By Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/
Investors are feeling almost euphoric. While the market hasn’t rebounded to a Dow topping 14,000 (where it was in Oct, 2007), it is up 58% flirting with 10,000 from the 6,500 bottom we experienced on March 9th of this year. This sharp rebound is a relief but can be scary in its own right.
SELL NOW! Many investment gurus are predicting another round of market setbacks. P/E ratios (i.e. the relationship of earnings to the price of stocks) are high at about 20. (15 is considered normal.) Their observations focus on the negative realities we are still experiencing, such as unemployment, the housing collapse, and unprecedented government spending and impending inflation. The ‘smart money,’ they say, is going into hibernation or reinvesting in exotic currency and commodity offerings.
BUY, BUY, BUY! Other investment mavens are optimistic. On this side the ‘smart money’ notes that the steepest market drops are historically followed by higher and higher stock prices. The market is a leading indicator and is looking ahead 9-18 months. The stage is set for a global recovery and owning stocks is the place to be.
Who can you believe? Keep two things in mind: 1) the ‘smart money’ in both groups represents only 5% of the traders but accounts for 95% of the stock transactions every day, and 2) every day a ‘survey’ is taken, and 50% of the ‘smart money’ thinks the market is going up while the other half thinks it’s going down. It has to be that way, because for every buyer there must be a seller – and one of them is wrong!
It is enticing to try to forecast what will happen next, and the experts can be very convincing. Usually they focus on one or two factors that support their conclusion, and their position appeals to one of the two most dangerous emotions for investors: Fear and Greed.
Fear made some people jump out of the market at the end of last year or the start of this year. They panicked and sold all of their stocks. Perhaps they felt burned, yet satisfied knowing that they were ‘right’ as the market tumbled downward until March 9. Now many of them are kicking themselves for turning shy and not getting back in as they watched stock prices spiral upward. They wonder if they should buy back into the market now is it too late? Is the market due for a correction?
This is the market timer’s dilemma: they first have to decide when to sell. Then they have to decide when to get back in. So both decisions have to be right. Statistically, they will get both right 25% of the time; the other 75% of the time they will make an error.
If Greed wins out and they put everything back in the market now, they run a 50% chance of being ‘whipsawed.’ As soon as they buy back in, the market nosedives. So their Fear kicks into gear and they sell out again and take a large loss to avoid a huge loss. Then, of course, stocks skyrocket. I have experienced this myself. It is a very depressing experience.
Market timers can get so caught up in their timing schemes that the market takes over their whole lives. They constantly watch ‘the market’ and listen to talking heads expound while reading about the latest investment fad. In the end, they would be better off financially and emotionally if they had a clear plan and stuck to it.
We use Functional Asset Allocation, an investment strategy format that is designed for real people. It incorporates real estate as well as stocks and bonds/cash. We seek to balance the portfolio in relation to total net worth, rather than try to time the market. As we balance our clients’ investments, we want to lower their investment costs, reduce the overall volatility of the portfolio, and, especially, make their portfolio tax efficient. We make decisions about things we can control by understanding the difference between what is certain and what is speculation. We position clients to enjoy a ‘market rate of return.’
By using a 15 year bond ladder with Treasury bonds, we provide clients with a safety net so they don’t have to time their investing activity. They keep their real estate, even when the market tanks. They continue to dollar cost average into the stock market when it falls and rises. By maintaining a balanced portfolio, our clients are always positioned for any economic environment. They have investments to hedge against inflation, deflation and to participate when prosperity returns.
An investment advisor once commented to me that we could get a much higher rate of return by using municipal bonds and junk bonds instead of U.S. Treasuries. I acknowledged that, if an investor can time interest rates successfully over a long period of time, the gains might offset the extra taxes and transaction costs involved. But I explained that all our clients need to do is to get a market rate of return. We don’t take the extra risks that are required to try to ‘beat the market.’ We sell sleep.
You may be a bit shy about getting back into the stock market now because you got burned badly during the last downturn, which was the worst in the last 50 years. The key to not getting burned is to adjust your expectations and have a balanced portfolio that is geared for your particular situation. It’s the best way to experience the rewards of long-term investing and protect yourself against emotion-induced investment losses.
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
November 27, 2009
November 25, 2009
What Deflation Looks Like
Bert Whitehead, M.B.A., J.D.
Franklin, MI
http://www.bertwhitehead.com/
For years we have been told about the evils of inflation. But now we are witnessing deflation, which most people have never experienced since 1950. What does deflation mean for you today? How is the economy affected? How bad can it get?
Inflation is an economic phenomenon that has been described as too many dollars chasing too few goods. Deflation occurs when the opposite happens -- too few dollars are being used to buy the available goods.
For most of this decade credit has been abundant and too much money was lent, especially to people without a strong financial foundation. It was easy to buy houses, cars, take trips, etc. As borrowers defaulted en masse on mortgages, student loans, car loans, etc., the banks and other lending institutions curtailed lending to consumers and to businesses. This resulted in an alarming drop in sales of cars, houses, etc. Retail sales across the board have shrunk as people became very frugal.
