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/