Insurance can seem like a nasty word, and I’ve found that most of us would rather not talk about it. However, it’s all about protecting and preserving your assets. Our job is to help our clients grow their wealth so they can achieve all that is important to them. However, we’d be foolish if we neglected to also help them mitigate risks that could eat away at all their hard work.
When it comes to car insurance, I’ve found a few common mistakes.
Too little insurance
Many states require all drivers to maintain a minimum level of coverage in order to drive legally. Some states even require a minimum level of coverage for medical or personal injury. This is just a minimum standard and is often not even enough to cover the average cost of repair from an accident. In every accident, the human body is the weakest link in the chain and the one at greatest risk of injury. Cars are a fixed cost to repair – you know how much a BMW will cost to repair or replace, whereas we don’t know how much it will cost to save or repair a human body.
Rather than getting the minimum, consider carrying coverage based upon the car you drive, and more importantly, the cost of the other cars on the road.
Too much insurance
Every once in a while, I run across a situation where someone has purchased higher limits of coverage. Usually this person is terrified of the risks that exist in the world and will pay absolutely anything to protect themselves. As a result, they often have excess liability or umbrella insurance coverage, which is usually a very wise investment.
This additional insurance is fantastic, and something that I suggest for almost everyone. However, they might be paying more for auto insurance coverage that they just don’t need. If your auto insurance liability coverage is $500,000 and your umbrella coverage begins at $300,000, you are paying for $200,000 of unnecessary coverage. You could reduce your auto coverage to $300,000 and save on your premiums.
This is generally a good idea. However, if your umbrella coverage doesn’t include an additional layer of underinsured (or uninsured) motorist coverage, you might want to keep the higher coverage on your auto policy.
Generally speaking, the higher the deductible, the lower your premiums will be. The deductible is the amount you are responsible for before the insurance company provides protection.
I see situations where the deductibles are far too low and one could easily save 20-40% on their premiums by simply increasing the deductible. If you are able to stay accident free, you’ll often save enough on the premiums over the next few years to be able to cover this increased deductible. This isn’t always the case, though. I had a client looking to increase their deductible from $1,000 to $2,000 and we were both shocked that the premium savings was less than $100 annually.
If you drive an older car, it doesn’t make sense to have a low deductible for collision or comprehensive coverage on a vehicle that is relatively inexpensive to replace. In fact, if your car is older, consider getting rid of collision and comprehensive coverage altogether. If you do this, it’s still important to carry the proper amount of liability protection.
Not combining policies with one company
If you have your auto policy and homeowners policy with the same carrier, you’ll tend to save on your premiums and have better coordinated coverage with your umbrella policy, if you have one.
Failing to review your coverage
It’s very easy to get your insurance in place and then forget about it for many years. There are a few problems with the set it and forget it approach as your lifestyle and potential risks may change over time. It’s always good to have a history with an insurance company. However, you should periodically review your coverage to make sure that it fits your needs today.
Solely focusing on the cost
Insurance is one area where focusing solely on the cost could get you in a lot of trouble and financial pain. I find that many of us don’t want to be educated on the need for various types of insurance coverage, and often view this education as a sales pitch. You may find the lowest absolute cost for any given coverage, but it might pale in comparison with what a competitor offers for just a few dollars more. The devil is in the details, and I suggest looking at the details of the coverage so that you know exactly what you are getting for your money. Also, rather than focusing solely on the cost, you should work with a professional who will take the time to evaluate your situation and help you understand your insurance needs.
I am often asked if I know of any good books on investing for those just starting out. Many times this is for the children or grandchildren of my clients. While I do know of many such books, I find a few challenges. Investing books can be somewhat dry and boring, especially if you are not all that interested in the subject matter. While I think investing is definitely important, and investing well can make a huge impact, I also find that learning about investing without the basics of handling your financial affairs to be somewhat like putting the cart before the horse. By not paying attention to some of the basics everything can be destroyed in the blink of an eye. If we do everything correctly with basic financial management and planning, investing well becomes the icing on the cake.
A big turn-off to reading almost any book about money is the snooze factor. Many are about as entertaining as watching paint dry. The Wealthy Barber by David Chilton, however, takes a novel approach, providing some personal finance education in a narrative/story form.
It’s the story of three young adults who realize they don’t know anything about how to create a long-term financial plan for their future. They turn to a parent for help who points them to an unlikely expert: The local barber. This barber has managed to turn a low-wage job into a comfortable lifestyle with millions of dollars in the bank. Their monthly meetings include plenty of humor and enough character development to keep it interesting. The barber imparts such wisdom as the value of saving, wills, life insurance, retirement, housing, investing and taxes. The secrets imparted are simple, easy to follow, and illustrate that you don’t have to have high paying job to live the good life.
In my opinion, this book imparts valuable wisdom that is not only easy to read, it is also easy to comprehend and retain. It’s one of the first books I recommend anyone read on financial planning.
In a recent article, Fortune magazine named our wonderful city as one of 4 great places to retire. They identified four archetypes of next-generation retirees and found a place for each of them a college town for the academically minded, a city for the urban-inclined, a mountain town for lovers of the outdoors, and an overseas destination for explorers.
Personally I was quite surprised to see Seattle top anyone’s list. We all love living here and enjoy the great beauties that surround us, however all you hear from everyone is that it rains a lot and the skies are always grey. Journalists will often highlight the abnormally high occurrence of those diagnosed with Seasonal Affective Disorder (SAD), which refers to episodes of depression that occur every year during the fall or winter months. However, in this article Seattle was highlighted for the urbanite based on the city being a mecca for the arts with a small-town feel despite the size, and top-rated health care facilities.
It was not that long ago when the equity markets were down over 50%, buy-and-hold investing had been declared dead, and many investors had little faith that the markets would recover during their lifetime. Two years later the equity markets have risen significantly. Many investors may not understand why as the recovery has occurred during a period of soaring deficits, major bank failures, increased tensions in the Middle East, rising prices for oil and gold, and uncertainty over the financial stability of the European Union.
This article by David Callaway offers lessons that many investors have learned during this most recent downturn: The market has always recovered without the ability to see nor predict the turning point until after the fact. Buy-and-hold investment strategies are not dead, and investors who stayed the course through thick and thin did quite well. Diversification works, and diversified portfolios have helped to capture the best of market movements. Quite possibly the most important lesson we can all learn is that as the daily noise of the news grows louder and louder, often times the best thing we can do is tune it out.
I currently have allocated my retirement funds to your Vanguard buy and hold strategy as listed on your website. I have half of the allocation in DFA Funds as I noticed that some of the Vanguard Funds have performed better over the 5 year period as compared to the DFA ones so that is why I have a combination of the 2 fund families making up the entire suggested investment plan. I do pay a management fee for the whole portfolio though as all the assets are under the advisors care and maintenance. In your opinion is this a winning strategy to invest in the best performing asset classes from each fund family?
This is a very good question, one which in one way or another is on the minds of many investors these days.
I think the core question you are asking is something like this: Once I have figured out the asset classes I want, shouldn’t I use the funds in those asset classes that have performed best over the past five years?
You are implying two other questions:
- Which is better, Vanguard or DFA?
- Why has DFA underperformed Vanguard in several asset classes over the past few years?