The Asset Advisory Group

So, Um, What is a Private Equity Firm?

2012-01-24T16:53:00.000-05:00

(from Marilyn Geewax's NPR report, 1/19/2012 - click here for the original post. Marilyn is NPR's Senior Business Editor. Besides assigning and editing business stories, Geewax regularly discusses economic issues on NPR's Weekend Edition Sunday. More on Marilyn can be found here.)

In the run-up to Saturday's GOP presidential primary in South Carolina, candidates have clashed over the role of Bain Capital — a firm that either creates or kills jobs, depending upon whom you believe.
Front-runner Mitt Romney sees the bright side. Before entering politics in the 1990s, he co-founded Boston-based Bain Capital, one of the nation's largest and most profitable private equity funds. He has said he created 100,000 jobs while at Bain.

But critics say that figure excludes the legions of workers who were laid off by Bain. Candidate Rick Perry, who ended his campaign Thursday, had described Romney's work as "vulture" capitalism. And former House Speaker Newt Gingrich repeatedly raised questions about the firm's approach to job-cutting.

Before this controversy erupted, most Americans had never heard of Bain. That's because it operates in the private investing world, not the public market.

In the public arena, anyone can turn to say, the New York Stock Exchange, and buy shares of a publicly traded company. But in the private equity investing world, only wealthy individuals and large institutions, such as pension funds, are welcome. That's Bain's world. Here's how it works:

What is a private equity firm?
This term describes companies like Bain, which gather up funds from wealthy individuals or institutions for the purpose of buying up companies and turning a profit, usually within four to seven years. The equity firm's managers get fees, as well as about 20 percent of the gross profits.

A typical deal goes something like this: The equity firm buys a company through an auction. The firm then increases the value of the company by, for example, upgrading its accounting system, procurement process and information technology, or by laying off workers and closing unprofitable operations.

After the private equity firm gets the company in better shape, it exits the deal by selling it to a large corporation or offering stock to the public. But often the effort to fix up the company fails and bankruptcy is the outcome. The rewards can be huge, but the risks are great too.

So why is this controversial?
Sometimes, the private equity firm uses strategies that critics say play out more as "vulture capitalism" — a phrase that some people are using to describe a process where investors make enormous profits while needlessly laying off workers.

The Wall Street Journal did an analysis of the 77 businesses Bain invested in during Romney's tenure. It found 22 percent either filed for bankruptcy or shut down within eight years of Bain's investment. Even several companies that initially provided Bain with huge profits later ran into trouble. Of the 10 deals that produced more than 70 percent of Bain's gains, four eventually filed for bankruptcy.
But the companies that succeeded were hugely profitable. The Journal concluded that Bain turned $1.1 billion in investments into $2.5 billion in gains in the 77 deals.

The phrase "leveraged buyout" is sometimes used in connection with private equity firms. What is that?
"Leverage" refers to large amounts of debt. Just as a lever can be used to help lift a heavy load, borrowed dollars can help lift a deal that otherwise wouldn't happen.

Defenders say the deals can work well. For example, if a company is headed for bankruptcy anyway, an infusion of borrowed money may be a life preserver. The cash can be used to buy equipment, upgrade software or offer severance pay to unneeded employees.

In the end, the spruced-up company can be sold to a larger corporation, or it can start selling shares in a public stock market. The profits can be used to pay off old loans and reward the investors. Critics say the strategy too often results in needless layoffs that do little to actually save the company.

What is venture capitalism?
That's another strategy for investing private funds. In this scenario, the equity firm provides capital (money) to a startup venture and then helps support the small company as it grows.

The private equity firm hopes to make lots of money from successful startups, but the investors are taking bigger risks than bank lenders would be willing to take.

We've also heard about "crony capitalism." What's that?
In a capitalist system, success is supposed to be determined by the free market and rule of law. But Perry's critics said that in Texas, he had been promoting "crony capitalism," where the relationship between business and the state is too close. Under crony capitalism, the success of a particular business is dependent on the favoritism shown to it by the government, in the form of tax breaks, grants and other incentives. Perry's spokesman denied the governor had engaged in inappropriate business dealings.

President Obama also has been accused of crony capitalism in relation to his support for Solyndra, a failed company that specialized in green energy technology.

Private Equity At A Glance

Private equity firms headquartered in the U.S.: 2,300
Buyout/growth expansion funds currently fundraising in the U.S.: 260
Private equity-backed companies headquartered in the U.S.: 14,200
Employees hired by U.S. private equity-backed companies: 8.1 million

Notes: As of September 2011
Source: The Private Equity Growth Capital Council

Do You Want Fries with That?

2012-01-17T14:04:00.007-05:00

I was reminded of this line from a Tim McGraw song when I went to the dentist Monday. I began a relationship with a new dentist a few years ago after my dentist of 25 years retired. For the first two years everything was great. I liked that my new dentist was close to my age (we could grow old together), had a friendly staff and appeared to be utilizing the latest technology. My eyebrows were initially raised about a year ago when I noticed her face staring back at me from the seat of a Kroger shopping cart ad, followed by a few Groupons featuring her practice.

During my initial visits, care was taken to create a welcoming atmosphere where the staff ensured procedures were performed in a comfortable manner. When I went for my check up last summer, I was a little surprised to see an assembly line of hygienists ready for their next patient. Today’s experience sealed the fate of our relationship. Not only were my teeth cleaned by the sixth hygienist I’ve met in as many visits, but the whole environment had become geared toward treating as many patients as possible and getting them out the door as quickly as they can.

As a business owner I certainly understand the need to grow your business. It just disheartens me that many professions that were once dominated by personal relationships seem to be taking their customer service cues from the fast food industry.

At The Asset Advisory Group (TAAG) we realize growth is important so the children and grandchildren of today’s clients will be able to maintain a relationship with our firm. We are continually looking for ways to improve our service with technology. Of equal importance is maintaining the personal touch and customizing each client’s experience. For example, we offer to hold Skype meetings with out of town clients to maintain the connection that’s often lost when speaking over the phone.

The majority of our new clients are referred by existing clients or their other advisors that share our service philosophy. We often hear new clients are leaving their current financial advisor because of a lack of communication or drop in service levels as their existing advisory firm grows. Each of TAAG’s advisors will only work with about 100 client families to ensure the company’s growth does not alter the relationship we have with our existing clients.

Going through experiences like I did with my new dentist only reinforces our vision for growth. If you know a good dentist….

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

Social Media & Investing – Protect Your Information

2012-01-10T13:10:00.000-05:00

Investors increasingly turn to social media for information when making investment decisions. Our social media lunch and learns have been some of our most well attended sessions. This is a positive advancement as information becomes instantly available to the masses, but it also means we must be more vigilant than ever when it comes to protecting privacy and identity.

The SEC recently released two separate Investor Alerts involving investors and use of social media, focusing on what investors can do to avoid potential fraud. We thought it would be worthwhile to provide a brief synopsis of both articles as they provide some excellent, easy to implement tips.

Part I – Avoiding Fraud

Social media is an attractive playground to criminals intent on committing fraud as it provides a platform to contact multitudes of potential victims at little to no cost. The SEC advises on some key pointers that can be key in avoiding this type of attack.

- Unsolicited Offers to Invest

o It generally goes without saying that someone contacting you out of the blue with an attractive offer is something to be wary of, but the important thing to note is how professional and personalized these offers can be made to look in this day and age. Even if something looks extremely official, approach any unsolicited offer with extreme caution.

- Affinity Fraud

o This is a new term given to an old trick. The SEC recommends avoiding investment decisions solely on the recommendation of a member of an online group or organization to which you belong. Scammers here prey upon your feeling of community or identifying with a like-minded individual. Sometimes the person bringing you the opportunity maybe someone you have known for years, but were scammed themselves and are passing the danger along. Do your due diligence on your own as you would with any other investment opportunity.

- Market Manipulation

o Schemes known as “pump and dumps” have been around for a long time. Someone uses false or misleading information to drive up the price of a stock just in time for them to sell their shares before the stock tanks. The same tactic can be used in research reports or newsletters where writers are paid by companies to tout a given stock or investment. Social media allows for all kinds of new ways to promote investments in fraudulent or unethical ways. Always consider a person’s motivations for promoting an investment opportunity or company. If it’s such a can’t miss opportunity, why are they telling everyone they can via Facebook or another tool rather than just keeping it to themselves?

- High Yield Investment Programs

o These are unregistered investments that make the promise of providing a higher yield than is generally available in the market, often with little or no risk. Some of these offers use the term “prime bank”. Lots of return, very little risk is always a dangerous and often fraudulent combination. Turn and run the other way.

- Common Red Flags

o As with anything in life, beware of anything that sounds too good to be true, promises anything guaranteed (especially returns) or pressures you to buy immediately. The trick here is that with interest rates at historic lows, scammers can promise relatively low returns and still turn a few heads, but it still doesn’t mean it’s a legitimate opportunity or a good idea.

Part II – Securing Your Accounts

- Passwords

o The bottom line is to use different passwords on different accounts and make sure the password is extremely challenging. Use passwords to secure your mobile devices as well, especially if they have access to your social media accounts.

- Links

o Tread cautiously when clicking on links, even if sent by a friend. If the link looks funny or the message does not sound like a typical message a friend would send, simply delete.

- Privacy Settings

o The default privacy settings on many social media sites may not offer adequate protection. Take the time to go in periodically (sites will update available settings often) and customize your privacy settings to minimize the amount of personal data available.

- Requests from Financial Professionals

o Perhaps most importantly, always know that no financial institution, advisor or other investment related organization should ever ask you for personal data, account information, social security numbers, etc. via a social media website. Any request should be ignored and reported to proper channels.

The bottom line as with so much in life is “buyer beware”. If something sounds too good to be true or can’t miss, than it most likely is. If you want more detailed information on any of the above or care to see links to real-life cases where these incidents have taken place, you can find the original SEC reports below.

Social Media and Investing: Avoiding Fraud

Social Media and Investing: Understanding Your Accounts

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com

Is My Money Safe? Part II

2012-01-03T10:31:00.002-05:00

In my last blog I discussed the safety of investment custodians such as Fidelity and Schwab, after I received a concerned email from a client. After watching Jon Corzine, the former CEO of MF Global, trying to explain how $1.2 billion was missing from their clients’ brokerage accounts, he was worried about his own.

The next important question to ask is whether you can trust your advisor. Research indicates most investors believe their advisor is very trustworthy, even if the evidence shows otherwise. It’s great to have an advisor you feel you can trust, as long as that trust is backed up by checks and balances, facts and reality. Investment scams seem so obvious after they’ve been exposed, but most of those affected weren’t suspicious of their advisor until it was too late.

Investors disappointed in their returns over the past decade are more likely to be taken in by what appears to be a chance to make great returns. Tough investment markets bring out the emotions of fear and greed, and make people more vulnerable. Based on my study of advisors and investment scams, if your current advisor exhibits one or more of the following characteristics, you should be very concerned:

1. There is no independent accounting of individual investment holdings, portfolio account balances or returns. As a former KPMG auditor, this one is so obvious to me it’s frustrating. However, it’s been ignored by everyone from the very wealthy to low income individuals. Bernie Madoff was able to report consistently positive, long-term investment returns because he was the one preparing the reports, and we all know how that turned out.

But here in Cincinnati we have our own example as well. In February 2001 Stephen G. Donahue, owner of SG Donahue Securities, was found guilty of taking over $6 million from nearly 250 clients by supposedly investing their money in a tax free bond fund that never existed. Instead, he used the money to pay his personal taxes, buy a condo in Florida, and cover other personal expenses. The theft was hidden because the company did not use an independent custodian like Fidelity to report on client holdings. Instead, statements were prepared internally and mailed to clients by the SG Donahue Company.

2. They guarantee investment returns. Registered Investment advisors like The Asset Advisory Group are barred from using the word “guaranteed” when we discuss investment performance with current or potential clients. The Firefighters’ Retirement System of Louisiana, along with two other Louisiana pension funds, is now trying to recover a combined $100 million they have invested with Fletcher Asset Management, which had guaranteed a 12% minimum annual return. Their withdrawal requests have been met with only IOUs at this point. The FBI and SEC are currently investigating, so this story may just be getting started.

Our local example is George Fiorini and the 10% Income Plus Plan. His investment scam was first brought to my attention in 1995 by my administrative assistant, who gave me a mailing she received that was also circulating among her retired friends. Fiorini’s advertisements were on radio, TV, and bus benches, and featured local celebrity Bob Braun as his chief spokesman. Over 170 investors lost $5 million, most of whom could not afford to lose anything.

3. They report returns that are significantly higher than market conditions would indicate. Bernie Madoff was able to deliver consistently positive investment returns for decades while S&P 500 returns were negative, but if you questioned the validity of the returns, he returned your money and fired you as a client. This worked until too many people asked to cash out. Allen Stanford, CEO of Stanford Investment Bank, reported returns of 15% or more on the bank’s high rate CDs, until the SEC decided to investigate after Bernie Madoff’s Ponzi scheme unraveled. Remember Home State Savings Bank’s higher than market CD rates here in Cincinnati?

A December 27^th Wall Street Journal article, SEC Ups Game to Find Rogue Firms, indicates that the SEC is finally wising up and using performance data to screen out investment management firms to investigate. They have announced four civil-fraud cases so far as a result.

4. They use wealth, connections to the rich and famous, or exclusivity to give them credibility. George Fiorini would show up for meetings in a chauffeured black limousine. Allen Stanford sponsored cricket teams in the West Indies, and his friend pro golfer Vijay Singh promoted Stanford’s company by wearing the firm’s logo on his apparel and golf bag.

The aura of exclusivity was used to promote Ben-Mar Investments in the early 1990’s in Cincinnati. Ben Schmidt and Mark Gatch used country club connections and their relationships with Bengal players to promote an investment fund that supposedly used a sophisticated investment strategy in which only a select few could participate. Investors lost over $17 million. John Brinker defrauded 600 greater Cincinnati investors of about $20.3 million using Wellington Capital Holdings, a fictitious offshore investment bank that promised 100% returns through exclusive investment opportunities.

5. They use religion or other affiliations to build trust. George Fiorini would begin meetings with a prayer, and named one of his investment companies IGW Trust (In God We Trust). Over $2.2 billion was taken from investors through the Baptist Foundation of Arizona, IRM Corp. used face-to-face recruiting through church-based organizations to solicit over $400 million, and Greater Ministries International promoted “Christian Social Security” to take $580 million from investors. Deep religious beliefs are admirable, but they should not be the primary reason to invest with an advisor.

After reading all the horror stories you might begin to wonder if you can trust anyone. But you can build wealth, and maintain it, by working with an advisor who tells you the truth vs. telling you what you want to hear.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

A Plan for 2012 That You'll Actually Follow

2011-12-27T14:31:00.000-05:00

(from Carl Richard's New York Times' Bucks blog, 12/26/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.) His new book The Behavior Gap, will be out in January.

