Should You Give A Loan To A Family Member?

On this week’s show, Karl discusses whether or not someone should give a family member a loan.  Also on this show, there are many reasons investors aren’t successful with their finances and their investments.  Karl gives a few reasons.

Hey, hey, good morning everybody. Welcome to The Eggerss Report. It’s you’re investing playbook. Thanks for joining me, appreciate it. Grab yourself a cup of coffee. I have mine right here. Hold on, listen. Yeah, hot cup of coffee. All right, grab yours and let’s talk finance. Let’s talk about your Money, your portfolio, your financial life.

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Getting a lot of questions and comments. Over the last few weeks, I’ve asked what are you doing with your money? A lot of you have replied … Most people that have replied, it seems to be that there’s a little more of a trader mentality, which I think is fine. I do caution you, if you’re doing that with your entire net worth … People are emailing me saying, I’ve increased to 40% cash or 60% cash. That’s a heavy duty cash amount of your whole portfolio.

There are times when it’s very beneficial to do that. But most of the time, I would use that sparingly. Because, again, we see what’s happening with the markets, where we’ve had this complete V recovery. But continue to send those in. I think it’s interesting. I do think now is an interesting time. We’ll talk about it more in a little bit, that if you were in trades that you wish you weren’t in last year, now is a good time to reassess, sit back and look at it and maybe take that off the table.

If you’re too aggressive and the markets bounced. It’s giving you a second opportunity to reduce some of your exposure. This is the time to do it. If you put on a trade specifically because things were so cheap in December, this is a good time to take those off, perhaps. Again, depending on the position, but we’ve started to see some momentum relax a little bit, the momentum slowing down just a hair. We’ll get into that in just a minute.

Now, I mentioned videos a few minutes ago. I wanted to spend a few minutes talking about one of the videos we put up here recently on our YouTube channel. It was basically talking about being aware of investment biases. There’s a ton of them out there. I basically went and picked my favorite five and wanted to discuss that with you over the next few minutes. So, let’s do that.

Before we do that, later in the podcast, I’m going to tell you about a situation that I had this week with a client who asked me my advice on a particular situation. You may have been in this situation, and it’s regarding a family member borrowing money. What do you do in that situation? So, stay tuned for that.

Let’s get back to this investment biases. Investment biases are something that can really affect your results over the long term, and how you invest your money and really it ends up costing you tremendous amount of dollars and cents. I’ve been doing investment advisement for about 25 years or so. Through that time, I’ve seen tons of situations where people are really getting in their own way, and it’s caused by their emotions, how they were raised, all these different things get in the way instead of looking at the evidence.

There’s a lot of work on looking at just simply the evidence of what the market does over the long term and how volatile it is, what it does, when to buy, when to sell. A lot of times, we just get in our own way. It’s not easy. I’m not saying that the evidence is … The evidence is compelling. It should be easy. It’s just not because we live day by day, minute by minute, and especially with technology, whether it’s social media, whether it’s our phones telling us we have a news alert, those are things that really get in the way of us making good money over the long term.

Again, talk to somebody that’s left something invested in a proper way for a long period of time, how they have done. It’s usually better than if you were tinkering around with it. There’s modifications and there’s allocations based on what’s going on in your life. And there’s times to be tactical. Again, don’t hear me wrong, that there aren’t times to do stuff, but you understand what I’m saying. A lot of times I talk to people that just they know something’s going to happen in a negative manner, and it doesn’t happen. They’re trying to gain the system a little too much.

Excuse me, I’m still trying to get this coffee down so that it doesn’t get cold on me. We’re sitting here with what are my top five. The first one is, and some of these may relate to. Maybe all of them do, but cognitive bias. By the way, I didn’t make these up. These are biases that are out there. They’re known, it’s just the ones that I think are the most important ones.

