All posts by Financial Independence Hub

Timeless Financial Tips #6: Aligning your Investments with your Time Horizon

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By Steve Lowrie, CFA 

Special to Financial Independence Hub

I’ve spent my entire career railing against the dangers of market-timing — i.e., dodging in and out of markets based on current conditions. But there is a time when “timing” of a different sort matters. I’m talking about your investment time horizons.

Today, let’s look at how to use your personal time horizons to successfully separate today’s spending from tomorrow’s future wealth.

Spending and Investing over Time

One of the reasons we advocate for holding a diversified investment portfolio is because your investment horizons are diverse as well:

  1. For immediate spending, you’ll need cash reserves, which almost don’t count as investments.
  2. To preserve what you’ve already got and smooth out the ride, we turn to medium-term holdings such as bonds.
  3. For your long-term spending plans, nothing beats the overall staying power of owning a slice of the corporate pie, typically in the form of stocks, stock funds, or similar equity stakes in markets around the world.

On that last point, global equity markets are relatively dependable in one sense: by delivering on the success of collective human enterprise, they’ve delivered strong, inflation-busting returns in the long run. But these same markets are also quite chaotic in the near-term, with big, unpredictable price swings along the way. This means not all your dollars belong in this arena to begin with: only the ones you’re prepared to invest in for a good, long while. In other words:

Your cash reserves are for spending sooner than later. Your long-term investments are there for your future self, rather than as an ATM-like source for immediate spending.

Market-Timing vs. Financial Planning

How do you determine how long is “long-term” for your investments? Unfortunately, many investors use market-timing instead of personalized financial planning to decide when it’s time to move their money in and out of various positions. They pile into the action when markets surge and flee as they plummet. This is a timeless timing tragedy that foils the ability to preserve, if not grow, wealth over time.

Instead, use your own goals and investment timeframes to decide how much of your wealth to invest in pursuit of higher expected returns, as well as how much to shelter against the uncertainty.

  • For upcoming spending needs, your money may be best kept in cash or similar humdrum holdings. That way, it’s there when you need it. The catch is, cash and cash-like reserves aren’t expected to keep pace with inflation over time, which means your spending power gradually shrinks. So …
  • For spending that’s still years away, you’ll want to own positions that are expected to generate new wealth, rather than just maintain a status quo. That’s where the wonder of global enterprise comes in — aka, stocks. The catch here is, you must commit to keeping your future money patiently invested and ride out the downturns along the way.

Estimating your Time Horizon

Even if you’re committed to financial planning, it’s surprisingly common to underestimate how much time you’ve actually got to invest. For a couple retiring at age 65, there is a 50% chance one of you will live past age 90, which means your retirement timeline could be 25–30 years, or more. Extend it even further if you’d also like to leave a substantial financial legacy. Continue Reading…

Benefits and Drawbacks of Payroll Software

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By Daniel Bailey

(For Financial Independence Hub)

Payroll software eliminates the need to calculate payroll for your team manually. It also helps you track tax laws and deductions automatically. Look for a system with a simple interface and clear, contextual feature hints for non-technical staff. It should also provide secure integrations with HR and accounting platforms to bring these three departments under one roof.

Time-Saving

Payroll software can save your company a lot of time and money. For example, it eliminates the need to print paper timesheets and payslips for every employee. It reduces the amount of storage needed in your office and allows you to customize the payroll data for each employee. In addition, payroll software can also automatically send payments to employees, government agencies, and benefits providers. It can also file payroll taxes and handle end-of-year tax forms for employees. It will reduce your accounting department’s time running payroll and allow them to focus on more important tasks.

Additionally, payroll systems can store all your data in a single digital system, making it easy to access and analyze at the end of each pay period. You can use this information to plan future staff costs and budgets more accurately. Additionally, these systems can help you improve project returns by analyzing the number of hours your employees work. However, it is important to remember the costs associated with implementing payroll software. These costs can be recurring or one-time and include the cost of the software itself, plus ongoing maintenance. Some vendors offer a monthly subscription for a fixed number of users, while others charge a per-employee fee or a one-time purchase price.

Security

When a company chooses the right payroll management software, it’s crucial to consider security. Ensure that the solution offers data encryption and other protective features. It is especially important if you’re dealing with sensitive employee information. It will protect the organization’s employees from hackers and ensure no one can access private information that shouldn’t be shared. A decent payroll system should also provide safe connectors so payroll personnel and employees may use the platform from any location and device. It makes it easier to manage the different teams involved in payroll processing. For example, it should have a feature that allows employees to change their bank account details and other personal information without contacting HR. Continue Reading…

How to Balance Saving for a Home and Starting a Family

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Navigating the financial challenges of saving for a home while starting a family can be daunting.

To help you find a balance, we’ve gathered ten insightful tips from CEOs, business owners, and financial experts.