For 2012, I have a challenge for you: make financial decisions on purpose. Too much of what we do is based on habits and assumptions instead of a thoughtful plan. During the next year, see what happens when you do these three things:

1) Define your current reality. I used to think this was the easy part. Turns out I was wrong. Most people don’t know where they actually stand financially.

After the last few years, it’s tough to face the reality of our situations. Even if you have a sense that things have gone well for you financially, building a personal balance sheet doesn’t rank very high on the fun meter, but it has to be done. It makes it hard to reach any goal if you have no idea where you are starting from.

2) Set some goals. This step hangs people up because often we have no idea what we will be doing in five days, let alone five years. Still, it’s really hard to get somewhere if you don’t know where you’re going.

Let go of the need for precision. These are guesses, so make the best guess you can and move on. How important is paying for college for your child or children (or grandchildren)? Define it a bit. How much will it cost, what can you save, when will it happen?

Be honest. Be realistic. Of course part of this process will involve making some assumption about rates of return you will earn. Be conservative and focus instead on having realistic goals and saving more. If you can’t save more, maybe spend some time trying to earn a bit on the side.

3) Commit to course corrections. Plan on them, in fact. Break down what you have to do into quarterly action steps, and then revisit the plan every three months.

If you are off course, make changes while you’re only a little bit off. If you leave Los Angeles on a flight to New York City and you’re a half inch off course, it’s much easier to adjust when you are over Nevada than it will be a few miles outside of Miami.

Planning for a better financial future is an continuing process, not a single event. It is also short-term boring but long-term exciting.

In 2012, commit to doing small, simple things consistently and over time. It will be the opposite of what we’ll hear in the news every day about making enormous changes, so part of the challenge will be to ignore the constant call for rash actions and sweeping reform.

Let’s make 2012 about subtle, small actions so we can make progress towards our goals over a long period of time.

Embracing Simplicity

2011-12-20T15:50:00.000-05:00

Around the holidays, I find myself overcomplicating things. From trying to find the perfect gifts and decorating the house just right, to making a spectacular meal consisting of recipes I’ve never tried. Many times, this just ends up causing anxiety, and the end does not feel like it justifies the means. Not because I have ungrateful friends or family, but because what is more important to them is the time spent together, not the hours spent preparing a “Martha Stewart” moment.

The irony is that I am not practicing what I preach. I often tell clients that the less complicated an investment, often makes it better. This usually means lower fees, which translates into better performance.

It’s also true for the way people save. It can be very easy for someone to reach their financial goals by creating a plan, reviewing it at least annually or as their life changes, and simply letting the power of compound interest do the rest. Unfortunately, we live in a world where more complicated has become synonymous with more appealing. It’s easy to get seduced by the notion that more time and effort will always result in a better outcome.

All you have to do is look at our government to see how well this works. Most legislation that is passed is written on thousands of pages. Chip recently attended a Dimensional (DFA) conference where one of the speakers suggested each government agency cut their annual budget by x% each year. He mentioned this in his last blog post, FiscalStuff. This simple move could meaningfully cut our country’s deficit with minimal pain shared by everyone.

So, as you gather with your family over the holidays, and talk ultimately turns to New Year’s resolutions, maybe yours could be to embrace simplicity. This could be anything from setting up your 401(k) contributions to increase by 1% each year, to changing one dietary habit a month if you’re trying to lose weight, to just being cognizant of the way we allow complication to sneak into our lives. As with most things, once we create a plan of attack, our goals become easier to reach.

Enjoy the holidays!

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

Is My Money Safe?

2011-12-14T08:57:00.001-05:00

That’s the question a client asked me last week, after he watched Jon Corzine, former CEO of MF Global, testify to a Congressional committee about the $1.2 billion missing from MF Global client brokerage accounts. He wanted to know if his investment account at Fidelity was at risk.

The MF Global collapse is similar to that of Lehman Brothers and Bear Stearns that occurred during 2008, when brokerage companies traded to make profits for themselves and made poor decisions that led to their undoing. During the same time we watched Bernie Madoff's long- term Ponzi scheme unravel, and read about other investor losses here in Greater Cincinnati. Taken together, it’s no wonder he’s worried. In my next blog, I’ll discuss the common elements of investor scams that have occurred nationally and locally. Today I’ll address brokerage account risk, and compare MF Global to Fidelity Institutional Wealth Services and the Charles Schwab Corporation, the two brokerage firms we use to custody our client accounts. There are four major differences in MF Global operations and those of Fidelity and Schwab:

Company Focus
MF Global’s core business was providing brokerage execution and clearing services for derivatives traded on global exchanges and over-the-counter markets, and many of their clients were hedge funds and institutional money managers. It was in the process of trying to diversify into other areas, but was not as diversified as Fidelity or Schwab. Both Fidelity and Schwab provide retail and institutional brokerage services for a broad variety of clients as well as mutual fund management. This diversification of revenue sources helps to make them stronger.

Financial Strength and Regulation
The Standard & Poor’s ratings analysis on MF Global published on December 13, 2010 assigned the company a –BBB rating (the 10th S&P rating level, almost ‘junk’ ). S&P pointed out that the company had suffered losses for the year 2010 and for every year going back to 2008. For the first six months of fiscal 2011 they reported a net loss of $29.9 million. At the time, the company held only $253 million in excess capital over the regulatory minimum. Fidelity and Schwab have much stronger financial profiles. Fidelity had equity of $2.4 billion as of June 30, 2011 and carried a rating of A+ (the 5th level) from S&P, while Schwab held $6.7 billion in equity capital and an A rating (6th level) for the same period.

Even though MF Global was also a registered broker-dealer, the company primarily held commodity accounts, not securities accounts, which are supervised by the Commodity Futures Trading Commission. The Securities Investor Protection Corporation (SIPC) offers $500,000 protection on securities accounts, like those held at Fidelity and Schwab, but there is no equivalent insurance for commodities accounts. In addition, both Schwab and Fidelity have private insurance coverage in excess of the SIPC limit.

Client Agreements
Commodity brokerage firms are permitted to use cash in client accounts for their own trading, subject to certain restrictions. In fact, MF Global’s standard client agreement permitted the firm to “borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan or invest any of the collateral” in customer accounts. This practice has been an additional source of revenue for the commodities industry for decades, but companies are supposed to segregate client money from company funds. In the final days of MF Global, when Mr. Corzine was scrambling to cover proprietary trades he had made on behalf of the company, his accounting apparently got sloppy.

Schwab and Fidelity client agreements do not permit them to borrow funds from client accounts.

Regulatory History and Character
According to the S&P financial report I referred to earlier, MF Global had more regulatory actions than other rated brokerage companies. In addition, in 2008 the company suffered an “unusual” loss due to unauthorized trading inside the company. They didn’t exactly have a stellar track record. Both Fidelity and Schwab have respected regulatory records.

John Corzine held the office of both Chairman and CEO at the company, and had lots of concentrated power with little oversight. He was CEO of Goldman Sachs in 1999 before he was pushed out, but had been out of the financial industry for 12 years while he worked in politics. He was anxious to make a name for himself and took increasing risks with the company’s proprietary trading to increase profits at the firm. As I wrote in my November 8th blog, that did not work out well.

It’s important to know the companies you do business with, and the people who stand behind them. No matter how sophisticated the world gets, it’s the strength of character of the people you work with that still matters most.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

My Headline: Headline Risk Is a Lame Excuse for Active Managers

2011-12-07T12:39:00.000-05:00

(from Dan Solin's Huffington Post blog, 12/6/2011 - click here for the original post)

A recent blog on CNBC almost made you feel sorry for active managers It referenced a study by Bank of America Merrill Lynch which found that active managers were having "a rough year." Only 23 percent of large-cap managers beat the S&P 500 index and only 27 percent topped the performance of the Russell 1000.

There is a certain irony in the fact that Bank of America Merrill Lynch is the source of this information. The merger of these two mega active managers was triggered by what the New York Times characterized as Merrill's "billions of dollars in mortgage-related mistakes." Merrill's active management of its own portfolio did little to inspire confidence in its investment expertise.

But I digress.

Active managers were quick to explain their underperformance. Mark Lamkin, the CEO and "chief investment strategist" at Lamkin Wealth Management, blamed his underperformance on "headline risk," noting: "Nine of the last 11 years my active strategies have beaten the market, and I'm underperforming this market. It's all headline risk."

"Headline risk" is the possibility that a negative news story will adversely affect the price of a stock.
I tried to verify Mr. Lamkin's claim that his active strategies have "beaten the market" in nine of the last eleven years and was unable to do so. His firm does not publish the results of its portfolios on its web page. I called his office and asked for additional information but received no response.

Analyzing the significance of claims that a fund manager or advisor "beat the markets" is not uncomplicated. You need to understand how much risk the manager took and whether the benchmark used for comparison is an appropriate benchmark, comprised of a proportionately weighted mix of stocks and bonds.

Mr. Lamkin's lament about "headline risk" is troublesome. Unexpected news is a reason for under performance by active managers, but it is not an excuse that active managers should use to explain their inability to "beat the markets." Tomorrow's news drives stock prices. Active managers don't know tomorrow's news. They can't anticipate what they don't know. "Headline risk" is one of many reasons why active managers historically have underperformed the markets and are likely to continue to do so in the future.

According to a mid-year 2011 study by Standard and Poors, Over the past three years, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. Passive management trumped actively managed in nearly all major domestic and international stock categories.

The results for this year, while worse than in previous years, are not unexpected. The skill of active managers is not in "beating the markets." It's convincing you they are likely to do so in the future, and coming up with lame explanations for why they have not done so in the past.

That's my headline.

Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Fiscal "Stuff"

2011-11-30T07:59:00.001-05:00

As most of you know, we here at TAAG do not find much value in the exercise of trying to forecast the short or intermediate outlook of markets or the economy. All of our brains are wired to constantly crave information that will give us some insight to help us make better decisions with our money. Unfortunately, the name of the game when it comes to short term forecasting is uncertainty, despite the endless line of “experts” willing to line up and take their run at claiming to know what’s next. Go with their suggestions over and over again and you’re bound to lose.

That said, one of the best sessions at a recent conference I attended featured Ed Lazear. One of the world’s most renowned labor economists, recipient of most awards having to do with economics, chair of the more recent President Bush’s Council of Economic Advisers, advisor to governments around the world and currently a graduate school professor splitting time at both Stanford and the University of Chicago, Ed is a smart guy and worth listening to when it comes to all things economics.

I thought it would be worth passing along some of his thoughts on the current environment and all the “stuff” or noise surrounding our economy, what truly is cause for concern, and why we should be optimistic in the long run.

- Ignore the Forecasts

o When asked, Lazear estimated GDP will grow 2.5-3% in the next year, but that was just a guess. He went on to say that listening to any prediction about what the economy is going to do over a particular month, quarter or even year is pretty much a stab in the dark. While serving at the White House, his team would have all the economic data to generate the GDP growth rate for a given month. They would hand off the data to the number crunchers and within a few hours, GDP would be reported. Even with all of the data known and in their hands, Ed admitted their in-house advance estimates being off 0.75% or more, a pretty big margin of error for a number that’s historically in the 3-4% range annually. There are simply too many drivers for any one person to truly claim they know what’s coming next, much less how markets might react as a result.

- The Bad News

o Our unemployment rate remains tremendously high and is trending more in line with France’s than Germany’s which, historically, is not a comparison we want to aspire to. The real long term concern lies with our deficit and debt. The ratio of our deficit to GDP is entirely too high and rising. In the long run, allowing some of our entitlement programs to continue without any reform is what will truly cause our debt to skyrocket even further. It will take tough solutions to help get these trends moving in the right direction again. Moving in the direction we are today is simply not an option. The world took a pretty big hit over the last several years, but the U.S. is climbing back, albeit at a snail’s pace

- The Upside

o Lazear closed the session by mentioning that despite all of the doom and gloom, this is likely to go down as one of the healthiest turning points in our country’s economic history. For the first time in a long time, the national budget and the size of our government is front page news and front of mind for many citizens. This, in his mind, is hugely positive and will push us to innovate and develop solutions. The arguing and posturing in Washington, while extremely frustrating, is the nature of politics and will turn as constituents demand. All parties involved know they have to deal with this in the relatively near future. Not dealing with it is a “death sentence”.

o Ultimately, he sees an agreement being reached. He personally likes the idea of cutting the budget across the board at “X” percent per year for a number of years as an approach. It creates a disciplined process that allows groups to plan for without causing any one area more than their share of pain.

The point of this update is not to give you yet another person’s opinion on what’s to come, but to give you a long term, measured look at how one of the smartest guys in any room sees what can, at times, appear to be an overwhelmingly impossible situation. There’s no doubt there are major challenges in this world, but, as with investing, that creates more opportunities and higher expected returns for markets and society in the long run.

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com

Happy Thanksgiving!

2011-11-23T08:44:00.000-05:00

As we head full steam into Black Friday and all the hustle and bustle of the holiday season, we wanted to pause a moment this Thanksgiving Eve and encourage everyone to really take time tomorrow to enjoy all the family traditions, the time together and to truly give thanks for all that we have and enjoy in this world.

Wherever you are this Thursday, we hope you have a wonderful holiday and know that we are thankful for the work we get to do with and for our clients and their families each and every day.

Happy Thanksgiving to all of our readers, clients and their families!

The Asset Advisory Group
www.taaginc.com

Resetting Expectations

2011-11-15T17:15:00.001-05:00

I am an avid Cincinnati Bearcats fan. It was heartbreaking on Saturday to lose our first string quarterback, Zach Collaros, to a broken ankle. Although the players did a great job in the second half of the game adjusting to a new quarterback, we still lost to West Virginia. Zach’s out for the season and now four other teams are only one game behind our first place standing in the Big East. The Bearcats are still eligible for a bowl bid, but getting to a game like the Orange Bowl may be more challenging. I may need to adjust my expectations for post-season play.

This happens all the time in financial planning. We set goals, encounter obstacles, and need to adjust our plan when we face new challenges. This might be the loss of a job, an unexpected illness, or a precipitous drop in the stock market. While all of these events are beyond our control, how we prepare for them in advance and readjust along the way can minimize their impact on our ability to reach our goals.

Over the past 21 years, I have worked with many clients who have had to alter the original picture they had of their retirement. There were those who planned to retire from Procter & Gamble in March, 2000 when the stock tumbled from $87.44 to $61.00 in one day. Or the client going through a divorce only to learn that her husband had spent all of their savings, and they were living on credit cards. In each situation, what at first seems insurmountable is actually a temporary setback. The sooner you face a difficult situation, the less devastating its impact will be.