Cognitive biases is where people often they’ll share beliefs of someone else due to their upbringing. For example, if you … I grew up in this household. My father passed away when I was seven years old, this was in 1979. My mom had to raise three kids on her own. During that time, interest rates were extremely high. She didn’t have much experience in the stock market. My father didn’t have much experience in the stock market. He bought me one stock and many of you know my story, but he was not a big stock picker or investors. This was the days of pensions, social security and pensions. That’s how you retired, you got a gold watch.

Unfortunately, he got sick and passed away at an early age. But during that time, interest rates were very high. Here’s my mother sitting here with interest rates high, and having to figure out how to financially make it with three young kids, and decided that because she didn’t have any experience in the stock market, she was going to go the money market/CD route. Well, that was great when CDs were paying 10% and 12% and 13% if you remember that. Many of you do because you’ve got some gray hairs on your head and you remember when interest rates were that high.

During that time, she was able to make some really good interest on that and not take a lot of risk. Now, of course, we know inflation was higher at the time. But here’s my point, those conservative investments could have had an effect on me to where I never wanted to touch a stock in my life. Now, fortunately, I was wired a little bit differently, and became interested in stocks at the age of 14, and started trading stocks at the age of 14. Not in a big way, of course, because I didn’t have any money, but I did have enough to get interested in it. And then of course, decided to get a major in finance and made a career doing this. Had I not done the career I probably would have erred towards being much more conservative because that’s how I was brought up.

So, a cognitive bias is really how our parents may have raised us is a perfect example. On the other hand, some of you may have grown up where your parents liked to gamble, they took a lot of risks. So, you tend to have that mentality when it comes to your investments. Again, the point is, is that whether you’re doing something right or wrong with your investments, don’t let your beliefs and how you were raised necessarily influence you. Take an agnostic approach.

The next one is confirmation bias. This one’s pretty interesting. This is people’s confirmation bias tend to interpret information according to pre-existing beliefs. For example, if you think the stock market’s going to go down. If you think that, you’re going to search for information that will confirm that information, so it validates what you’re saying.

For example, you will go out and read an article online, newspaper, what have you. If you think there’s a bear market coming, you’re going to highlight and show your friends and your family the articles that say a recession is coming, a bear market’s coming.

On the flip side, there’s people that always think the markets going up. It can never go down. Those folks, if that’s the case, they’re going to find articles and data that suggests the market’s going up. You can just check your Twitter stream. If you’re on Twitter, go look at who you follow. A lot of people will follow only negative. I love to follow perma-bears and perma-bulls.

Perma-bulls of course are people that never think the markets going down. It can never go down. And then in ’08, it’s like oh, maybe it can. And then the dot-com bubble, maybe it can. December of 2018, maybe it can. Perma-bears are always thinking the world’s going to fall apart. It’s fascinating because those articles tend to grab more headlines and they make good money off newsletters and scaring people. I really don’t think they believe things are as bad as they are, but they write a lot of stuff about it. But if you think it’s going down, you’re going to say, aha, see some other people think the same thing. So, be careful about where you get your information because it can confirm your preconceived notion, it validates them.

The next one would be recency bias. This is something I talk about all the time. The reason why I talk about all the time is because most of us, you listening right now have gone through two of the biggest market crashes ever. They happened pretty close together, right? The dot-com bubble, the stock market on average fell about 50%. And then the 2008 financial crisis, the stock market fell about 50%. They happened in 2000, and in 2007.

So guess what happened in 2014.Tthat was an interesting year and many of you are listening at the time, but many people were telling me the market’s going to fall. It has these seven year cycles, doesn’t it? Well, just because it had one seven year cycle where it fell, doesn’t mean it’s going to continue. But our recency bias is us looking in the rear view mirror and whatever’s happened to us recently, we project out. If you have an awful day on Monday and it happens again the next Monday, guess what? Monday’s are horrible. No Mondays are typically horrible anyways, we know that. Maybe that’s a bad example, but you know what I’m saying. If you have a couple of things happen, it’s kind of coincidental, we tend to say, “Hey look, it just happened,” and we have this recency bias where stuff happened to us in a negative fashion. And so we’re going to project out. Go look at a stock market chart for 100 years, not for five years and not for 10 years, not for 20 years. Look at it for 100 years, then you will start to get a perspective on what the market looks like. So be very careful about recency bias.

