By Jane Young, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
About once a week a client asks me about the latest prognostication from some famous so called “financial expert/alarmist.” They are either predicting the demise of the world as we know it or predicting a triple digit increase in the stock market. Maybe I am exaggerating, just a little, but we’ve all experienced those who think they can forecast the future and lead us to “Financial Paradise.” I remind my clients of two things with regard to these “miraculous forecasters.”
The first is that most of the TV hosts, radio shows, magazines, and financial authors are in the business of making money by selling magazines, books, and ad space. They are not in the business of providing the consumer with the best possible advice. They want to entertain, tantalize, and terrorize you. This is what gets and keeps our attention. Let’s face it! Good solid investment advice is really boring. It doesn’t change much and doesn’t sell magazines! Secondly, they cannot predict what the market is going to do tomorrow much less six months from now. Historically, no one has ever been able to consistently predict the future of the financial markets. Sure, when you have thousands of people making forecasts a few are bound to get lucky. As a good friend often says, even a blind man eventually hits the bull’s eye.
Develop a solid plan to meet your unique situation and stick with it. Don’t let the financial hype throw you off course. Below are a few quotes that help emphasize the fallacy of placing too much faith in financial forecasts.
“We’ve long felt that the only value of stock forecasts is to make fortune tellers look good. Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children” (Warren Buffett).
“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window” (Peter Drucker).
” We have two classes of forecasters: Those who don’t know - and those who don’t know they don’t know” (J.K. Galbraith, US Economist and diplomat).
June 25, 2010
June 22, 2010
Greece: When the Trough Gets Smaller, the PIIGS Get Meaner!*
By Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/
The credit meltdown in Greece amplified the panic caused by a trading error to cause tumult in the stock market. While placing a sell order, an anonymous trader mistakenly entered ‘1 billion’ instead of ‘1 million’ (oh those pesky decimals…) The overreaction caused by the error subsided for the most part within an hour, but the unfolding events in Greece kept world markets in turmoil.
Watching crowds in Athens and other Greek cities participating in violent protests, to the point of killing 3 bankers, brought the impact of possible economic collapse up-front and personal. While Greece’s debt is not significant relative to other larger common market (EU) countries, it appears that the rest of the “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain) are also teetering on the edge. Each of these countries has accumulated debt equal to 66%-124% of their GDP (Gross Domestic Product produced by a country). Since the gross U.S. debt is now 93% of our GDP, Jason Zweig suggests the US should be added to the acronym: “PIG IS US.”
If the workers in other countries resort to violence as a reaction to the cuts in pay, benefits, and pensions, then their leaders may not be willing to institute much needed reforms, and other EU countries will not be willing to lend money to the PIIGS. International banks have already reacted by tightening credit offerings to customers including other banks.
Early on, Britain managed to sidestep the allure of the Euro keeping control of the British Sterling. But even so their politicians have ignored the dire economics of their situation. Britain must reduce an annual deficit that hovers at 13% of GDP, which is even worse than the U.S. Public spending in Britain is now over 50% of their GDP. There are so many Brits dependent on government spending for their livelihood, that during the election earlier this month not one of the three national candidates mentioned cutting pensions or government benefits. Instead they all relied on the empty promises of populist insanity to ‘reduce fraud, waste, and abuse.’
There is widespread concern that the U.S. is heading down the same path. According to Barrons, government employees in the U.S. are paid 50% more than employees working equivalent jobs in the private sector. This disparity is mostly attributable to factoring in lavish benefits such as holidays, vacation time, generous early retirement packages, and life-long health care. This is why nearly half of the states and cities in the US have huge underfunded pension plans. Already there is an expectation that the federal government will come to the rescue, and some localities have been using Stimulus grants to continue paying pensions.
Currently, 58% of Americans receive all or part of their livelihood from the government. During the period from September 30, 2008 to December 30, 2009 the U.S. accumulated debt has mushroomed from $5.8 trillion to $7.8 trillion. Since then it has increased another 8% so that it now totals over $8.4 trillion. This does not include unfunded liabilities for Social Security, Medicare, and the new national health plan. The popular concern is that the U.S., along with other countries, will buckle under the weight of their spoiled citizenry and inflate their currencies.
