time basis. Most have much longer objectives and the year to year value is not crucial. For example, the value of your home does not matter unless you are planning to move. Annual fluctuations are irrelevant in a long plan. They matter in the statistically based world.

At the other extreme is risk that is complete in itself. It is not something that may self correct in a longer time. It occurs or it does not. There are many of these. Your factory burned down, your bank went broke, you die unexpectedly, your key-person became disabled, or your son injured someone while driving your car.

These ones, while catastrophic, are easier to manage. Good maintenance and alarms will reduce the probability of a serious fire loss. Due diligence will limit the bank loss and you can insure the rest. Proactive approaches will extinguish most of this kind of risk.

Ones in the middle are harder. If someone has a serious heart attack, they are not dead, but they are not healthy either. They may have a loss just not one that is complete or even known yet. There are forms of insurance, like critical illness, that mitigate these.

Understand that some risks are systemic, like the stock market, other risks are personal and based on your activities, and others are random, like a once in 500-year storm. When managing risk, you need to know your exposure to risk, your tolerance for risk and your capability to deal with what comes along. If you have huge resources and are emotionally able to deal with a range of outcomes, you will do better than someone who must get it right the first try.

So your management of risk approaches are: 1) Avoid or minimize it if possible, 2) Decide what to accept if you cannot avoid it, and. 3) Insure it if you cannot do either. Risk is always there.

See also What Should I Insure.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

Understand The Challenge

Once upon a time two brave knights sought the hand of the lovely princess. The king was not about to make an arbitrary choice and so required the two to compete. Unfortunately for the knights, the king was a crafty old guy who had studied the underlying fundamentals of motivation and logic.  And a challenge it was.

The challenge:
“You shall race from the oak tree by the river back to the castle gate, a distance of six kilometers. The winner shall be the man whose horse comes in second.”

The knights mounted their horses and rode to the tree. Making the turn and heading back, it soon became apparent that speed was the enemy. After a few hundred meters, the pace slowed as each tried to follow rather than lead. Eventually a complete stop.

One ran off and tried to hide. The other remained still. One tended to a stone embedded in the horse’s hoof; the other watched. One detoured to get water for his horse. The other joined him.

Darkness fell. The knights plotted.

Sir Rupert thought, “Perhaps if I kill my horse, it could not come first, but then Sir Rodney would kill his too.”

By morning they had discovered the nuance and once they did, they found the answer.  Blow up the conventional paradigm of horse racing.

They switched horses.

Now the rider who could get back to the castle first would win as his horse, ridden by the other, must come second. The race was on.

It is like the advice we give students.  Read and understand the question before you decide how to answer it.  Answers frequently get in the way of the understanding so do not start there.

While the king intentionally created an ambiguous competition, many of us do so by accident. Your people cannot give fast, good and low cost service to your customers no matter how you instruct them.

Worse, you may not have the people who can see how to blow up the conventional methods to achieve the goal.

As part of any delegation process, be sure you know how the people will understand the challenge.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

On Leadership

Two years ago, my friend John Scollard asked me to attend a church meeting about leadership and I reluctantly agreed. It was to be a 16 week program to assist in the development of leadership skills. The form of the program was a DVD presentation by John Maxwell followed by a discussion amongst the attendees. As with many other things I did not want to deal with, this one turned out very well indeed.

If you have not paid attention to John Maxwell prior, make a little effort to do so now. There are many videos on YouTube and a wide selection of books on Amazon. You will not waste your time to notice him.

Some of what he talks about is specific to leadership but most is not. It is a very general kind of leadership. It is not how to be a CEO. It is more life centered. How to lead your family, your co-workers, your friends and so on.

There is another section on influence. How to have it , how to use it.

Some thoughts that I found insightful are:

    • Accept people for what they are and help them to be a better them. His thought: Don’t send your ducks to eagle school. It annoys the eagles and frustrates the ducks.
    • A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.
    • Life is 10% what happens to me and 90% of how I react to it.
    • Stay Focused. You can’t do everything, know everybody, and go everywhere
    • If you don’t have peace, it isn’t because someone took it from you; you gave it away. You cannot always control what happens to you, but you can control what happens in you
    • Take comfort in the knowledge that if a change doesn’t feel uncomfortable, then it’s probably not really a change
    • Maya Angelou observed you can’t use up creativity. The more you use, the more you have. Sadly,too often creativity is smothered rather than nurtured. There has to be climate in which new ways of thinking, perceiving, questioning are encouraged

There are many more.

The one I like the best is this. “Change is inevitable. Growth is optional.”

Leadership is crucial skill. Help yourself and those around you. Learn a little about it.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

iPhone WTF?

In my little phone plan we have eight iPhone 4’s.  The oldest is 30 months old and the newest a bit over 24 months.  Of the eight, five are currently impaired to one extent or another.  One has a camera that has failed, three have a power button that no longer works, and another has no sound from the external speakers.  One of the other three has already been replaced at a cost of $200.

As upgrades came available, I asked myself, “Why Apple?”

Answer. Because they integrate well with the iPads through iCloud and because I like the FaceTime app.

That did not seem to make it for me so I explored Android.  I bought an HTC One to experiment and with the exception of FaceTime I have replaced all the apps that I used before.  I like the screen and the sound is superb.  So far it is acceptable.  If only I could estimate its durability.

I think any failure within 30 months is unacceptable, but I could live with perhaps one if it was repaired promptly, but that is not the case with Apple.  They know the way people use these devices and yet they fail.  Not huge issues but annoying enough that they are likely to lose some of their business.

Given the way the stock has behaved over the past 8 months, I may not be the only one who has noticed.


Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

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