The downturn is compounded by a significant increase in the average family savings rate from about 1% of household income a few years ago to 6%+ now. The stock market dropped to the lowest level in 50 years, which caused working people to be alarmed about their retirement prospects. Seeing your house drop in value along with your 401-k is gut wrenching. So people are improving their “balance sheets” by paying off debt and increasing their savings at a feverish pitch.
These developments are good in many ways because we are weaning ourselves off the spending binge that lasted until about 2007. The downside is that companies have trouble making a profit because they have to cut their prices so much to sell their goods and services. This impacts suppliers. New orders for their products drops. To survive, all businesses are cutting staff. Then unemployment rises, there are even fewer purchasers, and people refrain from buying things because they either don’t have the money or they expect prices to drop further. This cycle creates a vicious vortex which sucks the wind out of our economy and causes deflation.
The big danger is that this downward spiral can worsen over time. As more people lose their jobs they can’t buy goods and services, sales continue to drop, and employers lay off more people, etc. Economists call this a drop in ‘velocity of money’ and, if it continues, it could cause a severe depression. At that point, it is very difficult to regain economic momentum. The Great Depression of the 1930’s only ended when we went to war in 1941. War increases employment, and creates a strong demand for armaments (which keep getting blown up and have to be replaced).
Deflation also causes the value of our dollar to drop against other currencies. For American workers, this means that the price of imports and the cost of travel abroad increases. For non-U.S. residents this situation is a bonanza: for example, Europeans can not only buy more dollars with each Euro, but those dollars will buy more U.S. goods, and travel to the U.S. is a real bargain. As foreigners buy more U.S. goods and services and travel here to spend their money our balance of trade is favored.
Swings in economic activity are often self-correcting. As prices drop during deflation, the value of the dollar for U.S. residents actually increases and we can buy more for less money. For example, the price of real estate has plummeted in many areas, the negotiated price of cars has dropped, and most retail stores, restaurants, etc. are offering enticing specials.
The U.S. is not the only country facing this situation: the whole world is experiencing deflation. But a free market economy like ours is affected sooner because a higher degree of our spending is non-governmental compared to many other mature economies. To address the danger of deflation, the U.S. government had to inject money into the economy using stimulus spending. Most countries have a stronger social ‘safety-net’ like unemployment benefits and free health care. They have decided that, for now, additional government spending in the form of a stimulus is not necessary.
Most of the U.S. stimulus money, however, is being spent on government jobs that do not create additional employment. The ‘TARP’ money earmarked to shore up our banking system isn’t being lent out by banks to create economic activity, as was expected, but is rather being used by the banks to repair their own balance sheets and recapitalize. So the ‘law of unintended consequences’ has kicked in to further complicate the situation.
Investors are faced with very low interest rates on their savings. Series I Savings Bonds, which accrue interest on an inflation-adjusted basis, are now paying zero interest due to deflation. As you well know, it’s all but impossible to find bank savings accounts or money market accounts that even pay 1%!
What can you do to combat deflation? The best hedge is U.S. Treasury bonds, which have a fixed interest rate over the life of the bond and are non-callable (i.e. cannot be paid off earlier than the original maturity date). Including them in your portfolio preserves your purchasing power when equities in your portfolio decline.
Although infrequent, deflation has its particular perils and it is important that you build protection into your portfolio to shield you from its devastating effects. It is actually more important to protect a portfolio against deflation with fixed rate Treasuries than to try to sidestep inflation by filling a bond portfolio with TIP’s (inflation adjusted Treasuries) that leave no defense against deflation.
We are a resilient nation, and we will survive this economic cycle. Indeed there are simple, sensible approaches you can take to ready yourself for all economic environments - deflation, inflation, or prosperity. The key is to build and maintain a balanced approach that positions you for any economic scenario. You’ll be able to stop trying to predict what might happen because you’ll know that you are prepared to face whatever does happen. Isn’t that one of the best “returns” your portfolio could ever provide?
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
Franklin, MI
http://www.bertwhitehead.com/
For years we have been told about the evils of inflation. But now we are witnessing deflation, which most people have never experienced since 1950. What does deflation mean for you today? How is the economy affected? How bad can it get?
Inflation is an economic phenomenon that has been described as too many dollars chasing too few goods. Deflation occurs when the opposite happens -- too few dollars are being used to buy the available goods.
For most of this decade credit has been abundant and too much money was lent, especially to people without a strong financial foundation. It was easy to buy houses, cars, take trips, etc. As borrowers defaulted en masse on mortgages, student loans, car loans, etc., the banks and other lending institutions curtailed lending to consumers and to businesses. This resulted in an alarming drop in sales of cars, houses, etc. Retail sales across the board have shrunk as people became very frugal.
The downturn is compounded by a significant increase in the average family savings rate from about 1% of household income a few years ago to 6%+ now. The stock market dropped to the lowest level in 50 years, which caused working people to be alarmed about their retirement prospects. Seeing your house drop in value along with your 401-k is gut wrenching. So people are improving their “balance sheets” by paying off debt and increasing their savings at a feverish pitch.
