Interview with Spencer Sherman, Financial Adviser and Author of The Cure for Money Madness

Recently I have had the privilege of interviewing Spencer Sherman, one of the top-rated wealth manager and financial adviser in the country according to Worth, and author of the recent book ‘The Cure for Money Madness’. Spencer is CEO of Abacus Wealth Partners, a fee-only independent wealth management firm. He firmly believes that our childhood experiences and perceptions of money prevent us from making rational money decisions and the first step to a lifetime of financial prosperity and improved money relationships is to cure our money madness. To read more about Spencer Sherman and his book please visit The Cure for Money Madness website. Independent reviews of the book can be viewed at Arohan’s Investing Life or at Yielding Wealth.

Spencer was kind enough to set aside some time from his busy schedule to answer a few questions that I had for him and I really appreciate his generosity. The interview below is presented verbatim without any editing (except for formatting). Spencer’s responses are under blockquotes.

PD: Congratulations on your recent book “The Cure for Money Madness”! It really does provides for a way for all of us to conquer our inner money madness and approach financial planning in a rational manner and simplify our financial lives and relationships. Do you have any special words of advice for many of us who are going through the current economic crisis with a fear of losing their jobs and houses? How should they plan for it?

Complete an intentional spending statement with ranges for each expense category. Pause before making any financial decision. Pretend you are advising someone else: what would you tell him/her to do? Use cash only (it’s impossible to overspend!) Complete an Actual Net Worth statement Give money away. You can’t be generous and fearful at the same time.

PD: What is your take on the current economic crisis? Do you think this represents a critical point in the US economy where we may no longer be able to achieve 10-11% long term appreciation in the US stock market?

No. I feel that this is the perfect time to buy equities. The valuations are highly compelling. History tells us that stock prices return at even higher rates than 10-11% during a rebound. The best returns come at the end of a stock market declines.

PD: No where in the book do you discuss the need for an emergency fund. Do you think a separate emergency fund is an essential part of financial planning? How would you recommend your readers to structure it? Should it be separate from one’s investment portfolio?

My emergency fund is part of the bond asset class percentage. The book shows you how to calculate your bond percentage. I recommend safe and short-term bonds. You can then sell the short-term bonds as you need cash for living expenses.

PD: The Madoff and Allen Stanford scandals have snared even the most sophisticated investors. How would you suggest a common investor ensure that their accounts are protected and not invested in dubious instruments?

Don’t invest in an unregulated structure like a hedge fund. This gives even the most ethical person license to do very risky and concentrated investments. Find a structured and transparent investment methodology that doesn’t allow a manager to do risky or emotionally-driven investing. If you invest in the Rainbow Portfolio, for example, you’ll avoid a dangerous, secretive, and exotic strategy. The best strategy is one in which the financial advisor has no discretion in terms of market timing or security selection. A study just released from MIT shows that for the 20 year period ending 1/31/09, only 3% of the actively managed funds beat a simple index fund.

PD: You recommend an investment program based on your Rainbow Portfolio.This portfolio is still overweight in US assets. Is there a specific reason why this may be the case? Do you feel that going forward more international allocation may be called for?

I’ve increased my international allocation to 40%. I will continue to adjust this as the world market valuations of different countries shift. I do overweight the US because my clients live here.

PD: For a business owner who depends on his business for income, should the business be considered a part of his or her investment portfolio and therefore considered in the asset allocation? For most, this would make the asset allocation very lop sided

We should be constructing an investment portfolio to hedge our risk, not increase it. If you are in the technology business, for example, don’t invest in technology.

PD: Even after we follow the advice in the book and simplify our financial lives considerably, there are still complications introduced by the complicated and ever changing tax and estate planning laws. How do we find a balance?

What I have found is that over a lifetime, people who keep things simple will make the most money. It’s that simple. And, yes, find an unbiased fee-only financial advisor and spend an hour with this person every 6 months. If you can’t afford or find such a person, ask a friend with common sense who has no agenda with you to be your money mentor; you could also be his or her money mentor. We are so much more objective and wise advising others than advising ourselves. For those who have a net worth greater than $5 million, an ongoing sophisticated fee-only financial advisor is essential.

PD: What are your thoughts on kids inheriting wealth?

Talk to them. Prepare them for it. The problems I have seen are with those kids who are unprepared for the responsibility. Find out how your kids feel about inheriting the money and what they plan to do with it. It might surprise you to learn that many might not even want the inheritance.

PD: I was interested in reading your thoughts on smart philanthropy where you recommend people invest in groups that teach people how to fish rather than hand out fish to the people and in the process try to generate a return for investors. However, the tax policy in this country penalizes by taxing those returns and encourages giving that may not help the recipient better his/her condition by giving tax breaks to the donors. What is your opinion on this apparent disconnect between what is best for the society versus the government policies?

I disagree. One has the opportunity to reinvest that money in another philinvestment or give it to a nonprofit. You do get a deduction if you lose your money in an investment. Only if you make money, do you get taxed. Conversely, you don’t get any money back from a non-profit donation. Also, today’s lower capital gains tax rates encourage entrepreneurial investing that will create products or services designed to solve the world’s problems.

PD: Thank You Spencer for your time and advice!

Photo Credit: The Cure for Money Madness and used with permission