Home bias is another one that I think is interesting, just because I think most of us have this. And home bias can mean several things, but one example would be an employee who invest primarily in their company’s stock. You know, they think they know more. I work at Microsoft, I work at AT&T, I work at Exxon. Who knows, just giving a bunch of examples of companies. I work at Enron. How about that? That’s the point of this, right? You think, you know, because you work there. This is a great company. And then you really don’t know what’s going on behind the scenes or regardless, you should diversify. So that’s one example of home bias.

The other one, which I think is even more prevalent, is investing only in your own country’s stock market or bond market. Why would I want to own international stocks? They’re risky. Well international people may say the same thing about the US. Why would I want to own American stocks? How about we own both? Because if we look at the global GDP, all these countries contribute to the overall growth. Shouldn’t our portfolio reflect that? Now are other countries may be more volatile or more risky than the US at times? Sure. Are they safer at times? Yes. So we should have a balanced portfolio of American stocks and international stocks. But most people that come in my office have very, very little international exposure and now’s a great, interesting time to look at international because it’s underperformed so much the last several years. So take a look at that. But home bias is something that can really hurt you.

Action bias, this is another one. Action bias is when you believe you’re adding value by doing something. So again, we’ve said it, over the long term, doing nothing and having great allocation is better than doing too much. And again, there are times to be tactical, which means to trade and take some off the table and to do something. Absolutely. I mean, I do something a lot for our clients, but that doesn’t mean that I’m doing it just to be doing it. You only do it if you think it’s going to be more profitable on the long-term. And we often see this during times of volatility, right? If volatility picks up a little bit, we’ve got to do something, I’ve got to protect, hunker down, and then the market goes back up and, “Uh oh, what do I do now?” So be careful about action bias.

So just to repeat these five that I think are the most cognitive bias is again, letting how you grew up, your environment perhaps, your upbringing influence how you make your decisions. Confirmation bias, trying to find things that will validate your beliefs, your preexisting beliefs. Recency bias. Looking back to something that happened recently and then projecting that that’s going to continue in the future. Home bias again, could be with an individual stock. It could be with investing in companies that are only in your city or only in your country. And then action bias, always feeling the need to do something.

Now there are, again, there are several of them, but you really stand back and ask yourself, I always have these preconceived notions. Have I been wrong before and why? Maybe I should open my mind up a little bit. The reason these are so important, especially, I would say this cognitive bias or a confirmation bias … Right now, especially in the last few months with the volatility we’ve seen, this is where mistakes can happen, right? This is where you make big mistakes or you make big money. You make big money by buying into the fear. You make big mistakes by selling into the fear. And I’ve had a few people recently, especially in December, we’re definitely going into recession. I mean we’re going into a bear market and they say it with such confidence that there’s no doubt that they are going to look around and find evidence. They want people on their side to say, “See, I told you.” You don’t know. I don’t know the market’s going up over the next couple of months. I don’t know we’re not going into a recession. I can have some evidence and I can weight my portfolio, balance it and tilt it a little towards what I’m believing because of the evidence. But I don’t read an article and then take my whole life savings and change it.

And I see people do that at just the worst times. So again, for the folks that do have 40% cash, 60% cash, this has been a hard 2019 hasn’t it? I mean the stock market’s probably up 20% from its low. And so again, have a game plan. And perhaps what it looks like, just to let you know is, and I don’t know if this is your whole portfolio, but if your game plan is I’m going to divide my portfolio into different piles of money. Maybe one is your long-term stock money. I’m not going to touch this pile of money for 15, 20, 25 years. Then just balance it out in stocks with international and US. Okay? Then you may have a bucket of money that you’re going to need in the next few years for something. Could be a house, could be what have you. That’s going to be more conservative. Okay? That’s not in the stock market.