But we have reached the point where the real danger is that investors may refuse to loan more money to subsidize nations currently living beyond their means. This is the downside of an interwoven global economy. The fear is that the Greece virus can start a cascade of “the deadly Ds” = downturns, deficits, more debt, downgrades, and defaults. Many on Wall Street expect another financial shock, not unlike the 2008 collapse of credit markets. There is rising concern even about the liquidity of money market funds.
Despite the fears of impending inflation coupled with the dread of more deflation, I would caution against extreme reaction. It is easy to underestimate the momentum of prosperity and the resilience of free countries. Many investors are wondering: “Are stocks undervalued now?” So what is a prudent investor to do?
First, don’t sell off your bond ladder. As bad as the U.S. economy looks right now, it is healthy relative to Europe and most of Asia, and is much more diversified. The economic situation is so complex at this time, that it would be foolhardy to try to predict the outcome with any degree of certainty. That is why U.S. bonds are still considered the monetary safe haven by the rest of the world. Many brokers are stampeding their clients into investments such as commodities, inflation-adjusted bonds, and emerging markets, but these are likely already overpriced and are subject to the mania of market timing.
Gold is a possibility, if it is held as gold bullion. Unfortunately right now the market is dominated with speculators, so selling gold at any given ‘market price’ is chancy. Dollar cost averaging into the market now may seem brazen, but will likely be the winning strategy for the long term. Finally, don’t pay off your 30-year fixed rate mortgage any faster than you have to and pay attention to your liquidity and cash flow.
The one change we are recommending to our clients is to move their cash from commercial money market funds to money market funds that exclusively hold government bonds.
Keeping a balanced investment portfolio that includes government bonds, diversified stocks, and cash has shown to protect clients through all types of economic cycles. Greece may be the harbinger of the New World Economy, but eventually politicians throughout the free world will have to wake up and smell the coffee.
*To paraphrase Dan Sullivan
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY., as well as the blog editing by Susan Stanley.
Franklin, MI
http://www.bertwhitehead.com/
The credit meltdown in Greece amplified the panic caused by a trading error to cause tumult in the stock market. While placing a sell order, an anonymous trader mistakenly entered ‘1 billion’ instead of ‘1 million’ (oh those pesky decimals…) The overreaction caused by the error subsided for the most part within an hour, but the unfolding events in Greece kept world markets in turmoil.
Watching crowds in Athens and other Greek cities participating in violent protests, to the point of killing 3 bankers, brought the impact of possible economic collapse up-front and personal. While Greece’s debt is not significant relative to other larger common market (EU) countries, it appears that the rest of the “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain) are also teetering on the edge. Each of these countries has accumulated debt equal to 66%-124% of their GDP (Gross Domestic Product produced by a country). Since the gross U.S. debt is now 93% of our GDP, Jason Zweig suggests the US should be added to the acronym: “PIG IS US.”
If the workers in other countries resort to violence as a reaction to the cuts in pay, benefits, and pensions, then their leaders may not be willing to institute much needed reforms, and other EU countries will not be willing to lend money to the PIIGS. International banks have already reacted by tightening credit offerings to customers including other banks.
Early on, Britain managed to sidestep the allure of the Euro keeping control of the British Sterling. But even so their politicians have ignored the dire economics of their situation. Britain must reduce an annual deficit that hovers at 13% of GDP, which is even worse than the U.S. Public spending in Britain is now over 50% of their GDP. There are so many Brits dependent on government spending for their livelihood, that during the election earlier this month not one of the three national candidates mentioned cutting pensions or government benefits. Instead they all relied on the empty promises of populist insanity to ‘reduce fraud, waste, and abuse.’
There is widespread concern that the U.S. is heading down the same path. According to Barrons, government employees in the U.S. are paid 50% more than employees working equivalent jobs in the private sector. This disparity is mostly attributable to factoring in lavish benefits such as holidays, vacation time, generous early retirement packages, and life-long health care. This is why nearly half of the states and cities in the US have huge underfunded pension plans. Already there is an expectation that the federal government will come to the rescue, and some localities have been using Stimulus grants to continue paying pensions.