As we have worked through challenges, and my clients have made adjustments to their original course, they have still been able to achieve a fulfilling retirement. As we’ve often said in this blog, it’s not what happens to you, but how you respond to it that will dictate the success or failure of your plan.

While the Bearcat’s initial response to losing their quarterback seemed to be fear and panic, once they were able to regroup at halftime and adjust their game play, they came a lot closer to winning their game. Maybe I’ll need that hotel reservation in Miami after all…

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

What Can We Learn from MF Global?

2011-11-08T16:59:00.000-05:00

Over the past two weeks, while the Greek Prime Minister tested the patience of Germany, France and other countries in the European Union, there was another drama playing out.

MF Global Holdings is described on its web site as a brokerage firm that provides ‘indispensable, well-timed insights and hedging solutions’ for its clients. They go on to say their ‘relentless pursuit of market opportunity separates us from the pack. We help clients find an edge in today's fast-paced, ever evolving markets.’ In so many words - we don't just sit around and watch the market, we DO something!

The company's CEO and Chairman, Jon Corzine, was the former Chairman of Goldman Sachs, and had decades of industry experience. He also had significant hubris about his ability to invest based on his ‘well-timed insights’.

Last Friday Corzine resigned from the company after a $6.3 billion bet the company made on European debt did not go the direction his insight told him it would. Now the company has declared bankruptcy, and the FBI is investigating $593 million in client funds that remain missing.

You’re probably tired of hearing about Wall Street financial failures; but MF Global along with the Merrill Lynch, Lehman brothers, and Bear Sterns failures that came before all share a common lesson.

Even the smartest, most well connected investors in the industry are wrong about which way the markets will move, when they will move, and what you should do about it.

Sometimes our clients ask where we think the market is headed and what we should do to prepare, and they are frustrated when we tell them we refuse to offer up predictions or opinions. We don’t refuse just to be difficult; we do it because we realize the next logical step after a prediction is the temptation to do something to avoid what you think is going to happen. But for each and every economic or political issue, there are multiple known and an even greater number of unknown possible outcomes. When Greece agreed to a debt bailout deal with the EU, and the Dow responded with a whopping rally, who anticipated the Prime Minister would decide to put a referendum vote on the decision – causing another drop in the market? We realize that we cannot anticipate every outcome, and we are honest enough to admit it. It doesn’t mean you can’t be a successful investor.

Investors have been taught to look for advice on when to jump in and out of stocks, and the media has reinforced it. Over and over again we have seen people hurt by promoters who sell products that promise to out-perform the market based on an ability to out-maneuver the market. We’ve even seen people hurt by attempts to avoid losses by moving their funds into ‘safe’ investments that can’t keep up with their spending or inflation. None of these tactics are successful, long-term strategies for growing and maintaining your wealth.

Building an investment plan based on what you want to accomplish financially; using low cost investment options to implement your plan to keep more of what your investments earn; and using the jumps and drops in the market to rebalance works. You will rarely hear someone on TV or radio talking about it, because it does not provide the same excitement and drama that MF Global’s strategy did. Somehow I don’t think you would miss it.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Stuff-ing

2011-11-01T15:27:00.001-04:00

As I continue my commitment to blogging about “stuff” through the remainder of 2011, I’m going to turn my thoughts today to Thanksgiving stuff.

As in stuff-ing.

As in the traditional start of the holidays where we begin to stuff our faces through the end of the year only to dread the consequences as we resolve to shed it all away in the New Year.

How do we break that cycle? No, I still want everyone to enjoy themselves throughout the holidays. But, I will make a simple suggestion. Go ahead and get started with your 2012 exercise plan right now. Keeping moving through those months when we tend to overindulge a bit might not solve the problem, but it will be much easier to lose those extra 10 pounds come January if you’ve avoided making it an extra 20 by getting some healthy habits in place in advance.

This Thursday, November 3rd, is National Start Eating Healthy Day. It’s likely no coincidence that it falls just three weeks before Thanksgiving. Three weeks is just enough time to develop good habits and make a meaningful, productive change. Pick something you can do over these next 21 days to really make a difference to your health. It’ll make that stuffing taste that much better come November 24th.

My commitment to starting off the season right will be to participate in the first annual Thanksgiving Day Race in downtown Cincinnati. Ok, so it’s their 102nd annual, but it’s my first. The 10k run (or walk if you’re so inclined) will be a great way to start off the day and stave off most, if not all, of the guilt to come later that evening. If you’re in town, get the family together and come join the fun!

Even if that’s not quite your speed, the message still applies. In a world where health care costs become more and more a focus in financial planning, the more preventative action we can take by staying as healthy as possible, the lower our exposure will be in an area of our lives where costs are growing faster than any other.

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

The Struggle to Define What We Truly Need

2011-10-26T10:31:00.000-04:00

(from Carl Richard's New York Times' Bucks blog, 10/17/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)

There seems to be a constant battle between what we have, what we need and what we think we want.
About a year after my wife and I had our first child, we moved into a neighborhood with homes built decades earlier. Each had two or three bedrooms. We soon noticed that when people had a third or fourth child they moved from the neighborhood in search of more space. One day I mentioned this to my next-door neighbor, who was 70 at the time, and he expressed surprise.

He and his wife had raised their five kids in one of the smallest homes on the block.

One of the most challenging personal finance issues we all face is the ever-expanding definition of “need.” Things we once considered clear luxuries have somehow becomes necessities, often without any consideration of how the change in status happened.

Cars that seemed just fine now seem old fashioned. Then there are children and their cellphones. Only a few years ago it would’ve seemed outlandish for 14-year-olds to need one at all, let alone the latest iPhone.

Achieving clarity about the difference between our needs and wants remains one of the biggest challenges in personal finance and a tremendous source of potential conflict within families. While simple in theory, the calculation is much more complex in practice.

One of the most discouraging parts of modern life seems to be this never-ending sense that we should want more. While this may not be true for everyone, it does seem like it’s become more difficult to be content with what we have. Whether it’s the media, our friends or even our family, it can be a challenge to separate real needs from wants. So here are a few of things to think about:

What if financial happiness is not about getting more but about wanting less?
What if things start out as wants and become needs not because the thing itself has changed but because our feelings about it have changed?
What if you can never really get enough of something that you don’t need?

From personal experience, I know that the shiny new toy I just had to have often ends up in a pile of things that I eventually need to sell on eBay. I’m not the only one that’s fighting this battle. It’s yet another example of why personal finance can be so complex. Because there’s no definitive list of the 100 things that every family must have, these end up being very personal decisions

I’ve talked about some of the ways I’ve seen people look for balance between wants and needs. They include things like sleeping on a decision overnight. My personal rule is that before I buy a book, it has to sit in my Amazon shopping cart for five days.

What have you done to help better define the difference between a want and need? And how have you focused more on being content with what you have instead of always striving for what you think you want?

Teach Your Children

2011-10-18T15:53:00.001-04:00

I attended Homecoming at my alma mater, the University of Cincinnati, this weekend. In the first twenty years after graduating, my only association with the school was through the support of their basketball and football programs. Last year, I reconnected with one of my professors and have become more actively involved by being a guest speaker in the classroom and joining the Foundation’s Planned Giving Committee and the Economic Center’s Financial Education Initiative Committee. Through each relationship, I am gaining insight into how children continue to be woefully unprepared for their financial future.

Many of the students to whom I spoke in a Careers class were not interested in a career in finance. However, I was able to get their attention when I demonstrated what the power of compound interest and time could do to a small investment (ten songs a week on Itunes) and the impact even a small credit card balance can have for many years. I was amazed this was new information to a class ranging from sophomores to seniors!

Through the committee at the Economic Center, we are reaching out to area schools and offering them a financial curriculum and access to professionals in the community to assist their efforts. This will be an uphill battle with the continual budget cuts the schools face. After all, finance is an elective, right? When are kids ever going to need to know how to balance a checkbook?

I don’t have children of my own and have been removed from our educational system for too long. This past year has served as an Aha! moment for me. My reconnection to UC has helped to explain why I see so many clients whose retirement becomes endangered because they feel obligated to bail their children out of a financial hole. If basic budgeting, saving and investing were a core part of our children’s education, this might not be the case.

While school may not be the place for your children or grandchildren to learn about finance, you can lead by example and look for ways to instill good financial habits. There are opportunities on a daily basis to teach children financial skills - by explaining the difference between a need and a want, showing them that saving a little can add up to a lot, and giving them the opportunity to learn the financial and emotional benefit to helping those in need. If you take the time to ensure your children are on a path to financial success, you just may be ensuring that you stay on one as well.

Christine L. Carleton, CFP®

clcarleton@taaginc.com
http://www.taaginc.com/

The Benefit of Perspective

2011-10-11T16:36:00.000-04:00

It's official. I'm getting older.

I blew my right knee out 2 weeks ago at the gym and have to have surgery to repair it, and I‘ve caught myself saying things like ‘back when we were kids….’

But there’s an upside to getting older too. My husband and I enjoy our adult kids, and our second grandson is due any day now. I love my job. Life is good.

Getting older has also given me the perspective to deal with the financial environment we’ve been experiencing since 2007, and the daily gyrations of the market this year.

In October 1987, the stock market dropped 20% in one day. Can you imagine seeing a 2,200 point drop in the Dow Jones Industrial average cross your computer screen today? We baby boomers were between 41 and 23 years of age then, so we still had years left to work, or we were just getting started. As one client put it, ‘I didn’t have any money then, so it didn’t really matter to me.’ Now it matters to us, because the first of the boomers turned 65 this year. As we retire or approach retirement, the daily drops and dismal economic reports create much more anxiety than that drop did 24 years ago. You add the technology bubble of 1999 to 2002, the Great Recession of the last four years, and many of us are beginning to feel picked on.

I get it. But the Dow Jones was 1,738 after the Crash of ’87, and it closed at 11,433 today as I write this blog. Our economy has grown, and the world outside the US has grown even faster. We have benefited from it financially during our lifetime. We need to understand that what we are going through now is not unusual, it's just happening to us at a time when we are feeling especially vulnerable.

Market climbs and drops will continue to happen in the future, maybe with even more regularity and severity with the speed of technology and change that exist today. But before you rush for your Maalox, consider that we will be retired for nearly as long as some of us worked. We have to have exposure to stocks to benefit in the same way we did over the 30 plus years of our working lives. We won’t be spending it all in one year, and we shouldn’t be viewing our investments as a month-by-month test of returns.

As we say time and again, the most important issues to focus on are those that we can control:

Do you have a plan?
Are you diversified?
Are you spending at a rate that is reasonable for your resources?

If you have those three issues under control, you can turn off your TV, put your investment reports away, and get on with enjoying your life. That’s what you’re supposed to do when you get older.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

More & More "Stuff"

2011-10-04T13:45:00.000-04:00

The response received from our recent blog on how to handle personal property in dealing with estate planning was an eye opener. From precious heirlooms to misperceptions about what’s trash and what isn’t, it’s clear that from aging parents to siblings to what to hand down to our own children, this issue seems to invade almost all of our lives in one form or another.

At the risk of staying on my soapbox about our unhealthy relationship with “stuff” a bit too long, I’ve decided to continue down the road with this topic, focusing on various angles through the remainder of the year. This week, I’d like to start by recapping some of the great tips and comments we received from clients, attorneys and other readers that I thought were well worth sharing.

- One client shared a story of a grandmother who would promise something to offspring on various occasions, but could never remember who she’d promised what. The result was multiple items being promised to multiple people, causing disappointment within the family. In addition, certain items of sentimental value to some family members were sold to an antiques dealer as the grandmother simply had no idea they meant anything to anyone. The bottom line here – the importance of communication when it comes to these sometimes difficult situations and documenting whatever is ultimately communicated.

- A recommendation came from a local attorney specializing in helping families, especially those with family businesses, with discussions around succession, philanthropy and a wide range of strategic planning. If the time has come to inventory and auction a family member’s assets, he recommends Everything But the House. Located in Cincinnati, EBTH will inventory and run an online auction to liquidate. This helps the seller retain top dollar for their items as it’s not subject to a one day only, live event.

Coincidentally, a family friend used this service when downsizing from their family home to a riverfront condominium. They enjoyed the process and handled the emotional component by taking a digital photo of each and every item. Now, whenever a sentimental urge strikes, they can “visit” their old possessions via a well organized catalog stored on their computers and reminisce.

- Last but not least, a local estate planning attorney provided this straightforward tip. He learned a while back that it’s great to ask grandma or grandpa, mom and dad or whoever in the family may need the nudge, to label items, especially artwork. This avoids the potential debates over whether the item is truly worth good money, or was a $10 print from Home Goods.

I thank all of those who sent comments and tips on how they’ve handled their “stuff” issues and certainly felt that these were worth sharing. Please continue to pass along your stories and observations about how you and your family have handled issues surrounding “stuff” in your lives.

Have a great week!

Chip Workman, CFP®
E-mail Chip / TAAG Website

The Ever-Shifting Balance Between Resources & Dreams

2011-09-28T08:40:00.000-04:00

(from Carl Richard's New York Times' Bucks blog, 9/20/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)

Most of us have limited resources, like time, money, energy and skills. At the same time, we have needs, goals and dreams. All too often they exceed the limited resources we have, so balancing these two areas of our personal economy can be tricky. We also need to understand that over time both of these circles change.

Sometimes the resources we have will be greater and allow us to do more of the things we want. Other times our needs and wants will seem to dwarf the limited resources we have to throw at them.
But it’s not something that we decide once and then check off the list. It’s a challenge we have to revisit regularly. So here’s how to think about both of the circles.

First, we need to stop focusing on things outside our control. When we do that, we miss opportunities during both good times and bad (like now) to find our financial balance. Don’t put off making important and necessary adjustments, because no one else will do it for you.

Second, we need to be honest about whether our goals are realistic given our resources. You may want to retire at 50, but if you haven’t been saving money regularly, that’s not likely to happen. Aim for things that really matter to you, but don’t set yourself up to fail before you ever start. Remember: your goal is maintaining balance, not achieving perfection.

Finally, look for new ways to make the balancing act work for you. Only you know your goals and only you understand what resources you can dedicate to achieving your dreams. Get the help you need to figure out the details, but it’s up to you to keep these two areas in balance.

It’s amazing the changes that I see in people once they figure out how to match their dreams with their resources. They worry a lot less day to day about things they have no control over. They spend more time with the people they love and doing things that make them happy. Even if their balance between resources and goals doesn’t look like anyone else’s, it’s still getting them where they want to go.

And that is all that matters.

How the Mighty Have Fallen

2011-09-21T08:30:00.001-04:00

This year has not been kind to mutual fund managers - at least the ones who try to predict the future. First, Bill Gross of Pimco warned everyone that they should cash out of Treasuries or “get cooked like frogs in an increasingly hot pot of water.” Gross manages the largest bond mutual fund and sold completely out of Treasuries earlier in 2011, only to have the performance of his Pimco Total Return Fund fall to the bottom 20% of bond funds for the past year. As Treasury yields continued to fall, prices went up and his investors suffered. In the past two months he’s increased his Treasury holdings to 16%, higher than it’s been since late last year. Looks like he’s the one feeling the heat!