These developments are good in many ways because we are weaning ourselves off the spending binge that lasted until about 2007. The downside is that companies have trouble making a profit because they have to cut their prices so much to sell their goods and services. This impacts suppliers. New orders for their products drops. To survive, all businesses are cutting staff. Then unemployment rises, there are even fewer purchasers, and people refrain from buying things because they either don’t have the money or they expect prices to drop further. This cycle creates a vicious vortex which sucks the wind out of our economy and causes deflation.
The big danger is that this downward spiral can worsen over time. As more people lose their jobs they can’t buy goods and services, sales continue to drop, and employers lay off more people, etc. Economists call this a drop in ‘velocity of money’ and, if it continues, it could cause a severe depression. At that point, it is very difficult to regain economic momentum. The Great Depression of the 1930’s only ended when we went to war in 1941. War increases employment, and creates a strong demand for armaments (which keep getting blown up and have to be replaced).
Deflation also causes the value of our dollar to drop against other currencies. For American workers, this means that the price of imports and the cost of travel abroad increases. For non-U.S. residents this situation is a bonanza: for example, Europeans can not only buy more dollars with each Euro, but those dollars will buy more U.S. goods, and travel to the U.S. is a real bargain. As foreigners buy more U.S. goods and services and travel here to spend their money our balance of trade is favored.
Swings in economic activity are often self-correcting. As prices drop during deflation, the value of the dollar for U.S. residents actually increases and we can buy more for less money. For example, the price of real estate has plummeted in many areas, the negotiated price of cars has dropped, and most retail stores, restaurants, etc. are offering enticing specials.
The U.S. is not the only country facing this situation: the whole world is experiencing deflation. But a free market economy like ours is affected sooner because a higher degree of our spending is non-governmental compared to many other mature economies. To address the danger of deflation, the U.S. government had to inject money into the economy using stimulus spending. Most countries have a stronger social ‘safety-net’ like unemployment benefits and free health care. They have decided that, for now, additional government spending in the form of a stimulus is not necessary.
Most of the U.S. stimulus money, however, is being spent on government jobs that do not create additional employment. The ‘TARP’ money earmarked to shore up our banking system isn’t being lent out by banks to create economic activity, as was expected, but is rather being used by the banks to repair their own balance sheets and recapitalize. So the ‘law of unintended consequences’ has kicked in to further complicate the situation.
Investors are faced with very low interest rates on their savings. Series I Savings Bonds, which accrue interest on an inflation-adjusted basis, are now paying zero interest due to deflation. As you well know, it’s all but impossible to find bank savings accounts or money market accounts that even pay 1%!
What can you do to combat deflation? The best hedge is U.S. Treasury bonds, which have a fixed interest rate over the life of the bond and are non-callable (i.e. cannot be paid off earlier than the original maturity date). Including them in your portfolio preserves your purchasing power when equities in your portfolio decline.
Although infrequent, deflation has its particular perils and it is important that you build protection into your portfolio to shield you from its devastating effects. It is actually more important to protect a portfolio against deflation with fixed rate Treasuries than to try to sidestep inflation by filling a bond portfolio with TIP’s (inflation adjusted Treasuries) that leave no defense against deflation.
We are a resilient nation, and we will survive this economic cycle. Indeed there are simple, sensible approaches you can take to ready yourself for all economic environments - deflation, inflation, or prosperity. The key is to build and maintain a balanced approach that positions you for any economic scenario. You’ll be able to stop trying to predict what might happen because you’ll know that you are prepared to face whatever does happen. Isn’t that one of the best “returns” your portfolio could ever provide?
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
November 23, 2009
Oh My, You Don't Have a Will?
By Troy Von Haefen, CFP®
Nashville, TN
www.vhfinancialmanagement.com/
Many folks that walk into my office for the first time don’t have a will in place. Maybe I should rephrase that….the folks that walk into my office without a will they have created have a will as prepared by their state. Dying intestate (without a will) will move into action the state’s plan, which more than likely will not coincide with your plans or wishes.
Let’s look at a few examples of what a state’s will may include (or not include)
Guardianship Provisions
Since most of my clients have minor children, let’s start with guardianship provisions. While the state will try to get the children where they belong, if the relatives cannot agree, the state can appoint someone. Guess what? That someone can be a stranger! Guardianship provisions should be the primary focus of young couples with children. It’s important that you designate a guardian and not leave that up to the state. Don’t let the care of your children become a bureaucratic decision.
Estate Tax Reduction
Your state will more than likely forgo any opportunity to lower estate taxes. There are estate planning techniques that may reduce estate taxes, but the state may not implement any options unless stated in a legal document (will). In essence, the state will say that your money is better off going into the state or federal coffers and not to your spouse, children, or charity.
Division of your assets
Here in TN, the state may give your spouse only one-third of your assets and your children the remaining two-thirds. The state can appoint your spouse as the legal guardian of your minor children but may require a performance bond to guarantee the proper handling of the children’s assets. The living spouse may also have to produce a yearly account to the probate court of the monies spent on the children. These details will only compound a difficult situation (death) by making a simple task (spending money on your children) complicated and burdensome.