Currently, 58% of Americans receive all or part of their livelihood from the government. During the period from September 30, 2008 to December 30, 2009 the U.S. accumulated debt has mushroomed from $5.8 trillion to $7.8 trillion. Since then it has increased another 8% so that it now totals over $8.4 trillion. This does not include unfunded liabilities for Social Security, Medicare, and the new national health plan. The popular concern is that the U.S., along with other countries, will buckle under the weight of their spoiled citizenry and inflate their currencies.
But we have reached the point where the real danger is that investors may refuse to loan more money to subsidize nations currently living beyond their means. This is the downside of an interwoven global economy. The fear is that the Greece virus can start a cascade of “the deadly Ds” = downturns, deficits, more debt, downgrades, and defaults. Many on Wall Street expect another financial shock, not unlike the 2008 collapse of credit markets. There is rising concern even about the liquidity of money market funds.
Despite the fears of impending inflation coupled with the dread of more deflation, I would caution against extreme reaction. It is easy to underestimate the momentum of prosperity and the resilience of free countries. Many investors are wondering: “Are stocks undervalued now?” So what is a prudent investor to do?
First, don’t sell off your bond ladder. As bad as the U.S. economy looks right now, it is healthy relative to Europe and most of Asia, and is much more diversified. The economic situation is so complex at this time, that it would be foolhardy to try to predict the outcome with any degree of certainty. That is why U.S. bonds are still considered the monetary safe haven by the rest of the world. Many brokers are stampeding their clients into investments such as commodities, inflation-adjusted bonds, and emerging markets, but these are likely already overpriced and are subject to the mania of market timing.
Gold is a possibility, if it is held as gold bullion. Unfortunately right now the market is dominated with speculators, so selling gold at any given ‘market price’ is chancy. Dollar cost averaging into the market now may seem brazen, but will likely be the winning strategy for the long term. Finally, don’t pay off your 30-year fixed rate mortgage any faster than you have to and pay attention to your liquidity and cash flow.
The one change we are recommending to our clients is to move their cash from commercial money market funds to money market funds that exclusively hold government bonds.
Keeping a balanced investment portfolio that includes government bonds, diversified stocks, and cash has shown to protect clients through all types of economic cycles. Greece may be the harbinger of the New World Economy, but eventually politicians throughout the free world will have to wake up and smell the coffee.
*To paraphrase Dan Sullivan
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY., as well as the blog editing by Susan Stanley.
June 18, 2010
Small Business Health Care Tax Credit
By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewartfinancial.com/
This new tax credit is part of the recently signed Affordable Care Act (healthcare). It helps small businesses and small tax exempt organizations afford the cost of providing health care coverage for their employees.
Small businesses started receiving postcards from the IRS last month with details on this new tax credit. Here are the major points:
I have also provided a link to a video on You Tube link that explains this credit in more detail.
Carlsbad, CA
http://www.stewartfinancial.com/
This new tax credit is part of the recently signed Affordable Care Act (healthcare). It helps small businesses and small tax exempt organizations afford the cost of providing health care coverage for their employees.
Small businesses started receiving postcards from the IRS last month with details on this new tax credit. Here are the major points:
- Credit is worth up to 35% of the premium costs paid by a small business in 2010 thru 2013. In 2014, the credit is increased to 50%
- Credit phases out for small businesses with average wages between $25,000 and $50,000 and for firms with with the equivalent of between 10 and 25 full time (FTE) employees
- A qualifying employer must cover at least 50% of the cost of health care coverage
- A qualifying employer must have less than 25 (FTE) workers
I have also provided a link to a video on You Tube link that explains this credit in more detail.
June 15, 2010
All the Serious Money Is Indexed
By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/
A recent New York Times article discussed how index funds are not only the most efficient way for people of modest means to accumulate wealth but are also the best way for wealthy investors to keep and grow their wealth.