Maybe you have a speculative bucket. Could be private equity, it could be just some riskier positions that you still tend to hold onto. But you may have a trading bucket. Okay? And that’s the part that if you want a 40 or 60% cash, it’s certainly better at these levels than it was on December 24th. But if you start compartmentalizing your money in that way, and it could be due to the fact that one’s an IRA, one’s a Roth Ira, one’s a joint, once a trust. Where you position your money, the strategies used to position it is very important, not only from a tax standpoint, but a when you’re going to need that money stand point. So that’s a whole other … And that’s where advisors come in to help you, hopefully help you find and build that portfolio.

But on the trading bucket, if you want to take some off the table, that’s fine. I have no problem doing that. But for folks that say, “I got 60% of my net worth in cash,” that’s what I worry about. because that’s when big mistakes can happen. And by the way, I’m not just picking on the people that have too much cash. I meet tons of people who come in here that have too much stocks, right? And they need the money like in the next three months for something. And they’re sitting here in December with their portfolio down, forced to sell at those low prices. And so it works both ways. You know, it works where again, there’s an allocation that’s incorrect and there’s folks that never sell or don’t have the right allocation and they have needs coming up for that money. Or it’s just too aggressive. They don’t realize … And I’m seeing this by the way, the last few years. The market has done well enough the last few years that it’s lulling people to sleep, especially newer investors to the game. They don’t think the markets go down and they have these unrealistic expectations on, well surely I should make x percentage every year, right?

And the answer is no. It doesn’t work that way and it doesn’t work to just stick it in there and you make money every year. That’s not the way it works. If you have a 20 year time horizon, it works pretty well. But there are times where you’re going to have to be tactical and avoid certain areas. So allocation is a big deal in modifying that. But these extremes of having 100% in the stock market when you may need the money. Or 60% in cash when there’s no reason to be 60% in cash. Those extremes is what we’re trying to avoid. And sometimes these biases I just mentioned, that’s what gets in the way. That’s what causes these issues.

So again, look back. And I talk about sometimes making a diary, probably 99% of you won’t do that and have never done that. But you know, it helps to write down what you were thinking and what you were feeling at times like, oh, I don’t know, October 1st last year, right? We’re at new highs. And then write down what you were doing and what you were thinking on December 24th right? Because you can look back now and say, “What was I looking at? Well, I was looking at a certain moving average or this person that I follow on Twitter was saying this and so it made me do this.”

That’s what we’re trying to avoid. And so if you notice on this podcast, I don’t know all the answers, right? I would love to, I want to solve this Rubik’s cube of finance and investing and know exactly what to do all the time. And that’s where these algorithms come in, where people have programs where they think it works every time. And it doesn’t, nothing works every time. But what we’re trying to do is what we do know, this is fact, is that there hasn’t been a 20 year period where stocks have been down. So we know that time horizon works to be in the stock market and we know that profits of companies generally dictate what the stock market is doing. Not on a day by day or even a week or month by month, but over the long term, if profits of companies in the United States and around the world are going up, the stock market goes with it. That we do know.

So we know some of these things. So it’s a matter of matching up the timeframes with what you’re trying to accomplish. So if you have a Roth Ira, you’re not going to touch for 30 years, it should be stocks. Now, does the volatility make you nervous? Then maybe ratchet it down a bit because of your feelings, but honestly your feelings shouldn’t have a lot to do with it. But sometimes they do get in the way and they do have an impact. You want to be able to stick with that plan. But we know that timeframe matches up with a heavy stock portfolio, right? Just like we know if you need money in the next six to nine months, you can’t invest in the stock market. You may risk not being able to get that particular chunk of money out because the stocks are down. So again, this is where asset allocation comes in to play big time. But don’t let your biases get in the way.