These are a few of the issues that can arise out of intestate death. The over-riding theme here is that while the state will try to do what is right with your children and assets, the letter of the state’s law may not be your wishes. If you have a will, make sure it conveys your wishes. If you do not have a will, speak with an attorney and have one drafted.
Disclosure: Troy Von Haefen is not an attorney and the above information does not constitute legal advice or the practice of law but is written for informational purposes only.
Nashville, TN
www.vhfinancialmanagement.com/
Many folks that walk into my office for the first time don’t have a will in place. Maybe I should rephrase that….the folks that walk into my office without a will they have created have a will as prepared by their state. Dying intestate (without a will) will move into action the state’s plan, which more than likely will not coincide with your plans or wishes.
Let’s look at a few examples of what a state’s will may include (or not include)
Guardianship Provisions
Since most of my clients have minor children, let’s start with guardianship provisions. While the state will try to get the children where they belong, if the relatives cannot agree, the state can appoint someone. Guess what? That someone can be a stranger! Guardianship provisions should be the primary focus of young couples with children. It’s important that you designate a guardian and not leave that up to the state. Don’t let the care of your children become a bureaucratic decision.
Estate Tax Reduction
Your state will more than likely forgo any opportunity to lower estate taxes. There are estate planning techniques that may reduce estate taxes, but the state may not implement any options unless stated in a legal document (will). In essence, the state will say that your money is better off going into the state or federal coffers and not to your spouse, children, or charity.
Division of your assets
Here in TN, the state may give your spouse only one-third of your assets and your children the remaining two-thirds. The state can appoint your spouse as the legal guardian of your minor children but may require a performance bond to guarantee the proper handling of the children’s assets. The living spouse may also have to produce a yearly account to the probate court of the monies spent on the children. These details will only compound a difficult situation (death) by making a simple task (spending money on your children) complicated and burdensome.
These are a few of the issues that can arise out of intestate death. The over-riding theme here is that while the state will try to do what is right with your children and assets, the letter of the state’s law may not be your wishes. If you have a will, make sure it conveys your wishes. If you do not have a will, speak with an attorney and have one drafted.
Disclosure: Troy Von Haefen is not an attorney and the above information does not constitute legal advice or the practice of law but is written for informational purposes only.
November 19, 2009
The More Things Change...
By John Scherer, CFP, ChFC
Middleton, WI
http://www.trinfin.com/
If you read the Time magazine article reference in my last post you can skip this paragraph right now and move on to the next. For those that didn't get around to reading the full article, the punch line is that despite sounding very much like something written in September 2009 with its references to high unemployment, credit problems, and the economy in a profound, once-in-a-lifetime state of turmoil, the article was in fact written in September 1992.
I would venture to guess that not many readers really remember the disastrous recession of '91, just like the crash of '01-02 is becoming an ever distant memory. Rest assured that the great debacle of '08-09 will take on a similar hazy recollection down the road.
But as the Time article reminds, it is in fact scary when we are in the midst of the downward part of the cycle that regenerates growth. Much like a destructive fire ultimately regenerates the forest, we need to remember that market declines are a natural and necessary part of capitalism.
Currently many major publications are talking about the 'new normal' economy. Rest again assured that today is not any more a new paradigm than when Japan was going to take over the world in the 80's, or when technology signaled the new economy in the 90's, or when stocks were dead in the late 70's.
The more things change, the more they indeed do remain the same.
Middleton, WI
http://www.trinfin.com/
If you read the Time magazine article reference in my last post you can skip this paragraph right now and move on to the next. For those that didn't get around to reading the full article, the punch line is that despite sounding very much like something written in September 2009 with its references to high unemployment, credit problems, and the economy in a profound, once-in-a-lifetime state of turmoil, the article was in fact written in September 1992.
I would venture to guess that not many readers really remember the disastrous recession of '91, just like the crash of '01-02 is becoming an ever distant memory. Rest assured that the great debacle of '08-09 will take on a similar hazy recollection down the road.
But as the Time article reminds, it is in fact scary when we are in the midst of the downward part of the cycle that regenerates growth. Much like a destructive fire ultimately regenerates the forest, we need to remember that market declines are a natural and necessary part of capitalism.
Currently many major publications are talking about the 'new normal' economy. Rest again assured that today is not any more a new paradigm than when Japan was going to take over the world in the 80's, or when technology signaled the new economy in the 90's, or when stocks were dead in the late 70's.
The more things change, the more they indeed do remain the same.
November 16, 2009
10 Investment Principals that Never Go Out of Style
By Jane Young, CFP®, EA
http://www.pinnaclefinancialconcepts.com/
Colorado Springs, CO
Frequently people talk about how everything is different and we should change the way we invest. Yes, we have just experienced a very difficult year with some major changes in our economic situation. However, every time we go through a major market adjustment if feels like “this time is different”. We could take numerous comments made at the end of the last bear market and insert them into today’s headlines without missing a beat. I call this the “recency effect”; bad times always feel more desperate while we are experiencing them. We need to step back and look at the big picture; don’t throw the baby out with the bathwater. Good, sound investment fundamentals are still valid. Some people may reassess their tolerance for risk, start saving more money or cut back on their discretionary spending - but the following investment principals are good, time tested guidelines that everyone should follow in any market.