This spring, Bruce Berkowitz, manager of the Fairholme Fund, dropped from leading 99% of his peers in performance for the last decade, to trailing 99% of the large company value fund managers in the last twelve months. In the past, holding only a handful of stocks and bonds in the fund paid off, but big bets in American International Group, Bank of America, Morgan Stanley, Goldman Sachs and Citigroup have backfired. The best performer in that group (Citigroup) is down 29.67% over the past twelve months vs. the S&P 500’s return of 5.64%.

On September 14th, one of the most well-known funds around, Fidelity Magellan, fired its manager, Harry Lange, after six years of subpar performance. He may have been a little premature when he told the Wall Street Journal in April of this year that “six months from now, I’ll look like I’m a star.” It’s hard to believe that a fund that once touted $110 billion in assets is down to $17 billion due to redemptions coupled with dismal returns. Hopefully the new fund manager, Jeffrey Feingold, who currently runs the Fidelity Trend Fund, can repeat his one year performance of that fund and will beat Magellan’s benchmark by 1.8%. I just wouldn’t want to bet any money I will actually need.

These are a few of the many stories of once heroic mutual fund managers falling from grace. We choose to invest our clients in the Dimensional Fund Advisors (DFA) funds because they are not depending on a “superstar” fund manager to continually outperform his/her peers. Their funds are not based on speculation, which often proves to be not only futile, but costly as well. DFA’s fund managers remain invested, capturing the returns of the markets, while keeping costs to a minimum. And because cost is the biggest predictor of the future performance of a fund, more often than not, they end up outperforming their peers.

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

Living with Uncertainty

2011-09-13T16:27:00.003-04:00

It’s been a year since my husband’s cancer diagnosis and surgeries to remove his tumor and lymph nodes. He has six weeks to go until he’ll be finished with his interferon treatments – a much smaller number than the 52 weeks he had to look forward to when his treatments began. He’ll be glad to have the drug and all of its side affects out of his system, but he’s hesitant to celebrate. Melanoma is a very aggressive cancer; and he knows he will have to live with it for the rest of his life.

We all realize life is full of uncertainty, but it feels like we’ve been living with more than a healthy dose of it over the last four years. This summer’s debt ceiling debate and the current concerns over Europe’s sovereign debt have done nothing to improve most people’s peace of mind. If you have the personality of an engineer or CPA like my husband and me, you may have an even more difficult time not knowing what comes next. So how do you cope?

Know what you are dealing with. I believe one of the biggest hurdles for many people is refusing to face their fears. For example, if you are worried about your ability to retire, but you have no idea what you are actually spending on a monthly basis, it only adds to your anxiety. It’s an issue you may not want to deal with, but not addressing it means you might be spending yourself further into a hole that you can’t dig yourself out. Not facing the issues you are worried about only compounds the situation.
Have a plan. I understand I’ve said this before, but having a plan is critical and helps keep panic at bay. If you know what you need to live on, and you have five years of living expenses stashed away in cash and short term bonds, the next time the market takes a dive it won’t take your stomach with it. You’ll be confident that you don’t need to rely on a market upturn for your future survival. If you are saving for a goal, know what you need to accomplish each year, so you can make adjustments if you need to, instead of abandoning hope.
Recognize the uncertainty for what it is. There are basic truths in investing that cannot be avoided. If you refuse to take any risk, you will not receive as much reward. Look at CD rates these days. Your principal is guaranteed, but you earn virtually nothing. Stocks, on the other hand, pay us a much greater return over time in exchange for the erratic path they take toward those returns. If there was no day-to-day uncertainty in holding stocks there would be no long-term reward.

So how are we dealing with Gregg’s uncertainty? We have read almost everything there is to read about melanoma, the current treatments and research in progress. We know his odds, and we are doing everything we can to improve them. We also know that uncertainty can be a gift. When you don’t take your life for granted, you appreciate each day even more.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Estate Planning & Personal Property

2011-09-07T08:13:00.001-04:00

My wife’s family is currently dealing with her grandfather making a permanent move to a nursing home that has highlighted an area of estate planning I believe is often overlooked.

What do you do with all of the “stuff”?

The formal estate plan has long been in order and has been reviewed and updated on a regular basis. We’re grateful knowing that everything will be handled to his precise wishes when the time comes. What to do with the personal property outside larger items, however, was never really addressed.

I’ve blogged on more than one occasion about my feelings surrounding “stuff”, but in this case, believe it deserves substantial consideration. There are items of sentimental value, items that he would like to go to specific individuals and other items that need to be donated or discarded.

Fortunately, he is still with us and able to help sort out which items belong in what pile. The process has been challenging, but no major blow ups or surprises have occurred. I can easily see where this would not be the case, though, especially where the loved one is deceased. At best, it could lead to some very uncomfortable conversations and debates amongst heirs. At worst, it could generate costly legal battles and tear families apart.

Often times when you walk through the estate plan review process, the attorney or your financial advisor will reference a checklist about how to handle personal property. This is often missed or forgotten about in favor of focusing on ensuring that assets get titled correctly, making sure all the I’s are dotted and T’s are crossed and that trustees, executors and beneficiaries are properly named. It’s understandable to take a “let the kids figure it out” attitude about the rest of the stuff, but we all have different ties to different things.

The solution? Make a video walking through your home and discuss items of significance, share stories that might be relevant to specific family members and why you’d like certain people to have certain things. For those items you don’t believe are significant, sit down with your heirs and make a list of those things that might hold some unforeseen value to them. As with most things, the more communication, the better.

No one enjoys talking about a family member’s future demise, but these conversations alleviate stress both for the ill in their final days and the families after the fact. Once these intentions are clearly thought through, sit down together as a family and make sure everyone is on the same page. You don’t want the burden to fall to the executor as to how to interpret lists and videos that few or no one has ever seen.

If there are contested items or things you want an unbiased opinion about how to divide, consult your estate planning attorney or financial advisor.

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

What Apple & Indonesia Can Teach You Abou Investing

2011-08-31T08:14:00.000-04:00

(from Dan Solin's Huffington Post blog, 8/30/2011 - click here for the original post)

You wouldn't think Apple and Indonesia have much in common. On the surface, they don't, but they can still teach you a lot about investing. Let's start with Apple.

Apple made the news recently with two major events. It is locked in a battle with Exxon over which is the most valuable company by market capitalization -- a remarkable turnaround. Apple has a market value of over $344 billion. Then Steve Jobs announced his resignation at Chief Operating Officer for health related reasons.

According to a thoughtful blog by Weston Wellington of Dimensional Fund Advisors (not available online), it was not so long ago that the financial media was trashing Apple. In February 14, 2005, Robert Barker, in an article in BusinessWeek stated "...Apple doesn't tempt me..." I wonder what did. Maybe Lehman or Bear Stearns!

Steven Gandel weighed in with an article in Money on March 24, 2004. He quoted Transamerica portfolio manager Chris Bonavico who opined that Apple stock is "...crap from an investor standpoint."

Many analysts credit the remarkable sales of its Apples Stores as the key to Apple's success. In a quote attributed to David Goldstein, Channel Marketing Corp, which appeared in an article in BusinessWeek on May 21, 2001, Mr. Goldstein gave Apple "two years before they're turning out the lights on a very painful and expensive mistake."

What can you learn from these comments about Apple stock? Read the financial media if you find it entertaining. It's useless (and potentially harmful) as a source of reliable financial advice.

What about Indonesia?

The financial media was preoccupied with the downgrade by Standard & Poor's of the credit rating of the U.S, which lowered its rating from AAA status to AA plus. The new rating places the U.S. below the United Kingdom, Canada and even the Isle of Man.

Many investors viewed the lower rating with alarm and considered it a precursor of low stock returns for decades to come. The data tells a much different story, and may indicate there is no better time to invest in U.S. stocks and bonds.

In another blog, Wellington notes that Standard & Poor's rated the credit of Indonesia a "B" in July, 2001, which placed it in the "junk" category. Over the past decade, its credit rating has never risen to investment grade.

Investors in the Jakarta Composite have earned a total return of a whopping 29% per year over the last decade, ending June 30, 2011. According to Wellington, "If the Dow Jones Average had kept pace with Indonesian stocks over the past decade, it would be over 104,000 today."

Here's the lesson to be learned from Indonesia: A low (or reduced) credit rating on sovereign debt does not necessarily correlate to lower stock market returns. This is the opposite of what many investors and financial talking heads believe.

Most investors get their financial information from the financial media or brokers. As Dr. Phil would say: How is that working for you?
Dan Solin is a Senior Vice President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, will be released in September, 2011. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

When I'm 64

2011-08-23T15:59:00.000-04:00

It wasn’t listening to Paul McCartney sing “When I’m 64” at his recent concert that inspired this week’s blog, but the fact that in 2011, another baby boomer turns 65 about every 10 seconds. Although age 66 is when you will reach Full Retirement Age for Social Security benefits, there are several decisions that need to be made regarding your Medicare coverage when you are 64.

If you are already receiving Social Security, you do not need to apply for Medicare and will be automatically enrolled in Part A (hospital or inpatient care) and Part B (doctor’s visits or outpatient care). You will receive your Medicare card about three months before you turn 65.
If you are not collecting Social Security, you can apply for Medicare at age 64 and 8 months. The easiest way to do this is to apply online.
If you have Part B coverage through an employer plan, your Medicare card will instruct you how to proceed. You should check with your former employer to see if your retiree coverage reverts to a Medicare supplement at age 65.

If your employer does not provide any coverage when you turn 65, you will need to decide whether to purchase a Medicare supplement (also known as Medigap) policy plus Part D (drug coverage) or whether a Medicare Advantage (Part C) policy makes more sense. This choice will be driven by your current health and the prescriptions you take.

When I helped my mother-in-law apply, it made more sense for her to buy a Medigap policy combined with Part D for her prescription coverage. The monthly cost was higher than Medicare Advantage, but her out- of-pocket exposure was significantly less. She had some health issues such as osteoporosis and high blood pressure and takes several medications on an on-going basis. When she had to have a Pacemaker put in the following year, she didn’t have any additional expenses associated with her operation.

It is very important to choose the proper plan because you can only change your Medicare coverage once a year. We can refer you to a specialist to help you decide what type of coverage is most appropriate for your situation.

The costs associated with Medicare coverage continue to change. Part A is subsidized through payroll taxes, but Part B and Part D premiums are based on your Modified Adjusted Gross Income from your tax return. The basic monthly premium for Part B starts at $115.40 and can be as high as $369.10. The Part D premium is $0 for couples making under $170,000 but increases to $69.10 for couples earning over $428,000.

Just like any other aspect of your financial plan, we are here to help you determine the most effective way to cover your healthcare costs in retirement.

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

Accountability

2011-08-17T14:47:00.001-04:00

Have you ever noticed how much better people behave when they know they’re held accountable?

My husband and I belong to a dinner group that holds events at independent restaurants, and for each dinner, we are asked to bring a bottle of wine to share. At first some folks were bringing wine that no one wanted to drink, so we began labeling the wines with the name of the person who brought it. Immediately, the quality of the bottles brought to share improved significantly!

During the last several years of economic and stock market gyrations, the issue of accountability could have saved us all lots of grief. If mortgage companies were held accountable for the home loans they made to consumers, they might have been more honest about the reality of the borrowers’ ability to repay the loan. If the rating agencies had been truly accountable to investors, who used their ratings to make purchase decisions, junk mortgages would not have been magically transformed into AAA investments by Standard & Poor and Moody’s. The lack of confidence in our financial system – caused by the lack of accountability – created the domino effect of losses beginning in 2007.

Recently, I went back and reviewed a book I’d read that was published right after we experienced the Crash of ’87 – when the US stock market experienced a 22% drop in one day, followed by similar drops in the international markets. "Liar’s Poker", by Michael Lewis, tells the story of his experience as a bond salesman for Salomon Brothers in the years before the crash. One passage in the book really illustrated the conflict of accountability to clients vs. the firm:

Who do you work for? That question haunted salesmen. Whenever a trader screwed a customer and the salesman became upset, the trader would ask, “Who do you work for anyway?” The message was clear: You work for Salomon Brothers. You work for me. I pay your bonus at the end of the year. So just shut up, you geek. All of which was true, as far as it went. But if you stood back and looked at our business, this was a ridiculous attitude. A policy of screwing investors could lead to ruin. If they ever caught on, we’d have no investors. Without investors, we’d have no business.

The only justification – if you call it that – I ever heard for our policy came unwittingly from our president, Tom Strauss, himself a former salesman of government bonds. At lunch with one of my customers, he offered his opinion: “Customers have very short memories.” If that was the guiding principle of Salomon Brothers in the department of customer relations, then all was suddenly clear. Screw’em, they’ll eventually forget about it!

The issue of accountability to investors was raised again in a recent New York Times article, The Mutual Fund Merry-Go-Round. David Swensen, Chief Investment Officer at Yale University and the author of the article, discusses how the mutual fund industry uses market volatility to produce profits by convincing investors that they need to move in and out of funds, chasing the “best” performers. This activity benefits the mutual fund industry and the brokers who receive a commission to sell them, but not investors, who are virtually guaranteed to sell low and buy high. (The blog, Why DFA?, outlined why we use a specific mutual fund company to implement our investment philosophy, and avoid the conflicts outlined in the article).

Meanwhile, the profits made by these mutual funds, brokerage firms and insurance companies are used to make large campaign contributions to politicians and payments to lobbyists who are working to keep the “fiduciary standard” (putting the client investor’s interests first at all times) from being applied to them. It is highly unlikely that these industries will ever be subject to the same standard that Registered Investment Advisors like the Asset Advisory Group have to follow. The push for change will have to come from investors, not the government.

Who does your advisor work for? How are they compensated? Are they more accountable to a company and the products they sell than they are to you? Every investor needs to ask these questions. If they did, the quality of advice brought to the table would improve significantly!

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

What Do We Do Now?

2011-08-10T07:42:00.003-04:00

Let’s get up to speed first

Last week, Congress & the White House came to a zero-hour agreement to raise the debt ceiling, covering the nation’s short term debt needs. While there were some cuts made in future spending, the greater challenge of creating long term, meaningful solutions was left to a Congressional committee, charged with presenting a deficit reduction bill to Congress by Thanksgiving.
Friday evening Standard & Poor’s, an agency that rates the quality of various securities, debt obligations, governments and other entities reduced its rating of the U.S. government’s long term debt from its highest rating tier, AAA to the second highest rating tier, AA+. There are varying opinions as to the validity of this decision, whether it was warranted or not and what it truly means for the economy, both in the U.S. and abroad over the long term. Standard & Poor’s ultimately felt the current plan for reducing the debt is far from sufficient and that it needs to see more action from the government before improving their outlook. As of this writing, the other ratings agencies have held the United States’ AAA status, but have warned that they, too, are concerned.