The reporter interviewed Princeton professor of economics Burton Malkiel, author of the 1973 investment classic "A Random Walk Down Wall Street" and pioneer in research which shed light on the folly of trying to beat the market. In the article he postulated that of all of the mutual funds in existence or created since the 1970s, the number that actually beat the broad indexes through 2009 would be in the single digits.
The counterpoints in the article from some active managers border on laughable. One compared stocks to baseball batters, saying "If you find the ones with the higher average, you're adding real value." Well no kidding...except that study after study shows that the odds of doing that are about the same as the odds of any single person reading this becoming an American Idol winner.
The same manager also said "We're selecting high-quality companies with earnings streams and eliminating all the bad stocks in the S&P that you have to own because it's an index." Apparently they're buying those great stocks from other active managers who prefer low-quality companies without earnings streams. (Remember they're not buying them from those silly indexers, because the indexers own a proportionate share of everything in the market.)
Malkiel also dispels the notion that commodities belong in a portfolio as a distinct asset class, because by properly diversifying one already has such exposure: "...if you're really well diversified and into emerging markets you're going to have some investments in Brazil, which is natural resource rich. It's simple."
Malkiel also divulges his personal holdings, which include buying some individual stocks "because it's fun. All the serious money is indexed."
Middleton, WI
http://www.trinfin.com/
A recent New York Times article discussed how index funds are not only the most efficient way for people of modest means to accumulate wealth but are also the best way for wealthy investors to keep and grow their wealth.
The reporter interviewed Princeton professor of economics Burton Malkiel, author of the 1973 investment classic "A Random Walk Down Wall Street" and pioneer in research which shed light on the folly of trying to beat the market. In the article he postulated that of all of the mutual funds in existence or created since the 1970s, the number that actually beat the broad indexes through 2009 would be in the single digits.
The counterpoints in the article from some active managers border on laughable. One compared stocks to baseball batters, saying "If you find the ones with the higher average, you're adding real value." Well no kidding...except that study after study shows that the odds of doing that are about the same as the odds of any single person reading this becoming an American Idol winner.
The same manager also said "We're selecting high-quality companies with earnings streams and eliminating all the bad stocks in the S&P that you have to own because it's an index." Apparently they're buying those great stocks from other active managers who prefer low-quality companies without earnings streams. (Remember they're not buying them from those silly indexers, because the indexers own a proportionate share of everything in the market.)
Malkiel also dispels the notion that commodities belong in a portfolio as a distinct asset class, because by properly diversifying one already has such exposure: "...if you're really well diversified and into emerging markets you're going to have some investments in Brazil, which is natural resource rich. It's simple."
Malkiel also divulges his personal holdings, which include buying some individual stocks "because it's fun. All the serious money is indexed."
June 12, 2010
Financial Tips for any Economic Environment
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
It’s been more than 18 months since we first heard the utterance of the “R” word, recession. The funny thing about economic data is bad news travels much more quickly than good news. While we all heard about the economy’s struggles, many have no idea that we are technically out of a recession.
While the technical data points to some positive signs and the economy actually grew, the pulse of individuals still remains fearful. Economic gloom and doom doesn’t have a mortal enemy that clearly pronounces the proverbial all-clear. While the media loves to provide data illuminating every wrinkle in our economic system, good news remains sparse at best.
Are we still in a recession? Either way, what does it really matter? From a personal financial standpoint, it really doesn’t matter. Our habits and financial wherewithal should always remain diligent. I live in Nashville, the city that experienced an enormous flood that some experts claim to be a 500 or maybe a 1000 year flood. Does it matter to those flood victims if we are or aren’t in a recession? Of course not, but what does matter is sound financial planning and decisions.
Sound financial decisions transcend good and bad economic data or even disasters. The stock market is out of our control, and the ups and downs associated with our economy are beyond the reach of our hands. Focusing on something that is out of our control is not productive.
If we can’t control the market or the economy, what can we control?
The items listed below will allow you to focus on the things you can control, while participating in financial growth, buffering against economic downturns, and all while providing support during emergencies.
Have sufficient cash liquidity.