1. Don’t time the market - The stock market is counter-intuitive. Generally, it may be better to invest when things seem most dire and sell when everything is rosy. It is impossible to predict the movement of the stock market and history shows that those who do frequently miss out on big upswings.
2. Dollar Cost Average - This enables you to invest a set dollar amount every month or every quarter regardless of what the market does. As a result you buy more shares when the price is low and fewer when the market is high. Dollar cost averaging helps you mitigate risk because we don’t know what the stock market is going to do tomorrow.
3. Maintain at least 3 to 6 months of expenses in an emergency fund - This is especially important in difficult financial times when stock market values are low and unemployment is high. Unless you have a very secure job I currently recommend a 6 month emergency fund.
4. Don’t invest in anything you don’t understand - If you just can’t get your head around something after it’s been explained or you have done a reasonable amount of research don’t invest in it. If an investment opportunity is overly complicated something may be rotten in Denmark.
5. Don’t Chase Hot Asset Classes - Today international funds may be skyrocketing and tomorrow it may be small cap domestic stock funds. Don’t forget what happened to the stock market after the dot.com bubble burst.
6. Diversify, Diversify, Diversify - Everyone needs to diversify with a mix of fixed income and equity investments that is consistent with their own unique investment goals and objectives. Although most stocks dropped in unison over the last year, I still think there is value in diversifying between different types of stock mutual funds. I believe we will see some categories of stocks outpace others as the market rebounds. Depending on your risk tolerance, a small allocation in commodities and real estate may be advisable.
7. Don’t Make Emotional Decisions - Many investment decisions are triggered by fear and greed and they are equally damaging. Don’t make rash decisions based on emotion. Remember the stock market is counter-intuitive.
8. Don’t put more than 5% of your assets in one security – Any given company can go bankrupt as we have seen with many financial and automobile firms over the last year. I encourage the use of mutual funds over individual stocks to help mitigate this type of risk. If you do invest in individual stocks don’t put too much faith in any one company. If you are investing in your own company and you have a strong understanding of the firm’s performance you could go up to 10%.
9. Be tax smart - Take advantage of tax advantaged retirement plans such as Roth IRAs and 401k plans. Consider tax consequences when re-balancing your portfolio. Use a bear market to harvest some tax losses and off-load some bad or inappropriate investments.
10. Be aware of fees and surrender charges - When selecting investments be aware of high fees and commissions. Tread cautiously with anything that contains a contingent deferred sales charge. Many clients have come to me with a desire to sell or transfer previously purchased investments, usually annuities, only to find they have a 5-10% surrender charge if they sell within ten years of purchase. A surrender charge can have a big impact on your flexibility. If you really want a variable annuity buy one with low fees and no surrender charges.
http://www.pinnaclefinancialconcepts.com/
Colorado Springs, CO
Frequently people talk about how everything is different and we should change the way we invest. Yes, we have just experienced a very difficult year with some major changes in our economic situation. However, every time we go through a major market adjustment if feels like “this time is different”. We could take numerous comments made at the end of the last bear market and insert them into today’s headlines without missing a beat. I call this the “recency effect”; bad times always feel more desperate while we are experiencing them. We need to step back and look at the big picture; don’t throw the baby out with the bathwater. Good, sound investment fundamentals are still valid. Some people may reassess their tolerance for risk, start saving more money or cut back on their discretionary spending - but the following investment principals are good, time tested guidelines that everyone should follow in any market.
1. Don’t time the market - The stock market is counter-intuitive. Generally, it may be better to invest when things seem most dire and sell when everything is rosy. It is impossible to predict the movement of the stock market and history shows that those who do frequently miss out on big upswings.
2. Dollar Cost Average - This enables you to invest a set dollar amount every month or every quarter regardless of what the market does. As a result you buy more shares when the price is low and fewer when the market is high. Dollar cost averaging helps you mitigate risk because we don’t know what the stock market is going to do tomorrow.
3. Maintain at least 3 to 6 months of expenses in an emergency fund - This is especially important in difficult financial times when stock market values are low and unemployment is high. Unless you have a very secure job I currently recommend a 6 month emergency fund.
4. Don’t invest in anything you don’t understand - If you just can’t get your head around something after it’s been explained or you have done a reasonable amount of research don’t invest in it. If an investment opportunity is overly complicated something may be rotten in Denmark.
5. Don’t Chase Hot Asset Classes - Today international funds may be skyrocketing and tomorrow it may be small cap domestic stock funds. Don’t forget what happened to the stock market after the dot.com bubble burst.
6. Diversify, Diversify, Diversify - Everyone needs to diversify with a mix of fixed income and equity investments that is consistent with their own unique investment goals and objectives. Although most stocks dropped in unison over the last year, I still think there is value in diversifying between different types of stock mutual funds. I believe we will see some categories of stocks outpace others as the market rebounds. Depending on your risk tolerance, a small allocation in commodities and real estate may be advisable.
7. Don’t Make Emotional Decisions - Many investment decisions are triggered by fear and greed and they are equally damaging. Don’t make rash decisions based on emotion. Remember the stock market is counter-intuitive.