The world markets responded to these events in a very negative fashion on Monday, speeding up some already brisk downward moves from the week prior due to continued tension in Europe and slower than expected growth in various sectors here in the U.S. Tuesday, the Fed released a statement confirming that interest rates will likely stay put for the foreseeable future. Along with some positive corporate earnings, this news drove the market up nearly 4% and the Nasdaq up more than 5% on an extremely volatile trading day.

We continue to believe that the best defense in any market is to have a broadly diversified, low cost portfolio that is thoughtfully rebalanced to track with our client’s long term goals and tolerance for risk. That said, we wanted to take this opportunity to provide our view on some commonly asked questions surrounding recent events.

Are my cash & short-term bond funds safe?

In a word, yes. The money market funds we utilize are of very high quality and will continue to provide safety and security for our clients’ cash reserves. Much the same, the remainder of the fixed income side of the portfolios, while subject to market fluctuation, are all short term, high quality bond funds. Using these tools helps protect our clients from a number of factors. For example, the debt downgrade impacts long term U.S. debt, but its short term rating has remained unchanged, meaning the impact of the S&P downgrade is likely to be minimal.

What can we do?

For most of us, the option to pull out of the market is the worst possible scenario, as can be illustrated by the late afternoon rally on Tuesday. We will take action by continuing to look for opportunities to buy low and sell high as the volatility provides rebalancing opportunities. Sticking with our long term discipline served us very well in 2008 and 2009 as the purchases we made during the worst of times have produced the strongest returns since.

While this sometimes feels like a “do nothing” response, it isn’t. The truth of the matter is, to quote author and financial planner, Carl Richards, “The time to prepare for a crisis is long before you find yourself in one. It’s not a good idea to figure out how a parachute works after you jump out of the plane. Financial plans and asset allocation models are built for the long term. Large fluctuations in market value are expected and are necessary as the downswings provide the buying opportunities that we’ll take advantage of in future upswings. How one responds to these temporary fluctuations over a lifetime of investing is what really tests us as investors.

This is the first time the U.S. debt rating has been downgraded. Is this time different?

No. While the look and feel of this crisis has different characteristics of the prior crisis, which had a different look and feel than the one prior to that, these issues, while incredibly painful and emotional, tend to appear and behave like most financial crises in hindsight. They are part of the natural economic cycle of booms and busts, the constant battle between fear & greed.
Corporations around the world continue to collectively be healthier than they’ve been in quite some time. Many are sitting on larger than usual cash reserves and earnings have remained strong overall. Famed economist Burton Malkiel recently said, “Panic selling of U.S. common stocks will prove to be a very inappropriate response...no one can tell you when the stock market will end its decline, but there are some things we do know. Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong.”

Who should I be reading? What should I focus on?

The best answer is that you should be reading your favorite books and magazines, and focusing on that which you can control and enjoy. If this current economic situation fits that bill, below are some excellent articles that help breakdown what has occurred of late and a variety of responses.

Resisting The Urge to Run Away - Ron Lieber, New York Times, August 5, 2011

Your Neglected Stock Market Backup Plan - Carl Richards, New York Times, August 8, 2011

Don’t Panic About the Stock Market – Burton Malkiel, The Wall Street Journal, August 8, 2011

This crisis will come and this crisis will go. The same goes for the upswings. When they will occur is something that no one can tell you with any degree of accuracy, certainty or consistency. It’s tough to feel positive in the midst of so much uncertainty, but take solace knowing that if you stick to your disciplined plan and stay focused on long term results, you’re prepared.

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

A Morality Litmus Test For Your Broker

2011-08-02T17:14:00.000-04:00

(from Dan Solin's Huffington Post blog, 7/12/2011 - click here for the original post)

It's bad enough that Ponzi schemers continue to thrive. The limits these schemers will go to get your money know no bounds. According to a recent report, three former members of the PTA used their connection with a grade school in Los Angeles to bilk investors out of $14 million. The women allegedly represented they had the exclusive right to sell products from a local dairy to various Disney enterprises and others. They promised returns of up to 100 percent.

40 investors used their life savings and took out second mortgages to pony up their "investments." According to investigators, some of the money was spent on vacations, hotels, cars and gambling.

In another scheme, Christopher Pettengill pleaded guilty to a variety of fraud charges. He was charged with concealing information from investors about a foreign currency program, while touting the investment as low risk. Mr. Pettengill admitted making a personal credit card payment of $11,369 from proceeds of the fraud.

These schemes share a common theme: The promise of high returns without commensurate risk. But even if you are too smart to fall for this kind of scam, your investments may still be in danger. You need a morality litmus test before you entrust your retirement savings to any broker or adviser.

A timely case in point is J.P. Morgan Securities. In a release dated July 7, 2011, the SEC charged this venerable firm with fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states, generating "millions of dollars in ill-gotten gains." According to Robert Khuzami, Director of the SEC's Division of Enforcement, "Municipal issuers and investors didn't stand a chance against the fraudulent strategies JPMS and others used to guarantee profits."

JPMS settled these charges by paying $51.2 million which will be returned to the affected municipalities and $177 million to settle parallel charges brought by federal and state authorities. As is typical in these matters, JPMS neither admitted nor denied the allegations in the complaint.

JPMS and its colleagues in the securities industry manage trillions of dollars of assets. Most of this money is actively managed, meaning they attempt to add "alpha" by beating designated benchmarks. The fact that overwhelming data indicates most active managers add "negative alpha", has had limited impact on these clients to date.

Investors "don't stand a chance" when dealing with brokers who view breaking the law and paying relatively trivial fines as a minor cost of doing business.

Just because it's business as usual for them, doesn't mean you should abandon your moral and ethical principles and continue to patronize them. A collateral benefit of using your moral compass is that your returns are likely to increase when you discover the benefits of a globally diversified portfolio of low management fee stock and bond index funds -- something your local broker is unlikely to discuss with you.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

The Price of Procrastination

2011-07-26T16:09:00.001-04:00

This week’s blog is inspired by our political leadership since I can’t seem to go anywhere without being reminded of the ticking clock in Washington. Once again, by putting off a decision until the last possible minute, its impact on all of us will be much greater than it should have been.

We all know that it’s easier to put off today what we can do tomorrow, but oftentimes we are simply taking a manageable situation and turning it into a crisis. If you look around, examples of this are not hard to find – and might even be happening in your own life.

A detrimental mistake I see people making at an early age occurs when they are just entering the workforce. The euphoria of earning (and spending) your first “real” paycheck may overshadow the importance of enrolling in the company 401(k). However, the combination of compound interest and time is a compelling reason to start saving early. If you start at age 25 and save just $20/ day and earn 6% interest, you will have amassed over $1.2 million at age 65. If you wait until you’re 35 and save $25/day, you will have $450,000 less to spend in your golden years.

As your career continues, retirement may seem a distant concern, so ensuring you are on track to get there is easy to put on the back burner. You need to take the time to make certain you are saving enough and your accounts are properly allocated at least annually. If you wait until you are ready to walk out the door before seeking financial advice the road to retirement may become even longer.

In retirement, if your spending is putting your financial solvency in jeopardy, many times making at least a small change can immediately make a large impact over time. The only thing you will accomplish if you ignore the situation is making it worse. Be honest when examining your needs versus your wants and wishes. It is a lot less painful to spend fewer dollars eating out, traveling or on gifts for your family than it is to get by on Social Security alone.

I often joke that when I am overwhelmed with the scope of a task, I like to “eat the elephant one bite at a time.” This is a good saying to keep in mind if it feels easier to put off or avoid making a financial decision. The ability to reach your goals may feel impossible at times, but procrastination may only ensure it is more difficult to achieve them. Just ask Congress.

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

Why Do Americans Hate 'the Rich?'

2011-07-19T16:08:00.002-04:00

The on-going Congressional budget negotiations have highlighted a social class divide in the US that nobody likes to talk about. The President has repeatedly called for an end to the Bush era tax cuts, saying the rich need to contribute their fair share to cut the deficit. An article in last Wednesday’s Wall Street Journal highlighted the attitude of most Americans when it quoted a teacher saying, ‘There are so many wealthy at the top, if Washington needs more revenue, it shouldn't come from people like me.’

But based on research by the Tax Policy Center, in order to reduce the deficit from its current level of 10% of the gross domestic product to 3% by 2015 using only taxes paid by the 'rich' (those with incomes over $250,000 a year) the top tax rate would have to be raised to 76.8%. The best way I know to discourage someone from working is to tell them they get to keep less than twenty four cents of every dollar they earn.

And who are these 'rich people' anyway? Everyone likes to talk about people who have offshore bank accounts and pay $30,000 for a shower curtain, but those are caricatures, and represent an extreme minority. At the risk of jumping into the political fray, I think my parents are closer to reality.

They were both born in West Virginia. My mother’s father worked as a coal miner and my paternal grandfather was a carpenter. My father almost died as a baby because his family could not afford the medical attention he needed. The youngest in his family, he was the only one to go to college. They both worked multiple jobs to pay for school.

After graduation, my parents worked as teachers, but they never stopped working. We lived on a farm and spent summers raising crops and selling them to groceries and people who stopped at our roadside stand. We used the money they made to buy a rundown house, fixed it up, rented it, and then used the income to buy more houses. When I was in junior high they bought a small monument company whose owners no longer wanted the hassle of running a business. When they retired from teaching they managed the business full-time. They maintained the rental properties, delivered monuments, and continued to run the farm.

While they worked, they never spent. My mom's favorite stores are still TJ Maxx and the ALDI Grocery. Dad bought only used cars, and mom still saves the wax paper lining from cereal boxes to use to chop vegetables. So they managed to accumulate savings.

They are in their 70's now, and they continue to manage a few rental properties. They volunteer for Meals-on-Wheels, their church pantry, the Rotary, and provide financial support for these and other not-for-profits. They set up a charitable trust that will benefit their church and two universities when they die. None of this would have happened if they hadn't worked so hard all their lives and become 'rich.' But now my parents are embarrassed about what they accomplished and are afraid people will think they are those ‘bad, rich people’ they are always reading about in the paper.

America was built on a strong work ethic. It's what has made us different from other countries all these years. I’ve met many people like my parents over my career as a financial advisor, and for every person like them there is someone else who worked long hours to reach the executive ranks, or started their own company; and many others who are employed by companies that someone else made sacrifices to create.

I understand it is an eternal human condition to be jealous of others who have more than we do. But America wouldn't be the country the world turns to for help if it wasn't for all the people who worked hard and became ‘rich.’ Before we demonize and demotivate them, we need to think about what it will mean for America's future and our own.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Update from Washington

2011-07-13T08:56:00.003-04:00

It was my hope this week to follow up my May blog on how changes in Social Security might impact you with an update on how the debt ceiling and budget agreement in Washington would do the same.

One small problem, I was relying on Washington to actually have a deal in place by today. Serves me right, I suppose. Here we sit Wednesday morning knowing just as little, if not less, than ever. It’s still my humble opinion that some kind of deal will get done soon, but the details from there are anyone’s guess.

I’ll instead attempt to introduce some more of the latest proposals getting support in regards to this legislation. I hesitate to add to the load of information (and misinformation) on this topic. But, as these ideas get kicked around the floor of Congress, the nightly news and the internet, I think it’s important to provide a basic, centered background on what they might mean for you.

Social Security Cost of Living Adjustments

One targeted way to help slow the growing costs of Social Security is to change how it accounts for inflation. Currently, annual adjustments are tied to the consumer price index, or CPI. For example, with traditional CPI, if the cost of beef rises, the index rises accordingly. The push is to change this in favor of what’s known as a “chained” consumer index. In this case, if the price of beef rises, an adjustment is made to account for those that would simply buy cheaper cuts or choose another source of protein. This would lower the average rise in social security benefits from year to year. It is unclear how much support this has and it would not be sufficient to sustain Social Security for any length of time, but it is a term you might hear in the coming days and weeks.

Social Security Payroll Tax

Employees have been enjoying a 2% cut in the Social Security payroll tax over the last year and a half. While it seems counterintuitive when trying to determine how to get more money into the program, there is talk of maintaining that reduction and extending it to employers as a form of additional stimulus for the economy. Of course, this would likely be tied into the other Bush era tax cuts that are currently extended through 2012, setting up another major clash on tax rules not too far down the road.

Medicare Adjustments

Medicare is an area where details are few and far between as politicians remain reticent to tackle Washington’s most challenging program. The most commonly advocated tax reform measure tied to Medicare is limiting the current $1.1 million mortgage interest deduction ceiling to $500,000 and restricting the deduction solely to primary residences. This would be another drop in the bucket, but seems to have a fair amount of support.

In other words, the unknown continues to be the unknown. The good news is that most of the changes being considered are slow moving and will take 10-20 years to fully come into play. It will take much of the burden off anyone currently receiving benefits and give those who hope to in the future time to plan and adjust accordingly.

The best offense is still a good defense. Having a broadly diversified portfolio capable of responding to different market pressures and providing for what you need in the short term, maintaining spending patterns that are within your means, and combating future health care costs by eating well and staying fit are the best tools to combat whatever comes down the pike. The only other recommendations I have would be to ignore the noise as much as possible until firmer details present themselves and, if you feel strongly about it, put that venting to use by sending an e-mail to your representatives.

It is my sincere hope to have an actual update on what was passed rather than what might be passed in the near future and how the rising debt ceiling and budget agreement impact you.

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com

The 25 Documents You Need Before You Die

2011-07-05T16:30:00.000-04:00

On July 20th, The Asset Advisory Group will be hosting an Estate Planning lunch and learn session with Jeff Albrinck of Rendigs, Fry, Kiely & Dennis, LLP. The topics will range from the basics to Jeff's take on the current state of estate tax legislation and how to plan for the future as laws continue to fluctuate with each election cycle.

In the meantime, the Wall Street Journal published an excellent article, "The 25 Documents You Need Before You Die" which does an excellent job of prefacing Jeff's presentation by breaking down the basic documentation all of us should have on hand and easily accessible by our heirs or those that would carry out our wishes. This often feels like an overwhelming task, but as author Saabira Chaudhuri explains, it really doesn't have to be.

You can link to the article above or by clicking here.

Have a great week!

The Asset Advisory Group
http://taaginc.com
info@taaginc.com

Freeze!

2011-06-29T08:37:00.001-04:00

It’s a good thing I practice what I preach. In late May, my husband, Tom, received a call from Nordstrom saying someone was trying to use his credit card number at their Chicago store. Thankfully, they require a password if you do not have your card in your possession and declined the charges because the imposter did not. The scary thing was that he did have Tom’s social security number. Chase Bank soon called to say a suspicious-looking charge was being attempted on our Visa. I called American Express to make sure there was no suspicious activity on that card. There wasn’t.

