Eric Monday, UK’s Executive VP for Finance, is one of the brightest people I have ever known but he had a brief lapse in judgment when he recently asked me to speak to his class titled, “Personal Investing and Financial Planning.” This is a class for non-Business majors who are interested in learning about financial planning, decision making and investing activities. They discuss and learn about stocks and bonds, 401(k)’s, IRA’s, insurance and many topics most of the population never learns or even considers. Dr. Monday asked me to speak to the class about my career path, particularly my experience as a client of a financial planner, then becoming one. The students were bright and engaged and here are a few of the topics we discussed and the students’ thoughts:
• How to buy a car:
Their curriculum covers the basics and I described how, 25 years ago, the buyer didn’t know the cost the dealer paid for the car so could only negotiate from the sticker price downward. Now, not only can the buyer learn the invoice price of the dealer but also what other people in your area paid for the same car recently. We also discussed the merits and pitfalls of leasing a car such as penalties for excess mileage, the advantages/disadvantages of changing cars every three years or so and the difficulty in negotiating a lease because most dealers start with the monthly lease price, rather than the cost of the car. Question (paraphrased): Will we really be purchasing cars in 10 years or will everyone just use a self-driving vehicle through a ride-sharing app? Uh, wow, hadn’t thought of that – next question!
• What should we expect average annual investment returns to be?
I was pleasantly surprised that the initial response from the class was 7-10% annually. While many people, particularly young people, often believe the market will generate returns much higher than that, this range is actually quite reasonable and accurate. Good job.
• What do you think when you hear the title, financial planner?
There were a variety of responses to this question but the answer I was expecting finally emerged – someone who sells products for a commission. Well, here was the softball I was itching to launch out of the park. While the financial services business has some bad actors – recent media stories even describe TIAA of pushing inappropriate products on their customers – what a person should search for is fee-only financial planner who acts as a fiduciary. Simply put, fee-only means the planner’s only compensation comes from you, the client. The planner receives no backdoor commissions from another entity to sell you products. A fiduciary, by law, dispenses advice solely in the client’s best interest. Period.
• I only have about $1,000 to start investing, should I invest in riskier assets like penny stocks?
This was a great opportunity for us to discuss the concept of investing and what it really is. First, penny stocks are worth pennies for a reason – the companies aren’t worth more than that. Remember, when an investor buys a share of stock, she is buying a piece of that company. So, do you think that company will earn money over the next few years? Remember, investing isn’t the same thing as making a bet at Keeneland. We’re not gambling, we’re purchasing something we believe has value and will return that value to us. So, my advice? Invest that $1,000 into a low-cost, small-cap mutual fund, regularly add to it – and look forward to the returns in 10 years or more.
• What is your reaction to the wild swings of the stock market over the last 10 days?
Crickets…..A good response for all of us.