8. Don’t put more than 5% of your assets in one security – Any given company can go bankrupt as we have seen with many financial and automobile firms over the last year. I encourage the use of mutual funds over individual stocks to help mitigate this type of risk. If you do invest in individual stocks don’t put too much faith in any one company. If you are investing in your own company and you have a strong understanding of the firm’s performance you could go up to 10%.
9. Be tax smart - Take advantage of tax advantaged retirement plans such as Roth IRAs and 401k plans. Consider tax consequences when re-balancing your portfolio. Use a bear market to harvest some tax losses and off-load some bad or inappropriate investments.
10. Be aware of fees and surrender charges - When selecting investments be aware of high fees and commissions. Tread cautiously with anything that contains a contingent deferred sales charge. Many clients have come to me with a desire to sell or transfer previously purchased investments, usually annuities, only to find they have a 5-10% surrender charge if they sell within ten years of purchase. A surrender charge can have a big impact on your flexibility. If you really want a variable annuity buy one with low fees and no surrender charges.
November 15, 2009
Holidays & Gifts
By W. Tedd Oyler, J.D.
Saugatuck, MI
http://www.teddoyler.com/
The American “holiday season” has ancient roots. We are carrying on a traditional custom of celebrating the winter solstice, the end of shortening days and the rebirth of lengthening days, and the hope for more sunlight. Several traditions have their own important observances that take place in the dark days of December.
It appears to be another human tradition to take simple celebrations and make them grander, more complicated. Christmas, for instance, has for some become a cacophony of Santas, reindeer, nutcrackers, tinsel, flashing lights, faux angels, office parties, holiday movies, and—above all else, it seems—a frenzy of gift buying and opening.
To be sure, each of us can choose how we celebrate our holidays. Our traditions dictate some of the experience. Beyond those teachings, we can choose how to observe important occasions. Just because the neighbors decorate their homes to a gaudy excess does not obligate us. Just because the neighbor children receive thousands of dollars worth of electronics does not mean our kids must as well.
You may be struggling to maintain treasured family traditions, such as a certain schedule for a holiday or a particular way of opening gifts. You may face new challenges if one sibling has moved away and another has married into another family, creating scheduling conflicts. Each of these issues adds stress to our lives and has the potential to compromise a pleasant holiday. If you think the season has become more material than spiritual, consider reinventing how you celebrate your holiday. And if you go into debt to buy gifts, maybe you should reinvent how you celebrate.
As we edge warily forward into 2010, absorbing one financial shock after another—to the point where we aren’t even shocked anymore, just frightened—we can reexamine our priorities, perhaps taking a fresh look at all those toys (for kids and adults) and all that debt that can enslave us.
It’s all about living in integrity with your own sense of values. If you don’t, you will be uneasy some part of every day—unhappy rather than happy, less useful to your family and friends. Failing to live in integrity will cause your life to dis-integrate—maybe slowly, maybe more quickly.
So how can you reengineer a holiday? Perhaps you can reduce the focus on material goods. For the children in your life, reduce the number of gifts you buy by one. Young ones won’t notice the difference, and older ones can be taught to choose what is most important to them. As kids become old enough to understand, offer them a gift for themselves with the provison that they’ll designate a charitable recipient to receive a gift of similar value. You may be surprised at how much they’ll appreciate this idea.
Instead of buying more “things” for adults who already have plenty, consider charitable donations in their name for as much as you would have spent on them. Choose a charity they support or where they volunteer.
Fewer material gifts means less wrapping, less mess, and less time spent in malls. This leaves more time and freedom to spend your holiday in your own way. Perhaps you and your family will prefer less in the way of material goods and cherish more meaningful time together.
Saugatuck, MI
http://www.teddoyler.com/
The American “holiday season” has ancient roots. We are carrying on a traditional custom of celebrating the winter solstice, the end of shortening days and the rebirth of lengthening days, and the hope for more sunlight. Several traditions have their own important observances that take place in the dark days of December.
It appears to be another human tradition to take simple celebrations and make them grander, more complicated. Christmas, for instance, has for some become a cacophony of Santas, reindeer, nutcrackers, tinsel, flashing lights, faux angels, office parties, holiday movies, and—above all else, it seems—a frenzy of gift buying and opening.
To be sure, each of us can choose how we celebrate our holidays. Our traditions dictate some of the experience. Beyond those teachings, we can choose how to observe important occasions. Just because the neighbors decorate their homes to a gaudy excess does not obligate us. Just because the neighbor children receive thousands of dollars worth of electronics does not mean our kids must as well.
You may be struggling to maintain treasured family traditions, such as a certain schedule for a holiday or a particular way of opening gifts. You may face new challenges if one sibling has moved away and another has married into another family, creating scheduling conflicts. Each of these issues adds stress to our lives and has the potential to compromise a pleasant holiday. If you think the season has become more material than spiritual, consider reinventing how you celebrate your holiday. And if you go into debt to buy gifts, maybe you should reinvent how you celebrate.
