Stop the Madness!

This week begins March Madness.  Friends, families and co-workers have begun selecting their picks for the 2012 NCAA Basketball Tournament.  As I contemplated my brackets, I realized that the selection process I was using to get to my winning team is similar to the process many people use when selecting investments. 

First, there’s usually a hometown bias.  This may be geographical or the team that is your alma mater.  I attended both Indiana University and the University of Cincinnati.  My attachment to these schools as well as my familiarity with their basketball programs typically leads to me advancing them farther in my tournament brackets than they often should go. 

This is not unlike buying stock from a company in which you have ties.  Oftentimes, I see clients that not only hold their company stock in their retirement plan, but they also purchase additional shares of the same company in an outside account as well.  It is also commonplace to see a new client’s portfolio that has a large weighting in local companies such as P&G, GE, Cinergy and Kroger.  These companies are familiar which can give an investor the false impression that this also means they are a safer.

Next is the equivalent of Morningstar’s star ratings.  Each team in the NCAA tournament is given a seed, ranking them in their region based on their past record and strength of opponents they’ve faced.  If you have not followed basketball all year, it’s easy to fall into the pattern of picking teams with a higher seed because they seem more likely to succeed.

Many investors chose mutual funds that have outperformed their peers in the past because they have a higher star rating.  Unfortunately, this does not guarantee the same results going forward.  This is similar to the NCAA tournament.  Not many people probably picked VCU to go to the Final Four last year or George Mason in 2006.  Both teams were 11 seeds.  In fact, I had to refresh my memory to what VCU stands for – Virginia Commonwealth University.

Whether you have the proclivity to pick stocks, mutual funds or basketball teams, keep in mind a saying from sportscaster Dick Vitale that “Anything can happen, baby.”  I wouldn’t want to invest my savings using a methodology similar to tournament betting – would you?  

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

The Games are Coming

On March 1^st, tickets went on sale for an event many of you have likely been hearing about for some time, the 2012 World Choir Games.  The Games, billed as the Olympics of choral music, will be held in Cincinnati on July 4 – July 14, 2012.  The event will be the largest international event, arts event and, indeed, one of the largest events of any kind in the city’s history.  An estimated 200,000 visitors will come to town from as many as 70 countries to watch up to 20,000 participants perform and compete in 23 different categories of choral music.  Downtown will be transformed into a mini-Olympic village and a wide array of music, languages and culture will fill our streets.  It promises to be an incredible event and opportunity for the region.  For a great look at what the Games are all about, check out this short video.

To break down the numbers a little further, the UC Economics Center estimates that the economic impact to the area will reach $73.5 million, primarily stemming from visitors eating, drinking, sightseeing and booking more than 40,000 hotel nights, the most ever for a single event.

Cincinnati is the first city in North America to host the event which is held every two years.  It was selected due to an outstanding effort by local officials and for its rich cultural and musical heritage, the quality of its arts venues and the “walkability” of the city from major hotels to most of the choral venues.

I was fortunate enough to become involved with the Games as part of my participation in the 2011 class of C-Change, the Cincinnati Chamber of Commerce’s Development program for emerging leaders.  Part of my year was spent working in a small group focused on developing a speaker’s bureau charged with going out to various community groups and professional organizations and speaking on all that the Games will bring to the region.  That work has continued into this year and we are as busy as ever filling requests from a wide array of interested groups.

While it is certain to be a wonderful few weeks, it can’t be done alone.  More than 4,000 volunteers are expected to be needed to fill a dizzying number of assignments.  More information on those opportunities can be found here.

If volunteering isn’t feasible, but you would like to know more about the concerts, event schedules and how to buy tickets, that information can be found here.  Many of the concerts will be free and there will even be opening and closing ceremonies, which promise to be a prime attraction. 

While trying to avoid this being too much of a sales pitch, I thought it was important to share some of the details surrounding this event with our clients, the trusted professionals we work with, and other readers as many have heard about the Games, but are not fully familiar with the scope of what is coming to town in July.

I strongly encourage all of you to get involved in this once in a lifetime event.  Try and find some time to volunteer, attend one of the many concerts, or just make a point to visit the downtown area during the Games.  For those clients of ours that are out of town and have been looking for an excuse to come back and see friends or family, this just might be the perfect excuse.

Have a great week!

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com

Why Wealth Can Be Fleeting

The recent announcement of P&G’s decision to lay off 5,700 workers reminded me how vulnerable financial security can be.  Even though our economy is recovering, many people are still afraid of losing their jobs.  In January, my sister learned her company is laying off 40% of its workforce on April 2^nd.  As the sole income earner for her family, she has to wait and worry while she manages her staff until the announcements are made.

Obviously, the Great Recession of 2007-2009 had an impact on the financial well-being of many families, but it appears the impact on upper level executives and high net worth retirees was much more severe.  According to the Wall Street Journal, one third of all people considered wealthy in 2007 were no longer in that group by 2009, and the income of the top group fell 34% over the same period.  By contrast, the average income of the bottom 90% of the population fell less than 3% over the same period. 