From creating a realistic family budget to exercising patience and smart spending, let’s explore these strategies to help you achieve your financial goals.

 

 

  • Create a Realistic Family Budget
  • Leverage First-Time Homebuyer Programs
  • Reevaluate Spending Habits
  • Establish Separate Accounts for Goals
  • Prioritize Consistent Savings and Budgeting
  • Consider the “House Hacking” Strategy
  • Avoid Lifestyle Creep, Automate Savings
  • Trim Expenses, Seek Additional Income
  • Explore Alternative Homeownership Strategies
  • Exercise Patience and Smart Spending

Create a Realistic Family Budget

My top tip for balancing the financial goal of saving for a home while starting a family is to create a realistic budget. Take the time to review your current budget and account for earnings, current expenses, and estimates for future expenses. Kids are expensive: they can cost $20k or more in the first year alone. 

Your priority is to keep your kid safe, fed, and loved. Kids don’t care if you’re a homeowner. Once you have a good sense of what you’re doing with your money each month, put aside a reasonable amount each month to save for your home. 

If you’re a few months out from buying, consider investing the funds in something with a fixed interest rate, such as a CD. It’s safer than investing in the stock market and has a higher return than most savings accounts. — Jeremy Grant, Founder and CEO, Knocked-up Money

Leverage First-Time Homebuyer Programs

First-time homebuyer programs are designed to make homeownership more affordable and accessible. These programs provide benefits like down payment assistance, lower interest rates, or reduced closing costs. 

Research and identify the programs available in your area, offered by government entities or local financial institutions. Eligibility criteria may include income limits or credit score requirements, but many programs have flexible guidelines. If it all seems overwhelming, work with a knowledgeable mortgage lender or loan officer to navigate these programs effectively. — Mike Roberts, Co-founder, City Creek Mortgage

Reevaluate Spending Habits

Sit down and have a priorities conversation. Are you spending a lot of money in areas that don’t actually make you happy, just because you’ve always had the income to afford it? Just because you can, doesn’t mean you should.

Of the three to four things you spend lavishly on, what if you kept only one of those things — whichever makes you very happy to spend lavishly on it — and you downgraded the rest?

Every family can find at least one area of money being spent every month that doesn’t nearly matter that much to them but has become a habit. Which ones bring you true joy, and which ones have just become “the way we do it”? — Alex Boyd, Owner, Mindfully Investing

Establish Separate Accounts for Goals

The one tip I recommend for balancing the financial goals of saving for a home while starting a family is to have different accounts for each goal. I started doing this after reading The Richest Man in Babylon.

I started by saving 10% of my income, then divided everything else to pay for household bills and debts. After a few months, I increased this amount to 12%, then 15%, until I hit 35%.  Continue Reading…

5 ways Scammers are Targeting your Bank Account

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By Devin Partida

Special to Financial Independence Hub

Scammers use various tactics to target victims’ financial data today, ranging from malware to fake giveaways.

People can protect themselves and their data online by understanding the risks at play.

Here are the top five bank account scams everyone should know about:

1. Phishing Emails and Texts

Phishing is one of the most common tactics scammers use to target victims’ bank accounts. Reported phishing attacks rose 61% in 2021, surpassing 1 million incidents worldwide. These attacks use deceptive messages to trick victims into giving away personal information, frequently including banking data.

Phishing messages most often come in the form of emails or texts. Scammers write the messages so they appear to be coming from a bank or credit card company. Usually, there is some urgent emergency in the phishing message that demands an immediate response from the victim. For instance, a phishing text might warn a victim that money was removed from their account.

This tactic aims to scare victims into panicking and responding to the message right away. Despite the urgency of messages like this, people must always contact their bank or credit card company directly to ask about the message before responding. This might take some time, but it ensures that phishing attacks fail to harvest sensitive banking information.

2. Online Shopping Scams

Online shopping scams are becoming more popular today, and they can be tricky to spot. These scams involve online stores collecting users’ bank account information in the background. They may or may not fulfill orders and can sell any kind of products. However, it is usually a sign that a store is a scam if an order is not fulfilled.

Online shopping scams often feature very cheap products. If something looks like a good deal, unsuspecting victims are more likely to fall for the scam. The store website may function smoothly and look like any other shopping website. A lack of customer service is a key giveaway that a store is probably a scam.

3. Fake Fraud Alerts

Fake fraud alerts are a specific type of phishing scam that leverages victims’ preexisting fear of data and identity theft. These dangerous fake messages are disguised as fraud alerts and may even specify the victim’s bank or credit card company.

A great example is the “account takeover” scam, which takes over a victim’s account by getting them to respond to a fraudulent account takeover alert. Like a self-fulfilling prophecy, once the victim responds to the fake message, they give the scammer the data they need to take over the victim’s account.

Luckily, there are a few ways to spot this kind of scam. If the message asks the victim to share personal information, it is most likely fraudulent. No bank or credit card company will request personal information via email, text or unsolicited calls.