I immediately logged onto each of the three credit bureau’s web sites and put a credit freeze on Tom’s credit report as well as my own. I also went to Annualcreditreport.com and ran a credit report from one of the three credit agencies. I noticed Macy’s had just made an inquiry into his report and when Tom called them, a new card had been opened in his name to the tune of $2,000 in charges. Next, Sears was calling to verify whether Tom had recently reactivated an account we closed several years ago.

Over the next few days we received mailings from Target and Victoria’s Secret that accounts had been applied for in Tom’s name, but were rejected because his credit had been frozen. Victory!

While it was definitely an inconvenience to deal with this, it could have been much worse. We each check our credit reports every four months using Annualcreditreport’s free site. Because we use our Visa and American Express to pay all of our monthly expenses, I download our transactions into Quicken daily. While both helped contain a situation that could have quickly gotten out of control, the fraud departments at Nordstrom, Chase and Sears are to be commended for not allowing any unauthorized activity. We were not liable for any charges at Macy’s.

In the past, I did not think it was necessary to have a freeze on our credit. Although the cost is minimal ($5 with each of the three credit bureaus to lock and subsequently unlock your account), it does add an extra step when you apply for credit, change jobs, insurance or anything else that requires a credit check. You must contact each credit bureau and thaw your account for a specific time period or for a specific lender. If you find out which bureau the lender uses, you can request the thaw at just that agency.

I now realize this is a small price to pay for peace of mind. While I’m not advocating a credit freeze if you do monitor your accounts and credit report regularly, you should definitely consider it if it you do not. Another option is the free version of Identity Theft services that are now becoming available. A recent blog in the New York Times described a few of them.

The worst part of this whole fiasco is that we do not know how Tom’s social security number and two of our account numbers were acquired by someone else. We shred all sensitive documents and mail the few bills we pay by Pony Express directly through the post office or our office drop box. With all of the recent data breaches in the headlines, I’m not really surprised. This has only reinforced what I have learned from our Identity Theft Lunch and Learns, which Chip blogged about last year. It’s not a matter of if, but when, your identity will be stolen. Do your best to be prepared.

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

What Do We Really Know?

2011-06-22T09:06:00.000-04:00

Many times in conversations I am presented with a concern that begins with ‘well we KNOW that….’ What follows is usually a statement that has been made and repeated enough times in the media that it is now accepted as fact. But sometimes what we think we know to be true may not be true forever.

For example, many people express concern that the US has lost manufacturing jobs at a rapid pace over the last decade, and believe we will no longer be a significant, global economic player. In the past, the strong US dollar made it difficult to export our products at favorable exchange rates, and lower wages in China and other countries made our labor costs uncompetitive, so the number of manufacturing plants in the US did decline; but that may no longer be the case.

The booming Chinese economy, which created a middle class whose population is an attractive target market for companies like P&G and McDonalds, has also had the consequence of raising labor rates in the country. According to the May 12 issue of The Economist, pay for factory workers in China soared by 69% between 2005 and 2010. This wage growth in China, combined with the relatively slow growth of wages in the US, may no longer make locating factories in China the savings ‘slam dunk’ that it once was. Caterpillar, a heavy equipment manufacturer, is moving production back to Texas, while NCR is moving its ATM machine manufacturing to the state of Georgia. Several other examples are cited in the article.

It’s a great lesson to learn. Every negative cited in the news – falling housing prices, the decline in the US dollar, the high US unemployment rate – has a corresponding impact in other areas of the economy we may not even be aware of today. There are too many forces at work on the market for us to know for certain what will happen next, so don’t accept conventional wisdom at face value. What you ‘KNOW’ to be true may already be changing.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Forecasts from the Best

2011-06-15T09:42:00.001-04:00

In an industry that has no shortage of soothsayers and crystal ball holders more than willing to go on record as to what will happen in the market, why do we feel so strongly that this is such a waste of time?

The easy answer is that no one, not even those viewed as the best of the best, seem to be able to make good predictions over and over again.

Bill Gross, the renowned bond investor and Founder of PIMCO, has been in the headlines the last few weeks for missteps that have created significant losses in their funds. It seems that Gross, who was touted for some of his moves during the 2008 market downturn, was also loading up on Lehman Brothers debt over the same timeframe. Losses from this poorly timed investment have cost investors more than $3.4 billion.

His current bet is against U.S. Treasuries, for which he is under some scrutiny as they continue to rally. His explanation is that he’s not wrong, just not right yet. Not the comforting explanation you want to hear from someone you’ve paid handsomely to supposedly outguess the market. As the saying goes, even a stopped clock is right twice a day.

This reminded us of another guru we talked a lot about in 2009, Legg Mason’s Bill Miller. Miller was another manager held out to have these powers of intuition, only to have a few emotional reactions to the initial market downturn backfire on him spectacularly.

The point is not to drag out these experts and disparage them every time they’re wrong. These are smart people who are very good at what they do. It’s simply to suggest that the crystal ball is a fairytale, that no one has the ability to continually outguess the market time and time again.

The one expert whose investment prowess often gets held out above all others is Warren Buffet. In most cases, truth be told, we couldn’t agree more. However, what Mr. Buffet does is quite different from the average investor. In fact, it would be more correct to call Buffet a venture capitalist. His company, Berkshire Hathaway, often buys very large stakes or controlling interests in companies giving them significant say over day to day operations, management and other company functions. Even when they don’t have direct involvement, he is often able to set very attractive terms for his investments, such as his investment in GE in late 2008. The average investor obviously doesn’t have this kind of control over their holdings.

While thinking about Warren Buffet, consider his quote from a Berkshire shareholders’ meeting a few years ago. Buffet said, "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees."

Ultimately, we believe that you need to work with someone that can help you put a plan in place and then stick to that plan, helping you make the sound decisions that you do have control over to help meet the financial aims surrounding your life’s goals.

In the end, the best investment forecast is to make no forecast at all.

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

When Television Feeds the Urge to Trade

2011-06-08T09:18:00.000-04:00

(from Carl Richard's New York Times' Bucks blog, 6/6/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)

Traveling last week, I shared some workspace where CNBC played all day on television. For most people, I realize that it’s often comforting background noise. However, since I almost never watch television, I found it amazing how bipolar I felt as they shifted from one commentator to another.

Given how wild the markets were last week, I imagine that there were many people tuning in trying to figure out what to do. And that’s the problem.

Watching CNBC might be entertaining, but unless you fancy yourself some sort of day trader, it will not help you figure out what to do with your life savings.

This won’t apply to all of you, but I’m going to make some assumptions here. I assume that for most of us the purpose of earning money, saving it and actually doing financial planning is to hit some sort of goal. I’ll also assume that those goals are typically things like getting out of debt, establishing a rainy-day fund and saving for retirement or college for kids.

If that’s true, what are you going to learn from watching hours of endless chatter about new-home sales or the jobs report that will be helpful in meeting those goals?

Things change so fast, and on television the reactions in the markets are amplified by the need to have something to talk about to keep everyone watching so they don’t miss the latest breaking news. This constant stream of information makes us feel like we should be doing something.

But the question is, what?

What should we be doing? What changes should we make based on the latest breaking news? Do you see the potential problem? If we’re tuning in to figure out what the latest news means for our investment plans, and we make changes based on what we hear … well, that’s an awful lot of changing.

Doesn’t it make much better sense to design our investment plans based on our goals, and then make changes when those goals change, instead of trying to react to the minute-by-minute updates? The only thing we know for sure is that things will change. Does your financial plan help you weather these changes or are you tempted to jump every time a new headline pops up on television?

Do You Know Who Will Inherit Your Money?

2011-06-01T10:47:00.001-04:00

When you start a new retirement plan at work or roll your money into an IRA account you will not only need to decide what investments to buy, but you also need to name a beneficiary for your account. If there is not a beneficiary named, your account will be distributed to your estate which could cause your heirs to have a much larger tax burden.

Many people do not realize the importance of their beneficiary designation. I was just reading about a court case where a man’s first wife passed away and he named his three children as beneficiaries of his 401(k) account at work. He eventually remarried and died just six weeks later. His new wife ended up inheriting the 401(k) even though his children were the intended beneficiaries. This is because a spouse is automatically the beneficiary in a workplace retirement account unless he/she has signed a waiver of spousal rights AND a new beneficiary form is completed.

This is a two step process. You cannot simply change the beneficiary form without the waiver and you cannot have the waiver signed without a new beneficiary form. This is also the case in a divorce. Your former spouse might indicate in the divorce decree that they are waiving their rights to your retirement account, but if you have not changed the beneficiary form as well, they can still inherit your assets.

Once you roll your account into an IRA, you are free to name anyone as a beneficiary and there is no need for spousal consent. It is good practice to review the beneficiary designations on your life insurance policies, annuities, and retirement accounts at work or held elsewhere on an annual basis. When you do this, make sure that they match the estate planning you have done. If you have a trust account, has your attorney recommended naming the trust as a primary or contingent beneficiary? If you have any questions about whether your accounts are set up properly, don’t hesitate to ask your advisor.

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

What's Your Philosophy?

2011-05-24T10:49:00.000-04:00

One of the most difficult things to do as a human being is to walk your path without being diverted or discouraged by other people’s opinions.
When you were young, your choice of clothing and music was influenced by your friends. As you got older, more important decisions such as where you went to college and what career you chose, were all influenced by others. Investing isn’t any different.

These days, people are trying to capture lost opportunities – they want to make up what they lost during the 2007 – 2009 market drop. As a result, people who intellectually agree that it is NOT a good idea to use the TV talking head’s market outlook to determine their next investment move find themselves unsettled by a friend’s recommendations to sell their stocks and put the cash in silver and commodities.

But time and experience have taught us that successful investors work from a philosophy vs. an outlook on the market. People who work from a market outlook are reacting to the events around them, the opinion of their friends, and the news; which ultimately creates a very confused and directionless investment plan.

An investment philosophy dictates how much risk you will take, when you will buy, when you will sell, and what you will hold. This philosophy should be based on your personal goals and objectives, and what you are trying to accomplish in your lifetime and beyond – not what Fox news or CNBC is telling you today.

As we head into the wedding, graduation and golf season, and your discussion with friends turns to investing, ask them – “What’s your investment philosophy?” You’ll probably be met with blank stares. If they don’t have a coherent philosophy for investing, they probably don’t know what they are doing, and they certainly shouldn’t divert you from your path.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

How Will Changes in Social Security Impact You?

2011-05-18T10:36:00.000-04:00

With Secretary Geithner back in the news last week pressing Congress to take action on the growing concerns with Social Security, it’s likely we’ll soon see Congress return to the slew of proposals presented over the last few months.

In this world of non-stop information, it’s tough to discern between news and opinion, truth and fiction and everything in between. Many of our clients have asked for a basic breakdown of the primary issues and proposals floating around Capitol Hill and how it directly impacts them. A summary of some of the basics are below.

Increasing the retirement age

An eventual increase in the retirement age for Social Security is likely to be a part of almost any proposal. This process is very likely to be gradual in nature, grandfathering anyone currently at or near retirement age. For those readers still in their working years, there’s potential for a wide range of impact based on what age is agreed to and when it goes into effect.

Means Testing

Since its inception in 1935, Social Security has always been paid based on an individual’s wages regardless of their other wealth or non-wage based income. The system’s current situation has shifted talk to proposals that could include means testing. Means testing refers to reducing or eliminating benefits based on a pre-determined formula for wealthier and/or higher income participants. This formula gets a little tricky depending on who gets their way in Washington based on a wide range of testing factors, such as…

          *   Income testing that may or may not include investment income or income from a business
          *   Asset-based testing that could be based on all assets a participant holds, or allow for
               omission of certain assets like residences or automobiles
          *   The tests could be assessed all at once when an individual’s benefits begin or over regular
               intervals
          *   The tests could either gradually phase out benefits, eliminate them altogether or a combination
               of both.

It’s important to note that there does seem to be some growing support in Washington that, if means testing is determined to be necessary, that it be done against career earnings as opposed to retirement assets.

Long story short, it’s still far too early to determine what the impact of means testing on a given individual could be, but it is an important piece of the puzzle to understand.

Where things stand

There are multiple budget plans out there right now that all treat Social Security a little differently. It’s unlikely that any of these plans pass as-is, but much like means testing, it’s important to understand what is included in each at a basic level to understand how it might impact you.

          *   The Simpson/Bowles Deficit Commission
                -   This group recommends starting some loosely defined form of means testing in 2050 for middle
                     and upper income earners.
          *   Paul Ryan’s “Roadmap” Budget Plan
               -   This plan suggests preserving the current Social Security system as-is for all people age 55 or
                    older and doesn’t get into great detail as to what other action should be taken to help keep the
                    program solvent for those under 55.
          *   Lindsey Graham’s Social Security Solvency & Sustainability Act
               -   This plan suggests raising the retirement age to 70 by 2032 and starting means-testing for new
                    retirees in 2018, with benefits beginning to tier down for retirees with income starting at
                    $43,000. Anyone currently age 56 or older would maintain under the current rules.

Hopefully this summary has at least given you some idea of the issues at hand. Obviously, a lot is still up in the air, but it will be important to separate the details from the rhetoric as this issue starts to be bantered about again. It is an issue that, one way or another, will impact all of us.

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

The Best Investment Advice: Stop Losing Money

2011-05-11T12:18:00.000-04:00

(from Carl Richard's New York Times' Bucks blog, 5/9/2011 - click here for the original post. Carl is a certified financial planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)

I’m more convinced than ever that Mark Twain was correct when he decided that he was more interested in the return of his money than the return on his money.

A couple of weeks ago, we discussed how often people in their 60s and 70s say that their primary residence of over 30 years was their best investment. This belief exists despite the fact that home values barely kept pace with inflation. How can this be, given that during the same time period average annual returns in various stock market indexes ranged from 8 to 13 percent?

Because for most people, it was the only investment that didn’t lose money!

While the same outcome may not apply to housing in recent years, the principle still applies to investing in general. Most of us are chasing the highest return, because that’s what investing is all about, right?

But the experience of many people has been that the well-intentioned search for the best investment actually cost them money. They bought at the peak and sold at the bottom, and their overall returns ended up being meager. I suspect lots of these people would gladly trade their actual experience over the last decade or more with simply having their money returned to them.

So, what if the key to investment success is to start by making sure that you don’t lose money? Could it be that accepting a lower rate of return might result in having more money than continuing the wild goose chase of this magical 10 percent we hear that the stock market delivers over time?

Part of the problem is that we focus on the wrong thing, like finding the very best investment or beating a particular stock market benchmark. Both are a wild goose chase. Having the money for a dignified retirement, however, is not. By setting real financial goals, we can quit chasing investment performance and focus instead on creating a plan for the future that makes sense.

