May 2014 Newsletter

What Baseball Can Teach You about Financial Planning

Spring training is a tradition that baseball teams and baseball fans look forward to every year. No matter how they did last year, teams in spring training are full of hope that a new season will bring a fresh start. As this year’s baseball season gets under way, here are a few lessons from America’s pastime that might help you reevaluate your finances.

Sometimes you need to proceed one base at a time

There’s nothing like seeing a home run light up the scoreboard, but games are often won by singles and doubles that get runners in scoring position through a series of base hits. The one base at a time approach takes discipline, something that you can apply to your finances by putting together a financial plan. What are your financial goals? Do you know how much money comes in, and how much goes out? Are you saving regularly for retirement or for a child’s college education? A financial plan will help you understand where you are now and help you decide where you want to go.

It’s a good idea to cover your bases

Baseball players minimize the odds that a runner will safely reach a base by standing close to the base to protect it. What can you do to help protect your financial future? Try to prepare for life’s “what-ifs.” For example, buy the insurance coverage you need to make sure you and your family are protected–this could be life, health, disability, long-term care, or property and casualty insurance. And set up an emergency account that you can tap instead of dipping into your retirement funds or using a credit card when an unexpected expense arises.

You can strike out looking, or strike out swinging

Fans may have trouble seeing strikeouts in a positive light, but every baseball player knows that striking out is a big part of the game. In fact, striking out is much more common than getting hits. The record for the highest career batting average record is .366, held by Ty Cobb. Or, as Ted Williams once said, “Baseball is the only field of endeavor where a man can succeed three times out of ten and be considered a good performer.” In baseball, there’s even more than one way to strike out. A batter can strike out looking by not swinging at a pitch, or strike out swinging by attempting, but failing, to hit a pitch. In both cases, the batter likely waited for the right pitch, which is sometimes the best course of action, even if it means striking out occasionally. So how does this apply to your finances? First, accept the fact that you’re going to have hits and misses, but that doesn’t mean you should stop looking for financial opportunities. For example, when investing, you have no control over how the market is going to perform, but you can decide what to invest in and when to buy and sell, according to your investment goals and tolerance for risk. Warren Buffett, who is a big fan of Ted Williams, strongly believes in waiting for the right pitch.  “What’s nice about investing is you don’t have to swing at pitches,” Buffett said. “You can watch pitches come in one inch above or one inch below your navel, and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want.”  Note: All investing involves risk, including the possible loss of principal.
Every day is a brand-new ball game

When the trailing team ties the score (often unexpectedly), the announcer shouts, “It’s a whole new ball game!” Or, as Yogi Berra famously put it, “It ain’t over ’til it’s over.” Whether your investments haven’t performed as expected, or you’ve spent too much money, or you haven’t saved enough, there’s always hope if you’re willing to learn both from what you’ve done right and from what you’ve done wrong. Pitcher and hall-of-famer Bob Feller may have said it best. “Every day is a new opportunity. You can build on yesterday’s success or put its failures behind and start over again. That’s the way life is, with a new game every day, and that’s the way baseball is.”



Saving for the Future: Start Now or Start Later?

There are many ways to try to reach a future goal. You can save now, or you can save later (or perhaps do both). But there is an advantage to putting your savings and earnings to work for you as early as possible.

Compound earnings

If you save $1,000 now and invest it at an assumed 6% annual rate of return, in 1 year you would have $1,060, in 2 years about $1,124, and in 10 years about $1,791. Your earnings compound as you earn returns on your earnings.  Your $1,000 initial investment increases through compounding to $1,791.*

Compounding at work

For example, let’s say you start saving now. You save $5,000 at the beginning of each year in years 1 to 20 and put it into an investment that earns a hypothetical 6% annually. At the end of 30  years, you will have accumulated about $349,150.  Alternatively, let’s say you start 10 years later. You save $5,000 at the beginning of each year in years 11 to 30. Once again, you earn an assumed 6% annually on that money. At the end of 30 years, you will have accumulated about $183,928.  In each of these examples, you’ve put aside a total of $100,000. However, by starting now, you accumulate about $165,222 more than if you start later, and all of that is from earnings. By starting now, rather than putting it off, you have put your money and the power of compound earnings to work for you.

Years Start Now Start Later
1 – 10 $5,000  
11 – 20 $5,000 $5,000
21 – 30   $5,000
Saved $100,000 $100,000
Earnings $249,150 $89,928
Total $349,150 $183,928

Now, let’s look at a different situation. Let’s say you would like to start later but accumulate the same amount as if you had started putting money aside now. In this case, you would need to save more, about $8,954 at the beginning of each year in years 11 to 30, in order to accumulate $349,150 after 30 years.  In this example, you would need to save a total of about $179,085. That’s $79,085 more than if you had started earlier, when compounding could have helped make up that difference. Compound earnings don’t have as much time to work for you when you postpone getting started.