As we edge warily forward into 2010, absorbing one financial shock after another—to the point where we aren’t even shocked anymore, just frightened—we can reexamine our priorities, perhaps taking a fresh look at all those toys (for kids and adults) and all that debt that can enslave us.
It’s all about living in integrity with your own sense of values. If you don’t, you will be uneasy some part of every day—unhappy rather than happy, less useful to your family and friends. Failing to live in integrity will cause your life to dis-integrate—maybe slowly, maybe more quickly.
So how can you reengineer a holiday? Perhaps you can reduce the focus on material goods. For the children in your life, reduce the number of gifts you buy by one. Young ones won’t notice the difference, and older ones can be taught to choose what is most important to them. As kids become old enough to understand, offer them a gift for themselves with the provison that they’ll designate a charitable recipient to receive a gift of similar value. You may be surprised at how much they’ll appreciate this idea.
Instead of buying more “things” for adults who already have plenty, consider charitable donations in their name for as much as you would have spent on them. Choose a charity they support or where they volunteer.
Fewer material gifts means less wrapping, less mess, and less time spent in malls. This leaves more time and freedom to spend your holiday in your own way. Perhaps you and your family will prefer less in the way of material goods and cherish more meaningful time together.
November 13, 2009
Revised First-Time Homebuyer’s Credit
By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
Below you will find links explaining the extension of the first-time homebuyer’s credit. The bill was passed in the Senate today and will likely be voted upon in the House tomorrow or early next week. This bill extends the qualifying date from December 1st, 2009 to June 30th, 2010 (a purchase agreement must be signed by April 30th, 2010).
Also, this bill offers a home buying credit of $6,500 to those who have lived in their home for 5 years. You can find more details if you follow the web links below.
http://blogs.wsj.com/developments/2009/10/29/qa-the-home-buyer-tax-credit-extension/
http://news.yahoo.com/s/ap/us_homebuyers_tax_credit
http://www.opencongress.org/bill/111-h3548/show
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
Below you will find links explaining the extension of the first-time homebuyer’s credit. The bill was passed in the Senate today and will likely be voted upon in the House tomorrow or early next week. This bill extends the qualifying date from December 1st, 2009 to June 30th, 2010 (a purchase agreement must be signed by April 30th, 2010).
Also, this bill offers a home buying credit of $6,500 to those who have lived in their home for 5 years. You can find more details if you follow the web links below.
http://blogs.wsj.com/developments/2009/10/29/qa-the-home-buyer-tax-credit-extension/
http://news.yahoo.com/s/ap/us_homebuyers_tax_credit
http://www.opencongress.org/bill/111-h3548/show
November 1, 2009
Saving Our Economy the Old Fashioned Way
By J. Marc Vorchheimer, CFP®
Spring Valley, NY
www.integratedfinancialconsulting.com
The economy may be the single most talked about topic today. Many people are out of work, and businesses are struggling to stay afloat. Even if the situation is stabilizing somewhat, most experts predict the economy will probably not recover quickly.
Our federal government has committed hundreds of billions of dollars to stimulate the economy. One of the rationales given for this unprecedented government largesse is to encourage consumers to spend, which, in turn, should help businesses increase their revenues, create more jobs, and so on.
Spending is certainly a vital part of any healthy economy. If people hoard their resources, commerce inevitably declines and businesses lose revenue, or even fail, leading to fewer jobs. The economy would suffer if people severely limit their spending for an extended time.
However, here’s another side of the coin (pun intended). A thriving economy also requires people to save money. According to a recent Wall Street Journal article, our country’s personal savings rate has increased, in just one year, from about 0% or less to about 7% of personal income. Other sources suggest the savings rate may be up to as much as 10%.
The unemployed naturally are not included in this increased savings rate. In fact, they often pay for personal expenses by dipping into savings or retirement accounts or by borrowing. Either way, they typically have a negative savings rate, spending more than their income. The exceptions are those living on pensions and Social Security, as well as those who saved consistently over time to accumulate enough income-producing assets.
Many in the media have decried the savings phenomenon as an obstacle to an economic recovery because it means consumers are cutting back on expenditures. I disagree. In fact, one reason we are in this economic mess is that we have been overspending for years. Now many finally have reached the point where there is no longer any money to spend. Saving has numerous benefits. Here are several reasons it is essential for our economy that we once again become a nation of savers.
Consumer Confidence
People feel secure knowing they have more resources than they need right now, a financial cushion they can use as an emergency fund. We are more comfortable knowing that if we incur an unexpected expense or lose our jobs, we have a source of spending money. And when consumers are more relaxed about money, they become more confident and more likely tospend enough to keep the economy going at a healthy pace.
Coping with Challenging Economic Cycles
Economic cycles of prosperity and adversity are inevitable. If consumers and businesses consistently spend all their resources (and more), an economic slowdown can be financially devastating. But if they consistently save a portion of their income, they will be better prepared to absorb periods of slower sales growth and reduced income, resulting in a quicker economic recovery.
Preparation for Retirement
Some experts predict that without drastic measures, the Social Security retirement system will run out of money by 2037. Even if the system survives, the income provided in retirement is insufficient for most Americans. People need to supplement their Social Security with income from other sources. If retirees save adequately in their working years, they should have enough during retirement. Working people who do not save will impose a huge economic burden on society when they retire, which will negatively influence the economy.