Liquidity is the keystone of the financial foundation. Emergency funds (cash) can provide liquidity to those in need during emergencies, large or small. This cash can prevent folks from going into debt for purchases that are necessary to return life to normal.
Live within your means.
Spend less than you make….save 10% of your income. These old adages will ensure that some money is set aside for tomorrow.
Dollar cost average.
Continue to be a buyer during economic downturns. Buying at regular intervals (such as into a 401k plan) will help buffer the ups and downs of the market.
Proactively manage your tax liability.
Proper tax and strategic planning can help reduce the single largest recurring expense that most Americans face.
Invest for the long term.
Don’t try to time the market. Timing the market most often results in disappointment. By focusing on the long term, the short term ups and downs become blips on the radar screen.
What we do behaviorally (controlling the things we can control) is much more important that what the market is doing or how the economy is holding up. So whether we are in a recession or not, the 5 tips above are simple to implement, yet extremely effective.
Nashville, TN
http://www.vhfinancialmanagement.com/
It’s been more than 18 months since we first heard the utterance of the “R” word, recession. The funny thing about economic data is bad news travels much more quickly than good news. While we all heard about the economy’s struggles, many have no idea that we are technically out of a recession.
While the technical data points to some positive signs and the economy actually grew, the pulse of individuals still remains fearful. Economic gloom and doom doesn’t have a mortal enemy that clearly pronounces the proverbial all-clear. While the media loves to provide data illuminating every wrinkle in our economic system, good news remains sparse at best.
Are we still in a recession? Either way, what does it really matter? From a personal financial standpoint, it really doesn’t matter. Our habits and financial wherewithal should always remain diligent. I live in Nashville, the city that experienced an enormous flood that some experts claim to be a 500 or maybe a 1000 year flood. Does it matter to those flood victims if we are or aren’t in a recession? Of course not, but what does matter is sound financial planning and decisions.
Sound financial decisions transcend good and bad economic data or even disasters. The stock market is out of our control, and the ups and downs associated with our economy are beyond the reach of our hands. Focusing on something that is out of our control is not productive.
If we can’t control the market or the economy, what can we control?
The items listed below will allow you to focus on the things you can control, while participating in financial growth, buffering against economic downturns, and all while providing support during emergencies.
Have sufficient cash liquidity.
Liquidity is the keystone of the financial foundation. Emergency funds (cash) can provide liquidity to those in need during emergencies, large or small. This cash can prevent folks from going into debt for purchases that are necessary to return life to normal.
Live within your means.
Spend less than you make….save 10% of your income. These old adages will ensure that some money is set aside for tomorrow.
Dollar cost average.
Continue to be a buyer during economic downturns. Buying at regular intervals (such as into a 401k plan) will help buffer the ups and downs of the market.
Proactively manage your tax liability.
Proper tax and strategic planning can help reduce the single largest recurring expense that most Americans face.
Invest for the long term.
Don’t try to time the market. Timing the market most often results in disappointment. By focusing on the long term, the short term ups and downs become blips on the radar screen.
What we do behaviorally (controlling the things we can control) is much more important that what the market is doing or how the economy is holding up. So whether we are in a recession or not, the 5 tips above are simple to implement, yet extremely effective.
June 9, 2010
Financial Considerations for an Inheritance
By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Originally published 5/24/2010 at the Financial Planning Association's All Things Financial Planning Blog
Receiving an inheritance can be one of the most emotionally charged situations concerning money. It is a memory of our loved ones, a symbol of their feelings for us, as well as their wish to enhance our financial security.
In today’s volatile market and low interest rate environment, many people are conflicted about what to do with this gift. Leaving a cash inheritance in a low-yield account just does not seem right. Likewise, you may be tempted not to sell stock gifts. Yet, a large stock position adds volatility and risk to a portfolio, and often creates an imbalance in your holdings.
Although it is only right to think about these funds in a special way, it is wise to consider your options before simply leaving them be.
When you receive an inheritance, it is important to remember that money is a tool. These funds were used for specific purposes during another person’s lifetime. Chances are, their purpose is not the same as yours, and how their place in your own plan may mean placing the funds in a better tool for you.