Published in December, The Truth About Wealth pointed out affluence today is much more unstable than it was in the past.  While the article focused on families in the top 1% of the population (those earning more than $343,000 in 2009) the issues it raised were relevant to anyone who is trying to build and retain wealth.  If you have a high income job with great benefits, or have accumulated several million dollars to live on in retirement, you might be secure; but there are risks you may be taking that can cause a fast reversal of your fortune if you ignore them:

Concentration

The risk of wealth concentration is difficult for many people to accept if they have created their wealth by putting all their eggs in one basket, and watching that basket most of their lives.  A Hewlett Packard Company executive who held only HP stock in his 401(K) plan and exercised HP stock options to supplement his lifestyle suffered a severe financial shock when he lost his job in 2007.  Meanwhile, his HP stock fell from trading at $52 a share in October 2007 to $27 a share in March 2009.  You can definitely become wealthy by concentrating your investment in a single company or asset class, but when it drops in value, you have no safety net.

Before retirement, if your livelihood is dependent on an industry or a specific company, you should not concentrate your investments there as well.  You should have no more than 20-30% of your net worth in any single asset – even if you own your own company.  In retirement, your lifestyle should be supported by a diversified portfolio of investments, with no more than 3-5% of your holdings in one company.

Leverage

Over the last decade, debt was the rocket fuel that propelled people into homes and lifestyles their parents only dreamed of.  But when you have a significant mortgage or other debt, and your source of income is reduced or eliminated, you may be forced to sell assets at the worst of all possible times.

Your total debt load should be no more than 25% of your total combined liquid (savings and investment accounts) and non-liquid assets (such as your home).  Many financial articles recommend your total principal and interest payments for all your loans, including your mortgage, car, credit cards and student loans, should not exceed 35% of your gross income.  But after observing people as a financial advisor over the last 24 years, I think 25% to 30% is much more realistic and gives people more room to weather a financial surprise such as a job loss or illness. 

Spending

Many people don’t really know what they’re spending on an annual basis.  As a result, they may be one crisis away from a financial collapse and not even know it.  This is the biggest issue for most people contemplating retirement, and the one that causes me the most stress when counseling clients. 

It doesn’t matter how much you have saved for retirement if you aren’t sure what it takes to support your lifestyle.  If you retire, and find you are spending nearly 10% of your savings each year, it’s very difficult to adjust after the fact.  You will be much more financially secure if you ‘practice’ retirement by living within the income you think you will need in retirement, before you retire.  If you find you aren’t happy living within your planned income limit, you have time to adjust.  You can work longer and save more, or eliminate expenses that might not be as important to you as retiring when you planned.

Wealth might be more fleeting today than it was before the 80’s, but there are steps you can take to keep yours intact. 

Jeannette A. Jones, CPA, CFP ®

jjones@taaginc.com

http://www.taaginc.com/

America Saves!

This week, we wanted to do our small part in furthering "America Saves Week".  Slated for February 19-26th and coordinated by the America Savings Education Council, America Saves Week is celebrating its 6th anniversary.  The goal is to encourage employers, organizations and others to promote good savings behavior and for all of us to evaluate our saving and spending habits.

If savings hasn't been on your radar, or that of a loved one, in quite some time, focus first on basic emergency savings.  Most of us should have anywhere from 6-12 months of expenses in a very liquid account somewhere that we can access reasonably quickly.  This can be tough to do, and we hear this all too often, but it's amazing what one less latte a week, using a water bottle instead of bottled water, only buying fruit and vegetables you're actually going to eat (Americans threw out $32 billion worth last year) or some other simple habit change can make to our long term plans. 

If emergency savings are covered, spend some time focusing on college, retirement, or other goals you might have.

Below are some links to details on America Saves Week and related articles that we wanted to share in the hopes that they help you or someone you know. 

America Saves Week - main site of a week focused on savings

America Saves - the non-profit organizations' home site

On Your Mark, Get Set, Save - A savings "how-to" article from Forbes magazine

Take America Saves Week to Heart - An article from Visa's head of financial education programs

ING Encourages Savings in Support of America Saves Week - a CNBC article on ING's recommendations to jump start savings

If there's ever anything we can do to help you sort out what your savings goals might be, please let us know.

Have a great week and happy saving!

The Asset Advisory Group
info@taaginc.com

Best for Whom?

Since the middle of last year, we have been refining The Asset Advisory Group’s (TAAG) mission and vision and creating a strategic plan for the future.  We want to ensure we continue to add value to the lives of our clients with the same level of service and care we’ve given them for the past 24 years.  This has made me even more aware of the treatment I receive as a client, as I mentioned in my last blog “Do You Want Fries With That?” 

Last weekend, I was reminded once again of how not to treat our clients.  My dog, Kenyon, tore his acl and meniscus while chasing a squirrel at the park.  Our vet let us know he could perform the surgery to repair Kenyon’s leg – in three weeks!  As I started to research canine acl surgery, I discovered there are a few distinctly different types of surgery.  Not knowing what was best for Kenyon, and feeling like our vet’s main concern was cost savings, I called a client who is an associate professor of small animal surgery at Purdue University. 