Affordable Prices
If people spend more than they make, they are buying items they cannot afford. Thus the true demand (demand from consumers who can afford to pay for the product) is lower than it seems. When demand increases for a product and supply is constant, the price of the product will rise. However, the price increase is artificial because the apparent demand is not sustainable. Many buyers cannot actually pay for the product. Alternatively, if people are saving and truly living within their means, prices will moderate to a level that reflects actual demand.
Fewer Loan Defaults
To spend money they don’t have, consumers must borrow. If they borrow too much, they cannot make their loan payments. If almost everyone can borrow money easily, the danger of borrowing and the risk of inability to repay increases. When borrowers cannot repay their loans , lenders (or sellers who financed purchases) take significant losses (the portion of the loan not paid back). This can be a draining trend on the overall economy as well.
Both spending and saving are vital for a robust economy. It is just a matter of knowing how much to spend and how much to save. As a general rule, saving at least 10% of your income is a good strategy. At that rate, you spend 90% of your income, which should be plenty to flow through to the economy and create prosperity. Of course, you may need to save or spend different amounts depending on your particular situation. Consult with your financial advisor, who can help you determine how much to spend and how much to save to meet your financial goals.
Spring Valley, NY
www.integratedfinancialconsulting.com
The economy may be the single most talked about topic today. Many people are out of work, and businesses are struggling to stay afloat. Even if the situation is stabilizing somewhat, most experts predict the economy will probably not recover quickly.
Our federal government has committed hundreds of billions of dollars to stimulate the economy. One of the rationales given for this unprecedented government largesse is to encourage consumers to spend, which, in turn, should help businesses increase their revenues, create more jobs, and so on.
Spending is certainly a vital part of any healthy economy. If people hoard their resources, commerce inevitably declines and businesses lose revenue, or even fail, leading to fewer jobs. The economy would suffer if people severely limit their spending for an extended time.
However, here’s another side of the coin (pun intended). A thriving economy also requires people to save money. According to a recent Wall Street Journal article, our country’s personal savings rate has increased, in just one year, from about 0% or less to about 7% of personal income. Other sources suggest the savings rate may be up to as much as 10%.
The unemployed naturally are not included in this increased savings rate. In fact, they often pay for personal expenses by dipping into savings or retirement accounts or by borrowing. Either way, they typically have a negative savings rate, spending more than their income. The exceptions are those living on pensions and Social Security, as well as those who saved consistently over time to accumulate enough income-producing assets.
Many in the media have decried the savings phenomenon as an obstacle to an economic recovery because it means consumers are cutting back on expenditures. I disagree. In fact, one reason we are in this economic mess is that we have been overspending for years. Now many finally have reached the point where there is no longer any money to spend. Saving has numerous benefits. Here are several reasons it is essential for our economy that we once again become a nation of savers.
Consumer Confidence
People feel secure knowing they have more resources than they need right now, a financial cushion they can use as an emergency fund. We are more comfortable knowing that if we incur an unexpected expense or lose our jobs, we have a source of spending money. And when consumers are more relaxed about money, they become more confident and more likely tospend enough to keep the economy going at a healthy pace.
Coping with Challenging Economic Cycles
Economic cycles of prosperity and adversity are inevitable. If consumers and businesses consistently spend all their resources (and more), an economic slowdown can be financially devastating. But if they consistently save a portion of their income, they will be better prepared to absorb periods of slower sales growth and reduced income, resulting in a quicker economic recovery.
Preparation for Retirement
Some experts predict that without drastic measures, the Social Security retirement system will run out of money by 2037. Even if the system survives, the income provided in retirement is insufficient for most Americans. People need to supplement their Social Security with income from other sources. If retirees save adequately in their working years, they should have enough during retirement. Working people who do not save will impose a huge economic burden on society when they retire, which will negatively influence the economy.
Affordable Prices
If people spend more than they make, they are buying items they cannot afford. Thus the true demand (demand from consumers who can afford to pay for the product) is lower than it seems. When demand increases for a product and supply is constant, the price of the product will rise. However, the price increase is artificial because the apparent demand is not sustainable. Many buyers cannot actually pay for the product. Alternatively, if people are saving and truly living within their means, prices will moderate to a level that reflects actual demand.
Fewer Loan Defaults
To spend money they don’t have, consumers must borrow. If they borrow too much, they cannot make their loan payments. If almost everyone can borrow money easily, the danger of borrowing and the risk of inability to repay increases. When borrowers cannot repay their loans , lenders (or sellers who financed purchases) take significant losses (the portion of the loan not paid back). This can be a draining trend on the overall economy as well.
Both spending and saving are vital for a robust economy. It is just a matter of knowing how much to spend and how much to save. As a general rule, saving at least 10% of your income is a good strategy. At that rate, you spend 90% of your income, which should be plenty to flow through to the economy and create prosperity. Of course, you may need to save or spend different amounts depending on your particular situation. Consult with your financial advisor, who can help you determine how much to spend and how much to save to meet your financial goals.
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