Once a plan is in place, it may very well be that the best thing we can do with our investments is to simply not lose money and take the time and energy we were spending in the chase and focus on those things that we have more control over. Things like finding creative ways to earn or save more, or just enjoying the one life we have to live.

How Not to Help

2011-05-04T11:58:00.000-04:00

In a recent meeting, Jeff Albrinck, an estate planning attorney at Rendigs, Fry, Kiely & Dennis, met with clients whose 45-year old son was diagnosed with Parkinson’s. The clients were concerned about their son’s long term ability to provide for himself. They wanted to amend their estate plan to leave everything to him, leaving out their other beneficiaries. After discussing their situation with Jeff, they realized the best thing they could do for their son and his family was to leave him nothing and create a special needs trust that would be available to him if needed, but never counted against him if he applied for government-sponsored benefits.

Many times when a loved one is diagnosed with an illness, family members focus on ways to help. Often, this will include gifts of money, stock, or a future inheritance. What many people don’t realize is they are actually doing more harm than good. This may inadvertently disqualify a person with special needs from government benefits. To qualify for Supplemental Security Income (SSI) and Medicaid, disabled individuals age 18 and up cannot have more than $2,000 in assets (excluding cars and homes).

Frequently, the individual with special needs is a dependent child who has been diagnosed with a condition like Autism or Down Syndrome. Even if a parent does not think they will need SSI and Medicaid for their child, it still makes sense to qualify them for benefits. This will allow the child to participate in training programs, housing arrangements and transportation that is funded by the government. It would also be a safety net if a parent loses a job or becomes disabled and can no longer provide health insurance for their child.

So, how can you help? Encourage the parents to set up a special needs trust which will protect their child’s government benefits and pay for everything except the basics such as food and shelter, which are covered by SSI. Once a trust has been established, you can gift assets or cash to the trust or make the trust a beneficiary of an insurance policy or retirement account.

If you have a child or other relative with special needs, it is important to start planning for their financial future as early as possible. We work with several attorneys, such as Jeff, who specialize in this area. We are happy to provide you with a referral, if needed.

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

"This Time is Different"

2011-04-27T16:54:00.001-04:00

The last few weeks I’ve met with clients and prospective clients who are very afraid of where our country is headed due to the climbing Federal deficit, the fall in interest rates, and the decline of the dollar vs. other currencies. Some have purchased gold or silver as a hedge against the anticipated fall of US stocks. I understand their concerns, and they are not unfounded.

One of the benefits of getting older is the perspective it provides, especially when it comes to investing and people. (Others might say I’m just getting crotchety, but I digress.) Looking back over the last 23 years, I‘ve heard “This time is different” a few times before.

In 1988, when I started The Asset Advisory Group, people were shell-shocked from Black Monday: October 19, 1987, when they saw the Dow Jones Industrial average fall over 22% in one day. As I worked with worried people to adjust their financial plans for retirement, they told me things would never be the same, because investors would not put their money in the stock market again and it would stay depressed as a result. “This time was different.” Those who invested in bonds and CDs based on their feelings missed the Dow’s climb from 1,739 on October 1987 to 3,975 on February 1994 – a 129% increase over less than seven years.

The fall of 1999 I spent talking with investors who were upset with our philosophy of portfolio diversification. After nearly four years of watching every dot.com provide high double digit returns, they were tired of being diversified in value stocks, real estate, and small US companies. Technology stocks were making a killing, and investing in any other type of company seemed foolish. Emotions in some meetings ran high, because people felt I was keeping them from making the returns their friends and neighbors were telling them about. I would be a rich woman if I had a dollar for every person who told me we were “in a new paradigm of investing”, or “This time is different.” The tech bubble burst in 2000, and it was real estate and small cap value stocks that kept our clients’ portfolios positive in 2000 and 2001.

In 2008 people were shaken again when we experienced a global stock meltdown that was touched off by the credit crisis in August 2007. The bad news dragged on through March of 2009, and comparisons to the Great Depression were made daily. “This time was different.” People were scared, angry and some wanted to move all their investments to cash and get back in when they felt better about the market. I felt a great sense failure when I could not convince one of my long-time clients not to sell out. But clients that kept the faith in the long-term resiliency of the global markets allowed us to rebalance their portfolios – we sold out of bonds and bought into stocks at depressed prices. These investors were rewarded with significant gains as the equity markets roared back in 2009 and 2010, and they recovered their portfolio highs of 2007.

Now investors are afraid of our country’s budget deficit and the status of our currency; gold and silver are being sold as the investor’s solution. “This time is different. “

I agree we have tough decisions to make in this country to get us back on track, but I don’t believe we need to hoard precious metals to protect us. We need to have a personal financial plan in place and execute it with conviction, so no matter what we experience we can survive it successfully. Each financial crisis we experience will be somewhat different, and even though history doesn’t repeat itself, it sure does rhyme. Take it from a crotchety old investor.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Confronting Your Personal Debt Ceiling

2011-04-19T16:25:00.000-04:00

(from Carl Richard's New York Times' Bucks blog, 4/18/2011 - click here for the original post. Carl is a certified financial planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)

We’ve all made financial commitments like mortgages, rent payments, college tuition and utility bills. When you combine those commitments, you end up with the foundation for a budget. But what happens when those commitments exceed your income?

After we become accustomed to a certain lifestyle, it can be difficult to make adjustments when the amount of money coming in decreases. But unlike the federal government, real people don’t have the option to take a vote and raise their personal debt ceiling. In the real world, increasing your personal debt ceiling only works for so long. At that point, there are only two options:

1. Earn more
2. Spend less

Simple math, tough choices.

Yet again we have another example of how painful it can be when the cold, hard facts of arithmetic smash against the complex, emotional issues of money. The math is simple: if you spend more than you earn, at some point things will have to change.

But once we move beyond the math, things start to get fuzzy fast. Most of us can relate to that sick feeling of comparing what we owe to the amount of money sitting in the bank and knowing it isn’t enough, or the pain of telling children that we simply can’t afford to do something that was incredibly important to them or the awkward discussion with a spouse about which extra expense we have to cut to make ends meet. These conversations aren’t easy, but they have to happen if we want things to change. At some point we can’t continue to kick the can down the road.

To add to the frustration, these decisions are intensely personal. We all want easy answers from some personal finance guru who will tell us what to do. We want a prescription, but this discussion doesn’t work that way.

Sure, there are books that will provide a framework, and learning from others (including Elmo) that have been through this can be helpful. But in the end, your situation is absolutely unique. It will require you to come up with a plan that works for you. Often what one family defines as a need another will view as a luxury, and neither one of them is wrong. In the end, they will both need to satisfy the equation on the napkin: their income must be greater than or equal to their expenses.

At some point in your life, you’ve done the math and realized that your financial commitments were out of whack with your income. How did you fix your problem? If you have children, how are you helping them understand the need for financial balance?

Small Tasks, Big Impact

2011-04-13T15:56:00.003-04:00

We’ve had a slew of things come across our desks recently that are little things that can be done that can go a long way in protecting our assets & our families in various ways. We wanted to share those briefly with you in this week’s blog.

Next of Kin Registry

For our readers who reside in the State of Ohio, the BMV has created a next-of-kin registry to help expedite emergency notification. The registry is a database of emergency contacts for anyone with a valid driver’s license or state identification card. It enables law enforcement, paramedics and other agencies to find a victim's relatives or emergency contact immediately.
All you need to do to register is click here, fill in the information requested and then list the names of those you would want to be contacted in an emergency. It takes just minutes and could save valuable time in letting someone know of any emergency or making crucial medical decisions at a critical time.
At this time, with nearly 8 million registered motorists in the state, only 150,000 have registered for this service. For your sake and the sake of your family and friends, take a few minutes and go sign up today.

Social Security Statements

For those of you who really look forward to getting that green and white social security statement in the mail each year, I have some bad news for you. The Social Security Administration announced last week that they will no longer be sending them out. The good news? This move will save $30 million this year and $60 million in 2012. Provided you’ve been in the workforce for 10 years, you can still generate a report using the retirement estimator available on the Social Security Administration’s website or by simply clicking here.

Another Reason to Check that Credit

Many of you have likely received some sort of e-mail from an organization you’ve done business with or read in the news about the massive security breach at Epsilon, a Texas online marketing company that sends out more than 40 billion e-mails per year on behalf of their clients. According to a SecurityWeek article, the data belonged to a long list of companies that included Best Buy, Brookstone, Capital One, Citi, Home Shopping Network, JPMorgan Chase, Kroger, LL Bean, Marriott Rewards, Ritz-Carlton Rewards, TiVo & US Bank.

The information compromised is believed to be limited to names and e-mail addresses only, but do what you can to be vigilant with any suspicious looking e-mails you may receive in the near future. Also, be sure to visit AnnualCreditReport.com, the government sanctioned website where you can pull a credit report from each of the three major bureaus free of charge one time per year.

One More from the BMV

It was brought to our attention recently by an estate-planning attorney we work with that the Ohio Bureau of Motor Vehicles does not accept powers of attorney from outside sources. They only accept their own, which can be found here. Arriving and waiting in line to re-title a vehicle on another’s behalf can be a tedious process to begin with, finding out the POA form you have with you isn’t valid might be enough to send anyone over the edge. If the need arises to use this form, simply fill it out without a date and keep in a secure location.
We hope these are helpful as we’re always on the lookout to help find ways, both big and small, to have a positive impact on your financial and emotional security. If you have any quick tips or questions, please feel free to comment below.

Have a great week,

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

Resetting Expectations

2011-04-06T10:14:00.000-04:00

With interest rates remaining near historic lows, many clients have been refinancing their mortgages over the past few months. A lot has changed since they took out their loan or last refinanced, and not just with interest rates. I’ve heard from more than one person who is surprised to find out that you need a credit score of 780 or higher to snag the best rates as well as 20% equity in your home.

A few things to keep in mind when you start shopping for the best rate:

Check http://www.annualcreditreport.com/ for a free credit report from each of the three nationwide consumer credit reporting companies. You will receive a detailed listing of all of your lines of credit, open and closed. You now have the ability to check your score for free at http://www.creditkarma.com/, a new web site from TransUnion. This site also give you a credit report card to compare your credit score in each category to the national averages and run scenarios such as how taking out additional credit or closing a line may impact your score. If you do find errors on your report, make sure they are corrected prior to applying for a loan.
If you have retired since applying for your last loan or refinanced prior to the housing meltdown, the information needed to prove your monthly income may have changed. If you are living off of your investment assets, your advisor can prepare a letter for your lender stating how your income is structured. Many times, it is helpful if we talk to a loan officer or underwriter directly to help them understand the monthly “paycheck” you receive from your portfolio and how that may differ from the income reported on your tax return.
Don’t automatically refinance with your current lender. A good place to shop for local rates is http://www.bankrate.com/. We have found that many of the smaller banks or credit unions offer competitive rates, lower closing costs and more intuitive underwriting. Feel free to call us for the names of local lenders you can trust and to assist you in comparing offers .

Deciding whether you should refinance, pay off your existing mortgage or how much to put down on a new home are all things we can help you evaluate. Remember that we are more than your investment account managers. We are here to help you with any financial decision, whether is involves refinancing your house, buying vs. leasing a car, how to fund college costs or when is the optimal time to retire.

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

Making the Most of Tax Time

2011-03-30T14:35:00.000-04:00

This is not a favorite time of year for most of us, because wading through all the paperwork needed to prepare our taxes can be a headache. But if you have to gather up all the information anyway, you might as well use it as an opportunity to improve your financial situation. Here are some ideas:

• Mortgage Interest Deduction - Look at the year-end summary report you received from your mortgage company and see what you still owe on your house and your current interest rate. The national average for a 30 year fixed rate is 4.96%, and some banks here in Cincinnati are offering even lower rates. If you have a mortgage over 6% you should seriously consider refinancing and locking in a lower rate while they are still at historical lows.

• Real Estate Tax Deduction - Chris Carleton mentioned it in her March 9th blog, Taking Advantage of a Decline in Your Home’s Value, but it’s worth mentioning again. Even if you have your home paid off, real estate taxes will continue to be a major housing expense for you, so having your house reassessed after the housing downturn might be worth it. You won’t be able to make the March 31st deadline for this year, but we can help you if you’d like to file for a reduction for next year.

• Interest and Dividend Income - Do you receive 1099-INTs from a variety of banks and brokerage companies? Do you have brokerage accounts that you set up with the intention of doing some investing on your own, but haven’t taken the time? You should hold three to six months of living expenses in very liquid investments in case of emergencies, but more than that and you are missing the opportunity to maximize your income. Consider consolidating these accounts to simplify your life and maximize your interest. You’ll thank yourself next year.

• Charitable Contributions – Do you give money to a wide variety of charities each year? Look at your average giving over a period of years, and consider setting up a donor-advised fund for future gifts. The large deduction in the year you set up the fund will have a much greater tax impact; and you can involve your children or grandchildren in your gifting decisions to pass along charitable family values. In Cincinnati, we have great resources such as the Greater Cincinnati Foundation, where you can establish a donor-advised fund with a $25,000 contribution, and the West Chester Community Foundation.

• College Planning with a Deduction – It felt like it took forever to pay off our college loans when we were first married, so my husband and I want to help our grandson with his college expenses. By setting up a 529 account, we can help him and get a deduction up to $2,000 on our Ohio income tax return. If you want to help a young person with college, this is a great way to do it.

We can’t make the work of filing your taxes go away, but we can help implement one of these ideas. If you would like to know more, please give one of us a call.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

The Only Question that Matters for Investors

2011-03-23T11:51:00.000-04:00

(from Dan Solin's Huffington Post blog, 3/15/2011 - click here for the original post)

The financial media is whipped into a frenzy. There is so much uncertainty. Here's a summary of recent developments:

Bill Gross eliminated U.S. government debt from the Pimco's Total Return Fund.
Nouriel Roubini ("Dr. Doom") predicts $100 billion in municipal bond defaults over five years.
Ireland, Greece, Portugal and Spain remain in tenuous financial condition.
The devastating earthquake in Japan has broad economic ramifications.
Unrest in Libya and in the rest of the Middle East threatens oil prices.

What does it all mean for investors? How fortunate we are to have so many "experts" who can make sense of these disturbing developments.

Money manager Laszlo Birinyi advises"[]These kinds of strong beginnings lead to long and durable bull markets. Hedge fund manager Barton Biggs agrees.

Over at The Wall Street Journal, they're not so sure. Brett Arends listed ten reasons why investors should be worried. His sources are interesting. He relies on an unnamed "European hedge fund manager" who is "worried about China." The source is not buying aggressively, and Arends find that significant. It's quite remarkable what passes for responsible financial journalism at The Wall Street Journal these days.