And we have them, I have them, right? I have them, but I try to diversify against myself, right? I know by nature I like looking at technical pictures. Those of you who know me for a long time and follow my Twitter and some of my articles, you know that I like trading. That is my mentality because I’m watching it minute by minute and I feel like I have an edge because

… That and I’ve done it so long and I recognize patterns. But I also realize that I have a basket of money for me and my clients that I don’t trade. It is in the market for better or worse because I know that batch of money over the long term has done very well. So I think if you blend these things together and make it a hybrid approach, it can work very well. And I think that’s the key is that most folks that have some of these biases don’t have a balanced approach.

They have a very myopic view of what’s going on and it just has to be that way. These statements like, “I don’t like stocks or I don’t like funds or Wall Street’s out to get me or surely somebody else’s making more money doing something so I’m not going to invest in this because they’re getting a better end of the deal.” You know all these kind of things that probably aren’t true. And if they are again balance it out is the key. So we have to start really with a financial plan, you have to know what am I trying to do here and then you build an allocation based on that.

And that’s not easy and you may need help doing that, but that’s what we do every day for folks. We don’t start with, “Hey, I like stocks and the client comes in and tells me they like stocks and we say great let’s build a stock portfolio.” That’s not how you do it. You say, “Well, how old are you? What’s your situation? What’s going on? When are you going to need this money? Where’s the money held in terms of type of account?” And then you start building a strategy based on that. And then you put the layers of where are we in the short term with the market and what things are a good deal and should I be in large cap or small cap? Do I like the stock versus a fund? Very, very important questions.

But these biases overall are really the thing that I think get in the way. And I think sometimes honestly as a financial advisor that the value we bring to folks is walking alongside of them, keeping them in the game, preventing them from doing stupid stuff. And I say that not to be mean but we all do stupid stuff sometimes. And it’s usually because of our emotions or our biases. That’s why we do it. We’re not intentionally going to do something stupid. It’s that we weren’t educated about it or we haven’t been through it before and so having somebody walk alongside you giving you some guidance and saying, “You know what, I had a client in this exact situation 10 years ago. And let me tell you what happened in that situation.”

So you know I’m always trying to help you guys out by one of the ways is by telling you about what I call kind of case studies or situations that I find myself in as an advisor. And it’s usually with a client that is telling me about a particular situation, wanted my advice about something and I like to share those with you. In case you run into those same situations. And so one that I got this week that I wanted to talk to you about was I had a client call me and he’s a younger guy, but he has an aunt in another state which complicates the situation. But he has an aunt in another state who said, “I need to borrow $14,000.” And he said I need some advice. What do I do?

Well, there’s a lot of directions this can go, right? So what I wanted to do first was I asked him some questions, which I’m going to share with you and he didn’t know all the answers so he was going to get back to me on some of this. But basically, I want to know what the situation is. Is this a person that has borrowed money in the past and not paid it back? Have they borrowed money from a lot of different people? And he made the point that yes, this had happened in the past. And it was his aunt and I think she’s approaching 80 years old.

So it’s not somebody that’s younger, but she had done this in the past. She had borrowed money and not paid it back so he said, “You know, I would never see this money.” And I said, “Well, are you intending to do it or not?” And he said, “Well, no, I told her I don’t have that kind of money just to give you that’s lying around.” So he said, “But I do want some advice on what I should do.”

And so some of the things I told him, which you may be in a situation where you’ve had a relative ask for money is find out what the situation is first, right? What’s going on in that particular situation that led to this point? Is there a timeframe involved? In other words, if they don’t pay by a certain date, what’s going to happen? Is it all due at one time? Just what’s the backstory? And once you find out the backstory and if it’s a one-time event that’s one thing, but if this is a pattern, that’s another thing.

