Family Investment Center
"I built a lawn mowing empire using a rented Lawn Boy. Okay, it was 4-5 neighborhood lawns, but they seemed like an empire each hot and humid Missouri Summer. And, yes, my father charged me rent to use his lawnmower. Those pint-sized business lessons still drive me 50 years later.
In 1998, I founded Family Investment Center. It’s a full-service, commission-free investment advisory firm with offices in St. Joseph, Mo. and Lenexa, KS., Family Investment Center serves clients in the Kansas City area and across 13 states.
Before that, I learned how bank trust companies work from the inside … and I feel strongly that a commission-free firm offers a better way for most people to receive independent, objective advice at reasonable rates, with a high level of personalized service.
My love of reading, writing, and explaining comes from my school teacher mother. These are the real advisory skills that set me apart. Investing and finance can be complicated but explaining things without jargon is my strength. You need some financial help? I’ll help figure it out and move forward."
Dan is quoted extensively about investing. He’s written for or been quoted in the Wall Street Journal, New York Times, Chicago Tribune, Kiplinger’s, U.S. News & World Report and dozens of other newspapers, magazines, and media outlets.
Dan has served in numerous leadership positions for civic and professional boards including the Missouri Western State University Board of Governors and as treasurer of the St. Joseph Area Chamber of Commerce. He was Chairman of the Friends of the Free Clinic, a support group for the Social Welfare Board in St. Joseph.
Dan has been president of the Missouri Western State University Alumni Association and was honored in 2003 with the Missouri Western State College Distinguished Alumni Service Award.
MS, Personal Finance, KSU
BS, Marketing, MWSU
Assets Under Management:
Putting bonds or bond funds in tax-free accounts is a very common suggestion. But I think it is kind of dumb. Or, at the very least, it places focus on the wrong thing.
It is always a good idea to consider taxes. But my experience says that many people place too much emphasis on taxes, to their detriment. Municipal bonds are a great example of this … many people who buy them are in lower tax brackets where the interest rate spread doesn’t really work. But they are so strongly opposed to paying tax that they buy them anyway! (Of course, the broker selling them couldn’t be happier.) They’d be better off after paying taxes on taxable interest.
So, let’s assume bonds are paying 3% a year. It’s right that you’d pay annual income taxes on that interest in a brokerage account. Truthfully, though, that’s not a lot of tax because it’s not a lot of income. Today’s rates are lower than usual, but a diversified investment portfolio will nearly always beat them on a long-term basis.
Put them in a 401(k) or IRA and you’ll save that bit of tax every year. But you’ve also limited the tax-deferred compound growth of your 401(k) or IRA to just 3% a year! The opportunity cost of that choice is huge. You’ve given up compounding (tax-deferred) at a much higher rate for decades. Compare the compound growth of $50,000 for 20 years at 3% to 20 years at 6%. The difference is over $30,000 in growth. And 6% estimated returns could be low for a diversified portfolio.
It is also true that the extra $30,000 will be subject to taxes when withdrawn, but those can be mitigated though good decisions when that time comes. In fact, 401(k) and IRA money stays in tax-deferred status for decades and decades.
The point of this entire discussion is to shift your thinking from tax savings to opportunity cost. Both should be considered in reaching solid investment decisions.
That’s a tough question to answer, but I’ll offer a few things to think about:
First and foremost, how do you want to live? A home, travels, leisure time and hobbies all take money. Travel and hobbies have ongoing costs, too, so they need be considered as a monthly or annual expense. A house is a one-time expense, but most people get a mortgage and pay it monthly. If you’ll have monthly payments (or rent for that matter), you’ll need income from some sources to pay them.
Almost everyone has other ongoing expenses, too. Food, utilities, health insurance or care, entertainment and just plain pocket money. You undoubtedly have others, too; I just don’t know what they are.
Now, here’s the key. Most advisors refer to the “4% Rule” as a starting place to answer your question. Simply, most financial models show that you can withdraw about 4% of your accumulated savings each year and have a good likelihood that you won’t use up all your money. It’s not guaranteed, but it’s a solid place to start.
