While attending Graduate school at Texas Tech, I had to opportunity to learn from one of the top financial planners in the country, Deena Katz. Deena has been in the business for many years and is recognized as one of the best CERTIFIED FINANCIAL PLANNERâ„¢ Professionals. She was recently named one of Financial Planning Magazine’s “5 Most Influential People in the Planning Business”. She is also the author or co-author of nine books on financial planning.
I appreciate the time that Deena took out of her extremely busy schedule to answer our questions. Here is the list of questions that I asked her. These questions include some of my own as well as some from readers. Deena has some great insight in her answers and I hope you appreciate her input!
YMR: What drew you to financial planning and how does it enhance your life?
Deena: My mother was a minister and a social worker, but when my father died at 39, it became clear that she was unprepared for the financial burden. She taught me early on to be able to take care of myself, because there is a high likelihood that I would be taking care of myself at some point in my life. That led me to the planning profession. My first company was working with women in transition. It is extremely fulfilling to see people learning to take financial responsibility and accomplishing their goals. I’m passionate about it.
YMR: Why do you think many individuals are scared about the thought of using a financial planner? What can the industry do to fix this problem?
Deena: There have been some very bad incidents in past years (Madoff and Standford most recently) which have shaken the trust and confidence that people had in advisors. This is a two-sided problem. Many people do not have the education to recognize if something is not right, some are looking for investment opportunities that are just too good to be true. A little greed and a little vice make a big mess. I always tell people “Never let anyone care more about your money than you do.” On the other side of that, I believe people should work with CFPs, who are bound to standards of ethics that are quite rigorous. I also believe that advisors should act as fiduciaries (in the best interest of the client.) When looking for a planner, ask how they work, how they are paid and if they are a fiduciary. Then you can begin to develop trust.
YMR: How have you been calming down your clients over the past year? Did you have them well prepared for an event like this?
Deena: No one is really prepared for an event like this. It’s a 6th standard deviation event. But, if we are able to manage client expectations from the first minute they work with us, we have a better chance to keep them from jumping ship when things are rocky. As advisors, we can never promise market returns, we should be exploring the downside of investments with them. We should be able to “stress test” their plan, to demonstrate how bad things really have to get, before their plan is unworkable. We need to keep them informed of what is happening in the markets, in congress, and in the economy so we can give them “our take” on it and how it affects them personally.
YMR: Do you think this economic climate will finally get people to realize that debt is bad and retirement saving should be a priority?
Deena: No. I don’t think many folks really understand. I am hoping that congress will start to help us focus on financial literacy so that young children get this education to prepare them for life, rather than stumbling through it, making grave mistakes, then trying to “right” everything before they retire. I think people are paying more attention, but I am not sure they have been taught successfully yet.
YMR Reader: Do you think budgets are a sexy thing right now?
Deena: I have always felt that budgets are a four-letter word…but “sexy” is not the word I think of. The nature of many human beings is not to feel the constraints of budget, because you fight against them, the same way you fight against your parents when you are 15. I believe in “trade-off” spending. The first thing you need to know is how much does it cost you to live-basics, like rent, utilities, etc. Then you look at the variables-eating out vs. eating in, for example. Then you can say, “I’d like to buy a new car, so if I eat in and shave off some other expenses, I can us that money to buy the car.” With budgets you are managing money, but with trade off spending you are managing goals.
YMR Reader: The buy and hold strategy has been around for decades. Do you feel that same strategy applies to the Gen X and Y generation?
Deena: I do not believe that modern portfolio theory is dead. I further believe that you can’t make market returns unless you are in the market. Look what has happened in the last two weeks— If you missed one day, you missed a 6 ½ % run up. Right now, I have no reason to change my investment philosophy.
YMR: Speaking of generations, do you think the baby boomer generation is prepared for retirement? Why or why not?
Deena: Baby Boomers are not prepared, but they don’t really want to retire either. Further, if all of us did retire, we would not have a big enough work force to carry on. Boomers may not stay with their current jobs, but may work at something they love, for less money. They will postpone retirement because they have to, even though they will not admit that’s the reason.
YMR Reader: Asset allocation has been preached extensively after the dot.com bubble, yet even diversified balanced portfolios took a significant hit with the recent economic meltdown. How do you address that to those concerned?
Deena: See #6 above.
YMR Reader: Speaking of asset allocation, what do you recommend people do with their retirement accounts? I would like an answer for new hires, mid-range employees and close to retirement employees.
Deena: First, the younger you are, the more time you have to let your portfolio grow. I suggest a low-cost S&P 500 index. Leave it alone. As you continue to add money, eventually you should buy small cap and international-all index. Mid range employees, you may want to add some fixed income, probably around 20% max. As you get closer to retirement, you may have 60% equities, depending upon when you will need to start withdrawing from them. You want low-cost selections, because the fund expenses come right off the return.
YMR Reader: The economy has my wife feeling a bit insecure even though we’ve got a sizable emergency fund built up, and we have no debt. The question is, once we’ve completed our emergency fund, what path should we take? Should we start investing in the stock market like it’s on clearance, save in a high yield savings account, or should we be paying extra on our mortgage? Or a combination of those things?
Deena: Some leverage is good, so I would not start paying down the mortgage unless your interest rate is so high that you cannot beat it by investing your money elsewhere. If your mortgage interest is low, invest in the market, because it is on sale. I would suggest that you in invest index mutual funds because they are cheaper (less expenses). Try Vanguard’s S&P Index fund for starters.
YMR Reader: My wife and I are in the market to buy a new home. We’ve saved up a sizable amount and we are selling our current co-op to use mostly as a down payment on a new place. Our credit is also impeccable. Still…how can we tell if we can truly afford it? Is there a metric/guide we can go by?
Deena: Bankrate.com has a calculator that can help you get your arms around that. I don’t like “rules of thumb” because they are made for average situations and I believe you deserve solutions that are unique to you.
YMR: Now a fun question! How are you liking semi-retirement in Texas?
I am not semi-retired! I am working 24/7, but loving it. I love Lubbock, it’s just the right size community for me. I love the school, my fellow faculty and most of the students. I can’t imagine doing anything else. In fact, we’ve opened up a branch office of Evensky & Katz here in Lubbock and we are in for the long haul.
Many thanks to Deena for allowing me to interview her!