Spend some time considering alternative strategies for the funds and reviewing your portfolio. Do you need the money to meet short-term or emergency needs? If so, the best choice with a stock gift is to sell to fund this need.
Even if no immediate situation requires the money, a stepped-up basis makes it beneficial to sell stock and place it in a diverse portfolio. No matter how long this stock was held, your tax consequence is likely to be minor and will be considered a long-term gain or loss.
If you have longer term plans for the money, a further review with your financial advisor is definitely in order.
If you received non-retirement money and are not maximizing retirement savings, consider increasing your current year deductions and consume the cash. While you may prefer to keep the inheritance account intact, keep in mind money is money, and that your gift is simply shifting accounts; not so different than moving a wallet from one pocket to another.
With an inherited retirement plan, make sure not to tie up in long-term investments the amounts you will need to withdraw. Spousal beneficiaries should often roll over an IRA into an account in their own name.
Not lost in these suggestions are the emotional considerations. But keep in mind that someone wanted this gift to be a part of your life, and would certainly hope you use it wisely for your ends.
Franklin, MI
http://www.nfa1040.com/
Originally published 5/24/2010 at the Financial Planning Association's All Things Financial Planning Blog
Receiving an inheritance can be one of the most emotionally charged situations concerning money. It is a memory of our loved ones, a symbol of their feelings for us, as well as their wish to enhance our financial security.
In today’s volatile market and low interest rate environment, many people are conflicted about what to do with this gift. Leaving a cash inheritance in a low-yield account just does not seem right. Likewise, you may be tempted not to sell stock gifts. Yet, a large stock position adds volatility and risk to a portfolio, and often creates an imbalance in your holdings.
Although it is only right to think about these funds in a special way, it is wise to consider your options before simply leaving them be.
When you receive an inheritance, it is important to remember that money is a tool. These funds were used for specific purposes during another person’s lifetime. Chances are, their purpose is not the same as yours, and how their place in your own plan may mean placing the funds in a better tool for you.
Spend some time considering alternative strategies for the funds and reviewing your portfolio. Do you need the money to meet short-term or emergency needs? If so, the best choice with a stock gift is to sell to fund this need.
Even if no immediate situation requires the money, a stepped-up basis makes it beneficial to sell stock and place it in a diverse portfolio. No matter how long this stock was held, your tax consequence is likely to be minor and will be considered a long-term gain or loss.
If you have longer term plans for the money, a further review with your financial advisor is definitely in order.
If you received non-retirement money and are not maximizing retirement savings, consider increasing your current year deductions and consume the cash. While you may prefer to keep the inheritance account intact, keep in mind money is money, and that your gift is simply shifting accounts; not so different than moving a wallet from one pocket to another.
With an inherited retirement plan, make sure not to tie up in long-term investments the amounts you will need to withdraw. Spousal beneficiaries should often roll over an IRA into an account in their own name.
Not lost in these suggestions are the emotional considerations. But keep in mind that someone wanted this gift to be a part of your life, and would certainly hope you use it wisely for your ends.
June 6, 2010
What makes a “fee-only advisor” different?
By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
I am frequently asked: what is a “fee-only advisor” and why should I work with one? First, a fee-only advisor’s compensation comes directly from the client. The advisor does not receive any commissions or referral fees from selling financial products (such as annuities, insurance or investments). A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate. I focus the majority of my business on retainer fees.
In contrast, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and from commissions on the products recommended as part of the “implementation strategy.” Many times the financial plan is offered at severe discount. Their real profit comes from selling you the products they recommend. Their belief is that by charging you a fee for their “objective” advice you are more likely to “implement” the strategies they recommend.
A commission-only advisor makes his compensation strictly from selling you financial products that have a “load” or commission attached to them. In my humble opinion, I tend to trust “commission-only” advisors more then “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan.”
I personally believe each of these advisors has a place in the financial service industry. However, the main thing I ask from each one of them is to disclose to the client how they are going to get paid. The main reason why you should work with a fee-only advisor is they can give you objective, unbiased financial advice free from the potential conflict of interest inherent in product sales. Yes, the fee-only advisor is still selling to you, although the “product” he is selling is an education and trustworthy advice.