Fortunately, she told me the questions I should ask, recommended I look for someone certified by American College of Veterinary Internal Medicine (there are only seven in Cincinnati!) and explained which surgery is most appropriate for Kenyon’s breed and injury.  In short, much more information than the family vet was able to provide. 

As she explained, my vet is more of a generalist, but because of the difficulty involved in this particular surgery, he should have referred us to a specialist who is continually learning the most innovative techniques.   

This is similar to the way we are set up at TAAG.  Each advisor is a Certified Financial Planner® who has taken coursework in Investing, Insurance, Estate, Tax and Retirement Planning.  Our goal is to create a relationship with our clients where we know as much about them as they are comfortable sharing, so that we can help make the best financial decisions for their circumstances. 

This does not mean we will have the answers to all of their questions or be able to provide all services they will need in-house.  For that, we rely on a community of experts such as attorneys, CPAs and independent insurance agents who are knowledgeable about the latest laws and regulations that affect their field.    As CFP®s, our focus is on creating a plan that will produce a sustainable income during our client’s retirement and continually educating ourselves about the best way to do this.  And we must always put our client’s interests ahead of our own – even if that means sending them to another professional. 

The biggest frustration I had with our vet was his implication that his services were all Kenyon needed and we were simply overpaying by going to a specialist.   I’m happy to report that Kenyon is a week out of surgery and already on the mend – two weeks before my vet would have even performed his operation!

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Chasing Winners

It may sound strange, but I was almost unhappy to see a Barron’s article last week highlighting the good fortune of the two funds we use to invest in Emerging Markets; DFA’s Emerging Markets Value Portfolio (DFEVX) and DFA’s Emerging Markets Core Portfolio (DFCEX). The article illustrated how, after January’s impressive performance, especially in international and emerging market stocks, investors have been flocking to equity-based mutual funds as cash inflows continue to increase. 

This rush to emerging markets, in no doubt, stems from their excellent performance so far this year.  As of the close on February 2, DFEVX was up 17.57% year to date with DFCEX following close behind at 14.97%.

So, why am I so glum?  Well, to me, the blogs have almost written themselves lately.  Last week, Jeannette touched on the media touting US stocks as the safe place to be in 2012 after their solid rise in the fourth quarter of last year.  We see this week how quickly the tune can change after just one month of returns.

This is another indicator that, behaviorally, investors simply don’t understand the dangers of chasing winners, trying to time the market or somehow believing that buying the thing that just won over some arbitrary time period (Note: Emerging Markets, as an asset class, was one of the worst performers in 2011) is the right course of action.  That’s not to say Emerging Markets is destined to perform poorly the rest of the year or that it will continue its rise.  It just means that shouldn’t be the focus is in the first place.

Having a diversified, well thought out approach to investing means never missing out on what the market provides and never having to look over your shoulder at what you think might be coming next.    Attempting to buy winners after the winning’s already occurred or is in process is a surefire way to lose over the long run.  You almost always tend to miss out on the greatest gains.

To put it simply, you have to be at the party before the cake arrives.  Trying to get in after the fact will, more often than not, leave you disappointed and hungry.

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/

Are US Stocks a Sure Thig?

The drive to restore investment portfolios to the levels set before the Great Recession is still influencing investor decisions.

In past blogs, I’ve expressed concern the economic downturn would make people more vulnerable to get-rich-quick schemes.   A recent chart published by The Economist,  A Multitude of Madoffs, showed the SEC  filed more than twice the number of Ponzi scheme cases in 2010 as they did in 2008;  and the FBI is currently investigating 1,000 cases of investment fraud.  The temptation to invest in something that sounds too good to be true is much greater these days.

For others, the feeling that they should re-position their investments for a faster recovery is equally tempting. 

After the rise of US stocks in the fourth quarter of 2011, many articles have been written about the expected out-performance of US stock market returns for 2012, especially given Europe’s continued struggle with their sovereign debt crisis and the recent rating agency downgrades of the debt of France, Italy and others.  But are US stocks certain to have higher returns than stocks in other countries?

Here at TAAG, time and experience have taught us that anytime something becomes the consensus, it’s time to be skeptical. 

International stocks fell out of favor in the late 1990’s when US telecom and technology stocks were on an upward trajectory that seemed limitless.  When the technology bubble burst in early 2000, real estate, emerging market and large international funds supported our client portfolios with positive returns.  Investors moved to real estate and real estate funds in 2005 and 2006 after experiencing losses in stocks, only to watch real estate values begin to fall in 2007.  When the Great Recession hit and the US market fell severely in October 2008, some investors chose to exit stocks entirely, relying on reports that the United States was in for an extended period of losses similar to the Great Depression.  They left in time to miss the 25% gain in the S&P 500 in 2009, and the 70% gains in US small value stocks. 

There is always someone willing to tell us where the market is headed.  When it becomes a chorus of agreement, that’s when it may be time to tune them out.

Jeannette A. Jones, CPA, CFP ®