Victims of this type of scam should check their bank or credit card activity directly, as well. Checking will usually reveal that no one withdrew money or accessed their account without permission.

4. Award, Prize, Giveaway and Lottery Scams

One type of bank account scam on the rise is fake awards, prizes, giveaways and lottery announcements. These scams often appear as emails and text messages but can also pop up as ads online. For example, YouTuber MrBeast has warned fans of a widespread scam impersonating him and claiming to give away free money.

This type of scam will usually ask victims to pay a “shipping” or “processing” fee or request bank details for transferring the prize money. After the victim gives this information or makes a payment, they never hear from the scammer again and don’t get any prize or money. Continue Reading…

Violating my Principles

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By Noah Solomon

Special to Financial Independence Hub

As I have written in the past, predicting stock market returns is largely an exercise in futility. Over the past several decades, the forecasted returns for the S&P 500 Index provided by Wall Street analysts have been slightly less accurate than someone who would have merely predicted each year that stocks would deliver their long-term average return. Importantly, not one major Wall St. strategist predicted either the tech wreck of the early 2000s or the global financial crisis of 2008-9.

To be clear, I am still adamant that consistently accurate forecasts are beyond the reach of mere mortals (or even quant geeks like me). Any investor who could achieve this feat would reap returns that put Buffett’s to shame. However, there may be some hope on the horizon. Good is not the enemy of great. The objective of any investment process should not be perfection, but rather to make its adherents better off than they would be in its absence.

To this end, I have decided to sin a little and model some of the most commonly cited macroeconomic variables that influence stocks market returns, with the objective of (1) ascertaining whether and how these factors have historically influenced markets and (2) what these variables are signaling for the future.

Don’t Fight the Fed

It is often stated that one shouldn’t fight the Fed. Historically, there has been an inverse relationship between changes in Fed policy and stock prices. All else being equal, increases in the Fed Funds rate have been a headwind for stocks while rate cuts have provided a tailwind.

Prior 1-Year Change in Fed Funds Rate vs. 1-Year Real Returns: S&P 500 Index (1960-Present)

As the preceding table illustrates, the difference in one-year real returns following instances when the Fed has been pursuing tighter monetary conditions has on average been 6.6%, as compared to 10.6% following periods when it has been in stimulus mode.

As of the end of June, the Fed increased its policy rate by 3.5% over the past 12 months. From a historical perspective, this change in stance lies within the top 5% of one-year policy moves since 1960 and is the single largest 12-month increase since the early 1980s. Given the historical tendency for stocks to struggle following such developments, this dramatic increase in rates is cause for concern.

Valuation, Voting, and Weighing

Over the past several decades, valuations have exhibited an inverse relationship to future equity market returns. Below-average P/E ratios have generally preceded above-average returns for stocks, while lofty P/E ratios have on average foreshadowed either below-average returns or outright losses.

Trailing P/E Ratio vs. 1-Year Real Returns: S&P 500 Index (1960-Present)

Since 1960, when P/E ratios stood in the bottom quintile of their historical range, the S&P 500 produced an average real return over the next 12 months of 9.4% compared with only 6.9% when valuations stood in the highest quintile. Sky high multiples have proven particularly poisonous, as indicated by the crushing bear market which followed the record valuations at the beginning of 2000.

To be clear, valuations have little bearing on the performance of stocks over the short term. However, their ability to predict returns over longer holding periods has been more pronounced. As Buffett stated, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Although valuations are currently nowhere near the nosebleed levels of the tech bubble of the late 1990s, they are nonetheless elevated. With a trailing P/E ratio hovering north of 21, the S&P 500’s valuation currently stands in the 84th percentile of all observations going back to 1960 and is at the very least not a ringing endorsement for strong equity market returns.

From TINA To TARA To TIAGA

At any given point in time, stock market valuations must be considered in the context of the yields offered by high quality money market instruments and bonds. The difference between the earnings yield on stocks and interest rates has historically been positively correlated to future market returns.

Earnings Yields Minus Fed Funds Rate vs. 1-Year Real Returns: S&P 500 Index (1960-Present)

When the difference between earnings yields and the Fed Funds rate has stood in the top quintile of its historical range, the real return of the S&P 500 Index over the ensuing 12 months has averaged 8.7% versus only 2.2% following times when it has stood in the bottom quintile.

Until the Fed began to aggressively raise rates in early 2022, TINA (there is no alternative) was an oft-cited reason for overweighting stocks within portfolios. Yields on bank deposits and high-quality bonds yielded little to nothing, thereby spurring investors to reach out the risk curve and increase their equity allocations.

As the Fed continued to raise rates, increasingly higher yields made money markets and bonds look at least somewhat attractive for the first time in years, thereby causing market psychology to shift from TINA to TARA (there are reasonable alternatives). Continue Reading…