When it comes to your money follow this common sense rule: “When you know how your advisor is getting paid you will know who he is really working for!”
You may find this article from Money Magazine interesting.
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
I am frequently asked: what is a “fee-only advisor” and why should I work with one? First, a fee-only advisor’s compensation comes directly from the client. The advisor does not receive any commissions or referral fees from selling financial products (such as annuities, insurance or investments). A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate. I focus the majority of my business on retainer fees.
In contrast, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and from commissions on the products recommended as part of the “implementation strategy.” Many times the financial plan is offered at severe discount. Their real profit comes from selling you the products they recommend. Their belief is that by charging you a fee for their “objective” advice you are more likely to “implement” the strategies they recommend.
A commission-only advisor makes his compensation strictly from selling you financial products that have a “load” or commission attached to them. In my humble opinion, I tend to trust “commission-only” advisors more then “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan.”
I personally believe each of these advisors has a place in the financial service industry. However, the main thing I ask from each one of them is to disclose to the client how they are going to get paid. The main reason why you should work with a fee-only advisor is they can give you objective, unbiased financial advice free from the potential conflict of interest inherent in product sales. Yes, the fee-only advisor is still selling to you, although the “product” he is selling is an education and trustworthy advice.
When it comes to your money follow this common sense rule: “When you know how your advisor is getting paid you will know who he is really working for!”
You may find this article from Money Magazine interesting.
June 3, 2010
The Demise of an Investment Portfolio - Emotions and Market Timing
By Jane Young, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
Forecasting the short-term movement of the stock market and trying to time the market is fruitless. As in all areas of our lives, we can’t control what life throws at us but we can establish a defensive position to best deal with a variety of outcomes. When it comes to our investments, we accomplish this through diversification, dollar cost averaging, maintaining an emergency fund and staying the course. We need to fight the natural inclination to make financial decisions based on emotions. Don’t forget that the stock market is counter-intuitive. Generally, the best time to buy is when things seem really bad and the best time to sell is when things seem the brightest. But then again, we just never know. It is easy to get caught up in the fear or euphoria of the moment. But, keep in mind that emotional reactions to the market can have a devastating impact on your portfolio. The stock market is a long- term investment and we need to avoid reacting to short-term events.
Proof of this can be seen in a Dalbar study conducted in March of 2010 for the time period of 1/1/90 – 12/31/09. During this time the average return in the equity market was 8.8% but the average return for the individual investor was only 3.2%. This discrepancy is a result of investors trying to time the market or reacting emotionally to financial news and events. Below are two quotes that sum this up very well.
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
-Peter Lynch, author and former mutual fund manager with Fidelity Investments
“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it (time the market) successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently”
- John Bogle, founder of Vanguard Investments
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
Forecasting the short-term movement of the stock market and trying to time the market is fruitless. As in all areas of our lives, we can’t control what life throws at us but we can establish a defensive position to best deal with a variety of outcomes. When it comes to our investments, we accomplish this through diversification, dollar cost averaging, maintaining an emergency fund and staying the course. We need to fight the natural inclination to make financial decisions based on emotions. Don’t forget that the stock market is counter-intuitive. Generally, the best time to buy is when things seem really bad and the best time to sell is when things seem the brightest. But then again, we just never know. It is easy to get caught up in the fear or euphoria of the moment. But, keep in mind that emotional reactions to the market can have a devastating impact on your portfolio. The stock market is a long- term investment and we need to avoid reacting to short-term events.
Proof of this can be seen in a Dalbar study conducted in March of 2010 for the time period of 1/1/90 – 12/31/09. During this time the average return in the equity market was 8.8% but the average return for the individual investor was only 3.2%. This discrepancy is a result of investors trying to time the market or reacting emotionally to financial news and events. Below are two quotes that sum this up very well.
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
-Peter Lynch, author and former mutual fund manager with Fidelity Investments
“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it (time the market) successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently”
- John Bogle, founder of Vanguard Investments
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