So, if you need $40,000 each year to make house payments, pay utilities, food, health insurance, and entertainment, it will take $1 million in savings. If you’ll need $80,000, $2 million. If you need $200,000, then you should plan on accumulating $5 million.
Now these guidelines are simplistic, so you need to adjust them for your circumstances. At 45 years old, there’s a chance you’ll be drawing from this investment pool for 40+ years. You’ll need to invest to thrive across various market cycles and protect the purchasing power of tomorrow’s money.
The last thing to think about is flexibility. Over a 40+ year time horizon, almost anything could happen. It’s probable that you’ll encounter both good and bad years, plus a health crisis or two. A $40,000 car could easily cost $100,000 or more by 2058. I’d want a sizable cushion in my estimates to meet changes as needed. I’d steer clear of any investment ideas that feature penalties, surrender charges, or illiquid investments.
I hope that helps.
Beta is a measure of volatility. It is essentially a comparison of one investment to a standardized index. If the number is greater than 1, then the investment was more volatile than the index. If it is less than 1, then it has been less volatile than the index. If it was 1.10, then it was 10% more volatile than the index, at .91 is was (roughly) 10% less than the index. It's important to know several things: what index is being used? If you compare the movements of a single stock against the S&P500 index, the Beta math might be correct, but how good is a comparison of one stock to 500 stocks? Similarly, it wouldn't make much sense to compare a bond mutual fund volatility to an S&P500 index ... they are vastly different investments. Make sure you understand the index used and calculate a different Beta using a different index if that makes more sense. Another issue is the time frame. A "three year monthly" Beta compares just three years of data. That same calculation could be done with five years or ten years, and might be more or less accurate for understanding. You didn't ask this, but volatility is the usual measure of risk in portfolio science. If an investment is more risky (more volatile), investors expect higher returns. Less risky investments generally provide lower returns. Beta is also used to measure portfolio returns with a general rule that a 10 percent higher Beta (volatility) should yield a 10 percent higher return ... Alpha is the statistic (+ or -) that compares actual returns using Beta.
It sounds like you could benefit from professional help. My recommendation would be to visit the National Association of Personal Financial Advisors (“NAPFA”) website and search for a member in your area. If there are several, you can screen them for credentials, expertise, and fees, and visit them via phone or in person to choose.
Obviously, there are hundreds of brokers and brokerage firms to choose from, but NAPFA professionals offer two important benefits. First, they are “fee-only” meaning they don’t earn commissions on products they sell. And, secondly, they are fiduciaries. They have a legal obligation to put their client first when making decisions.
Commissions are a traditional approach to selling investments, but they narrow the field of options (some investments pay commissions to salespeople, others don’t). The broker working in this system is only paid from the sub-category offering commissions. And the commission itself is an extra layer of fees for the buyer.
Some people dislike the NAPFA business model because it requires an ongoing fee, usually a percentage of the portfolio amount. My experience – and I’ve been managing investments for several decades – is that this ongoing fee is often lower than the combination of fees paid elsewhere. More importantly, that ongoing fee is for ongoing service; these are mostly discretionary portfolios professionally devised, implemented, monitored, and adjusted for your benefit.
I’ve been a NAPFA member for years and I serve on one of the NAPFA Regional Boards. Not everyone needs this level of service, but it sounds like your schedule and circumstance favor it. I’d contact a NAPFA advisor in your area as a starting place.
Discount cash flow models are important, but they aren’t the only factor in stock price (thus market cap). Many, maybe most, people wouldn’t read or understand a discounted model if you handed it to them.
Of course, discount models are based on estimated future cash flows, so those estimates can be wrong. They are produced by some analyst, not the company. Plus, the cost of capital and growth rates are – at best – educated guesses. A public company’s revenues should grow from year-to-year but there is no assurance of that. But, over time, rising cash flows and revenues do bring rising stock prices.
People buy stocks based on anticipated growth and opportunity, too, and those are rarely shown in the numbers. And the perceived opportunity can be very distorted. Stock prices and market cap reflect the current value set by thousands or millions of buyers and sellers. Each does their own analysis. Emotion plays a bigger role than you might expect.