And so I like to find out what’s going on, what’s the situation, and then how can I help. So one way to help is obviously to teach them about better habits. And sometimes they’re not ready to listen to that because they want the quick fix. They want the money, and they think that’s going to fix their problem. And it’s really not going to fix their problem because generally when they come to you to borrow money it’s they’ve put themselves in a bad situation and it’s happened before. That’s usually the case I hear when people tell me about these kinds of situations. And if that’s the case, again, helping them by saying, “Here look, here’s what you need to not do.” But if they want money, they’re really just wanting a band-aid. Because that’s all it’s doing. It’s putting a band-aid. It’s fixing a situation today, but in a few months they may be back. And they may be asking for money again so you’re not really doing them any favors.

It’s very similar to the about, obviously, teaching them how to fish rather than giving them fish, right? So I told him you need to find out more information about how she got into this situation. What are the repercussions? Why is it $14,000? Is it all due at one time? But the other thing I would encourage you, the listener, to do too is does this involve, not having food and shelter, right? If she said I need $14,000 or I’m going to get kicked out on the street, and he didn’t have the $14,000, well obviously you know paying for a hotel for some period of time, making sure they have food. Those are no-brainers, right?

But if it’s a situation that you’re reading that it’s just going to put a band-aid on it. They’re going to be back in the same situation in a few months you’re not solving anybody’s problems that way. And oftentimes when people get a loan and they don’t pay it back in this family situation, it keeps happening over and over. Now they know I can borrow money from that person because I’ve done it before and there was no repercussions. And so and to complicate matters, as I said, this person’s in another state. So that’s fairly difficult. Now it sounds like he said there was some medical things going on. She’s actually still working so again I don’t know all the situation, but the way I read it someone that’s almost 80 years old, still working in a school had some medical situation short term so she didn’t have any income, but did have potentially some medical bills, that’s something that we can maybe deal with.

But again what is the $14,000 for? What is it? What’s the urgency? And then try to deal with that and try to come up with a solution. So he’s going to find out more information and get back to me, but we’ve probably all been in that situation, and it’s a very uncomfortable situation sometimes when a family member asks for money. Because you want to help them but on the other hand you don’t. And so what I would get across to you is that how can you help them in lots of different ways without just writing a check.

And a lot of times again they may not be wanting to hear that right away but they need to hear how did you get into … These are the steps you took that got you here. Let’s try to prevent that in the future. And again, some of you have been in that situation have been burned. Some of you have been in that situation and it worked out just fine. And so it is kind of the spirit of it and that’s why I want the backstory. I want to know how did this come to be? But the fact that this has happened in the past and it caused some bad blood in the family apparently. That was something I forgot to mention. When she did this in the past, it did cause some bad blood because it wasn’t paid back. So he already has a template, right? He knows this person, his aunt, is somebody that may not pay him back and probably won’t.

And I think that’s the other thing: If you ever are going to give some money to a family member, treat it as a gift. Because oftentimes it ends up being a gift and not a loan because they don’t get it back. So if you go into it with that mentality, you won’t be disappointed when you don’t get that money back. So if I get more details, hopefully I will, I will share them with you. But I wanted to pass that along to you because again, people call me for all kinds of financial advice and various situations and I’ve heard most of them. They’re not all the same, but I was missing some information so until I get that information I can’t really give them everything.

But he thought it was helpful about, again, some of the little bullet points and some things that we discussed. So hopefully that’s helpful if you’re going through that in your situation. Hey guys, if you need our help with an allocation. You have a friend that needs our help, whether its financial planning advice and it could be social security, when to take it, what the rules are. It could be starting a ROTH for a child or grandchild. It could be any of these things. Give us a call 210-526-0057 and our website is And we will be glad to help you. We love helping people out and that’s what we do and that’s why we do this podcast to bring information to you that you can use. Thanks for joining me. Have a great weekend, and we’ll see you back here next week on the Eggerss Report.

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This show is for entertainment only and information provided by the host, guest and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.

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