Years Start Now Start Later
1 – 10 $5,000  
11 – 20 $5,000 $8,954
21 – 30   $8,954
Saved $100,000 $179,085
Earnings $249,150 $170,065
Total $349,150 $349,150

Strike a balance

Of course, you could accumulate even more if you do both. For example, if you set aside and invest $5,000 at the beginning of each year in years 1 to 30 and earn an assumed 6% annually on that money, at the end of 30 years, you will have accumulated about $419,008. This is substantially greater than the $183,928 accumulated if you invest $5,000 in years 11 to 30, while somewhat greater than the $349,150 accumulated if you invest $5,000 in years 1 to 20.  But maybe you can’t afford to set aside $5,000 now. Could you manage $3,000 this year, increase that amount for next year by 3% to $3,090, and continue to increase the amount set aside by 3% each year? If that money earns an assumed 6% annually, you will have accumulated about $351,520 at the end of 30 years, slightly more than the $349,150 accumulated if you save $5,000 each year in years 1 to 20.  Compared to saving $5,000 a year for 30 years, you’ve contributed almost as much here ($142,726
compared to $150,000), but your earnings are substantially less ($208,794 compared to $269,008) because your largest contributions came in later years and had less time to work for you.

Year Constant Increasing
1 $5,000 $3,000
2 $5,000 $3,090
29 $5,000 $6,864
30 $5,000 $7,070
Saved $150,000 $142,726
Earnings $269,008 $208,794
Total $419,008 $351,520



Test Your Knowledge of Financial Basics

Working with a trusted financial professional is one of the best ways to help improve your overall financial situation, but it’s not the only thing you can do. Educating yourself about personal finance concepts can help you better understand your advisor’s recommendations, and result in more productive and potentially more prosperous financial planning discussions. Take this brief quiz to see how well you understand a few of the basics.
1. How much should you set aside in liquid, low-risk savings in case of emergencies?
a. One to three months’ worth of expenses

b. Three to six months’ worth of expenses

c. Six to twelve months’ worth of expenses

d. It depends
2. Diversification can eliminate risk from your portfolio.
a. True

b. False
3. Which of the following is a key benefit of a 401(k) plan?
a. You can withdraw money at any time for needs such as the purchase of a new car.
b. The plan allows you to avoid paying taxes on a portion of your compensation.
c. You may be eligible for an employer match, which is like earning a guaranteed return on your
investment dollars.
d. None of the above
4. All of the money you have in a bank account is protected and guaranteed.
a. True

b. False
5. Which of the following is typically the best way to pursue your long-term goals?
a. Investing as conservatively as possible to minimize the chance of loss
b. Investing equal amounts in stocks, bonds, and cash investments
c. Investing 100% of your money in stocks

d. Not enough information to decide


1. d. Conventional wisdom often recommends setting aside three to six months’ worth of living expenses in a liquid savings vehicle, such as a bank savings account or money market mutual fund. However, the answer really depends on your own individual situation. If your (and your spouse’s) job is fairly secure and you have other assets, you may need as little as three months’ worth of expenses in emergency savings. On the other hand, if you’re a business owner in a volatile industry, you may need as much as a year’s worth or more to carry you through uncertain periods.

2. b. Diversification is a smart investment strategy that helps you manage risk by spreading your investment dollars among different types of securities and asset classes, but it cannot eliminate risk entirely. You still run the risk of losing money.
3. c. Many employer-sponsored 401(k) plans offer a matching program, which is like earning a guaranteed return on your investment dollars. If your plan offers a match, you should try to contribute at least enough to take full advantage of it. (Note that some matching programs impose a vesting schedule, which means you will earn the right to the matching contributions over a period of time.) Because 401(k) plans are designed to help you save for retirement, the federal government imposes rules about withdrawals for other purposes, including the possibility of paying a penalty tax for nonqualified withdrawals. You may be able to borrow money from your 401(k) if your plan allows, but this is generally recommended as a last resort in a financial emergency. Finally, traditional 401(k) plans do not help you avoid paying taxes on your income entirely, but they can help you defer taxes on your contribution dollars and investment earnings until retirement, when you might be in a lower tax bracket. With Roth 401(k)s, you pay taxes on your contribution dollars before investing, but qualified withdrawals will be free from federal, and in many cases, state taxes.
4. b. Deposits in banks covered by the Federal Deposit Insurance Corporation are protected up to $250,000 per depositor, per bank. This means that if a bank should fail, the federal government will protect depositors against losses in their accounts up to that limit. The FDIC does not protect against losses in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if those vehicles were purchased at an insured bank. It also does not protect items held in safe-deposit boxes or investments in Treasury bills.
5. d. To adequately pursue your long-term goals, it’s best to speak with a financial professional before choosing a strategy. He or she will take into consideration your goals, your risk tolerance, and your time horizon, among other factors, to put together a well-diversified strategy that’s appropriate for your needs.



Graph: The Best of Times, the Worst of Times, and 2013

May 2014 Newsletter

In 2013, the Standard & Poor’s 500 had its best year since 1997, while the Dow Jones Industrial Average set 52 new record closing highs and the Nasdaq hit a level it hadn’t seen in more than 13 years. Here’s how 2013’s price gains compare to each index’s best and worst years since 1926 by percentage gain as listed in the “Stock Trader’s Almanac 2014.” Note: All investing involves risk, including the possible loss of principal.




Graph: The S&P 500 Month by Month in 2013


May 2014 Newsletter-S&P 500 2013

Past performance is no guarantee of future results, but stocks had an extraordinary run in 2013.  The Standard & Poor’s 500 set 45 new all-time closing records during the year and by November had surpassed 1,800 for the first time ever. Despite some stumbles during the summer, by the end of 2013 the index had nearly tripled since its March 2009 financial-crisis low. Note: All investing involves risk, including the possible loss of principal.



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