I get asked for my opinion on many of these issues by readers of my books and blogs, advisory clients and prospective clients. Many can't hide their disappointment when I tell them I have no clue how these events will affect the markets. What's more, neither does anyone else, including those who are so confident of their predictions and who dispense their advice so freely. What's more, I don't care and I don't believe intelligent investors should either. Here's why.

Many studies confirm the relationship between loss of money and suicide. Ask most men what they fear most and they will tell you it is the loss of their money and homelessness. You would think their investing decisions would seek to minimize this possibility. Instead, they are more often focused on the short term consequences of current events. This makes no sense.

The average sixty-year-old will live another twenty years or so. Here's the only question she (and all other investors) should be asking her financial advisor:

Can you financially engineer a portfolio for me, using long term (at least 50 years) data, that will maximize my returns for the amount of risk I will be taking, for the rest of my life, and will minimize the possibility that I will be destitute in my old age?

The good news is that it is very easy to accomplish this goal. We have all the tools and data necessary to do so. The analysis can be based on sound academic, peer-reviewed research, used by savvy pension and trust fund administrators and high net worth individuals. Of course, it's not predictive, but it's far more reliable than relying on financial astrologers. I have rarely met an investor who had such a plan, or who understood that he could get one.

You have a choice. You can listen to the musings of people who believe they can predict the future, or you can plan intelligently for your own future.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Don't Confuse the Urgent with the Important

2011-03-23T11:42:00.000-04:00

Carl does a great job in the blog below of reminding us of why those things with low urgency, but a high degree of importance on our to-do list deserve our time and attention before it's too late.

(from Carl Richard's New York Times' Bucks blog, 3/21/2011 - click here for the original post. Carl is a certified financial planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, BehaviorGap.com.)

Last weekend marked the beginning of spring, and even though there’s still snow on the ground here in Park City, it reminded me that nearly a quarter of the year has come and gone.

Like many of you, I made resolutions in January. There were a lot of important things I wanted to accomplish. And for a few weeks, I did really well. But now it’s March, and part of me is panicked. There’s still so much to be done. But another part of me latched on to the second half of the equation: I still have three quarters of the year to go. What’s the big deal?

The problem results from the distractions that come from things that seem urgent. They cause us to lose our focus on the important issues.

On a day-to-day basis it’s easier to focus on those urgent things that capture your attention. After all, who wouldn’t focus on getting the car fixed over making sure the will is up to date? That seems like a logical decision that trumps the merely important goals you set in January.

Bob Goldman, a financial planner, said that he sees a surge in business around January and February. So at least they’re trying.

But Mr. Goldman added that he often doesn’t see those people again for years. Following through on the big decisions tends to drop down the list quickly when you’re confronted by life’s urgent demands. After all, many of these important goals appear complex, like buying life insurance or setting up college savings accounts. So we often push them aside in favor of the urgent and immediate.

Plus, we enjoy the sense of checking urgent things off a list. The more urgent the task the greater the sense of satisfaction. By comparison, sitting down and working through the details of your personal and financial lives doesn’t offer the same sense of excitement and immediate gratification.

Here’s the danger in all of this though. Once time passes, the important eventually becomes urgent. But by then it may be too late to do much about it.

Think about the stories of friends and colleagues who are dealing with complicated estates because family members let the urgent trump the important. Then there are the parents who didn’t think 18 years would pass so quickly; now they’re unsure whether they can help pay for college.

A friend who is an estate planning attorney noted that people will often come to him in a panic right before taking a trip without their kids. With worst-case scenarios floating through their minds, these couples want their wills done in case the plane goes down or the ship sinks. Since these things take time, it’s often impossible to finish before they leave town. Then, my friend doesn’t hear back from them again until a few days before the next trip.

See a pattern here?!

If there’s one resolution that I hope each of you keeps it’s this: please set aside time each month to tackle these important questions. Yes, you will be tempted to brush them aside until next month because there will be something urgent going on. But you can’t keep making the same resolution every January to deal with your important decisions this year. The tasks will never get smaller if you don’t start dealing with them one by one.
After every financial crisis we often ask, “How did we miss the signs?” Unlike a large-scale crisis that only seems obvious in hindsight, you know that you can prevent a personal financial crisis by tackling the important tasks in your life right now.

Resolutions - Part II

2011-03-16T09:34:00.000-04:00

In January, we blogged the “10 important investment resolutions for 2011” as listed by Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”

As we mentioned in that post, we’ll visit these resolutions periodically throughout the year and provide some commentary on each.

Resolution #3: I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.

TAAG Thoughts: We’ve covered this topic in a variety of ways in this blog, but it’s always a good time to refresh. Uncertainty can have a significant impact on the market and we’re desperate to gain any information we can in advance of others, hoping to gain an edge in our investment portfolio. Many have made fortunes selling their purported ability to forecast uncertainty ahead of others, but to no avail. The truth of the matter remains that the unknown is the unknown. We are all at its mercy. The best defense against the unknown when it comes to investing continues to be a low cost, broadly diversified portfolio which can lessen the blow of uncertainty’s impact in any one area of the market.

Resolution #4: I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).

TAAG Thoughts: This is an important one that’s very intuitive, but easy to forget. Often when we meet with clients, especially early on in the relationship, questions surround current political, economic and other issues of the day that are concerning for one reason or another. We’re happy to talk about these issues and they’re often concerning for good reason, but they’re never cause for modifying investment strategy. Average life expectancies continue to climb and, for the majority of our clients, investment horizons can be expected to last 20-30 years or more. Over those many, many years we will have ups and downs of all varieties caused by any number of events.

It is crucial to understand the role of short-term, high quality fixed income investments as a buffer from those short term events and the role of equities to provide that continued growth over the long run. Both work in concert, allocated properly to your risk tolerance and long term goals, to provide a plan that will ensure that your money outlives you and not the other way around.

The consistent theme in many of these resolutions is our behavior surrounding events that might cause us to veer from our financial plan. It’s ok to have these emotions, but we need to recognize that they’re often fleeting and no cause to act. As investment author Nick Murray recently said, “you can act your way to investment success, but you can’t react your way.”

We’ll continue to visit these topics throughout the year, touching on these basic, but crucial pillars of our investment philosophy.

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

The Current Market Aftershock

2011-03-15T14:47:00.005-04:00

David Booth, Chairman & Co-CEO of Dimensional Fund Advisors, released a timely video this month about shocks and aftershocks in the market. He walks viewers through a timeline of US stock market performance in several periods since World War II. The conclusion is that prevailing market sentiment is often wrong and investors should continue to focus on keeping to their disciplined plan to achieve their long term goals. Click "Watch Now" below to view.

The Asset Advisory Group
http://www.taaginc.com/

These videos contain the opinions of the participants but not necessarily Dimensional Fund Advisors or DFA Securities LLC, and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at www.dimensional.com.

Mutual funds distributed by DFA Securities LLC

Taking Advantage of a Decline in Your Home's Value

2011-03-09T11:36:00.000-05:00

Most (if not all) of us have seen our home values fall in the past few years. While Cincinnati did not experience the dramatic decrease seen in many areas of the country, we were not immune from the pain. Hopefully these tips will help reduce the sting.

Have your house appraised. Every three years Ohio counties will allow you to file a request with their Board of Revision to have the value of your home reassessed. In Hamilton County, you must complete a Complaint Against the Value of Real Property form and submit it with an appraisal of your property. You will find this form on your county auditor’s web page. A real estate appraiser will charge you between $350 and $550 for an appraisal. I did this last year and was able to save 14% on my real estate taxes! But hurry, you only have until March 31st of each year to file.

Check your homeowner insurance policy. If the cost to rebuild your home is less than the coverage amount of your policy, you could be over-insured. Most policies will automatically inflate your coverage by a certain percent each year, which could now exceed the replacement cost of your home. If this is the case, call your agent to have the value re-assessed.

If your house is in the name of a trust, make sure your trust is a named insured on the policy. This is similar to adding a bank that holds a loan or lease on your automobile to ensure coverage will extend to them if you are sued.

Apply for the Homestead Exemption. If you will be 65 or older this year, make sure you file for the Homestead Exemption. This is available through all counties in Ohio and you just need to complete a simple form which you will find on your county auditor’s web site. Here is a link to Hamilton County’s form. When your next property tax bill is prepared, $25,000 will be taken off of your home value prior to calculating the bill.

If you live outside of Ohio, research whether a homestead act exists in your state. In Massachusetts, there is not an exemption for property tax reduction, but a statute was recently enacted to protect $500,000 of your home’s equity from most creditors for those who record a homestead declaration with their local registry.

With a little effort on your part, you may be able to use the decline in your home’s value to save money on your taxes and insurance.

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

Why DFA?

2011-03-02T10:20:00.006-05:00

For those of you who’ve been clients of The Asset Advisory Group since our beginning in 1988, you know we have always followed an investment philosophy of diversification and rebalancing, but the investments we’ve used to implement your plan have changed over time. As an independent company, we can work with anyone, but we believe the best investment solution for meeting your financial goals is Dimensional Fund Advisors, or DFA.

DFA has been very successful, but quiet, since its funds became available to approved registered investment advisory firms in the early 90’s. As of December 31, 2010 they manage $207 billion in assets. Lately, due to the additional attention focused on the company since the publication of The Investment Answer, people are more curious about the company. Here’s a brief summary of why we use them to implement our clients’ investment plans:

They use academic research vs. forecasting. No DFA fund holdings are based on an individual or committee’s opinion of what will “outperform” in the coming year. Instead, specific criteria determine what can be held in each fund based on research developed over long periods of time. If you are invested in DFA’s Large Company Fund, you don’t have to worry that your fund manager will someday move everything into oil stocks just because he feels good about that part of the market.
They don’t blindly follow indexes. DFA is sometimes characterized as an index company, but they really create their own standards for what can be included in each of their funds. These “buy” lists are created using measures such as company size and geographic location, and then screened to exclude companies with issues such as bankruptcy, limited ownership, or other problems.
They take risk where you CAN be rewarded. Active managers try to obtain gains for their shareholders by concentrating their holdings in a few stocks (and praying those few do well) or shifting in and out of the markets at the “right” time. Ongoing research and internet sites such as CXO Advisors show that those tactics do not work consistently. DFA’s research shows that investors are rewarded for holding stocks, and even more so for holding higher risk stocks characterized as value and small cap. They have designed funds to capture these returns.
They are low cost. DFA funds have no sales loads, commissions, or trailing fees paid to advisors or custodians. They are pure, no-load funds. They are one of the largest mutual fund managers in the world, but you won’t see them sponsoring a golf tournament or paying $3 million for a 30 second Super Bowl commercial. Instead, they look for ways to reduce their investors’ management expenses. For example, many mutual funds lend out securities to other funds and receive payments to boost their company profits. DFA gives this interest income back to the funds that hold the securities, lowering the annual management expense for the fund’s shareholders vs. keeping it for themselves.
Their independence keeps them client-focused. The Asset Advisory Group is independent and can focus on client needs vs. selling a product a corporate parent wants us to push. As an independent investment company, DFA is under no quarter-to-quarter pressure to meet earnings per share targets that Wall Street might expect. As a result, they can make decisions that are better for the long-term success of their mutual fund shareholders. Examples include absorbing management fees on new funds and investing in research to determine how they can further improve returns.
They use trading to their advantage. If you have ever bought or sold a home, you know the person under no time pressure is the one with the bargaining power. If you are in no hurry to buy or sell, you can wait for your price. DFA uses this same strategy to obtain better prices for their funds. Index fund managers must sell when the index they follow changes. DFA can wait.
They have brain power. Roger Ibbotson of Yale, Robert Merton of MIT, Myron Scholes of Stanford, Eugene Fama of University of Chicago and Kenneth French of Dartmouth are all academic leaders involved in the management of the company, and lend their expertise to its improvement.
They are “wholesale” vs. retail. DFA funds are not available to the retail public. This protects you in several ways. First, when the media has investors scared and they begin the stampede to the exits of their mutual funds, you will not be trampled. Your DFA manager will not be forced to sell stocks to meet liquidity requirements when prices are down. Alternatively, DFA is not forced to digest hordes of cash when everyone decides that emerging markets is the hot investment for the year. They do not need to spend money attracting investors with full page newspaper ads and commercials. See #4 above.
They focus on constant improvement. DFA is constantly examining what they do and how they can improve it, using a feedback loop between the academics that sit on their board, investment advisors who use their funds, and the clients of those advisors. This continuous sharing of information has brought about many changes to the company over the years. For example, beginning in June 2010, the DFA Micro Cap now excludes the extreme small cap growth stocks that fall into lowest 25% book to market and earnings to price ratios, because academic research has shown that this segment lowers returns.
They provide access to education. We work to make sure that we stay up-to-date on tax, financial planning and investment issues by attending conferences and continuing education programs within our industry. DFA provides excellent educational opportunities for us by hosting conferences attended by some of the brain power mentioned earlier. We have to pay all of our own expenses to attend (see #4 again!) but we are more than happy to do so, because the education we receive makes us better advisors for you.

If you are interested in learning more, first hand, you are welcome to attend a seminar we are hosting at the Double Tree Suites from 11:30am to 1:00pm on March 11th. Joel Hefner, CFA and Vice President of Dimensional Fund Advisors will offer his take on “Redefining Investment Advice.” Please contact Mary Herrmann if you would like to attend.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Clueless

2011-02-23T08:54:00.002-05:00

(from Dan Solin's Huffington Post blog, 2/8/2011 - click here for the original post)

I'm sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine's Investor's Guide 2010 entitled "10 stocks that can keep running," the analysts he works with at Morningstar cover 2000 stocks. Wow.

With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey's 2010 predictions about stock market trends.

His primary observation was that we were in the "first phase of a bull market" where "smaller and junkier stocks tend to lead the way." However, he confidently predicted that "...speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year."

He was very negative on "lower-quality small stocks" noting they could "get killed if reality falls short of high expectations."

Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr.
Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year.

Not exactly.

In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500.

It gets worse.

Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index.

Let' see if I got this right.

Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index.

Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock.

It's all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who "manage" your money.

Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless.

You don't have to be.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

The Trouble with Talking Performance

2011-02-14T09:41:00.003-05:00

One of the first things we’re often asked in meeting with prospective clients is for performance data. We fully expect the question and often know it is coming. The marketing efforts of the traditional brokerage model and the financial media have conditioned us to think it’s the only thing that matters. The only problem is, they’re wrong.

We often reject the initial request for performance data as we don’t want it to cloud the decision making process for the prospective client in selecting a partner to help them plan their financial future. If someone goes into a financial planning relationship using portfolio performance as their only or even primary scorecard, it likely doesn’t make sense to even begin the conversation. We’re insistent that clients consider their comfort level with the investment philosophy, planning expectations, and overall personality fit long before secondary issues such as performance.

We don’t deny that performance is important, we just know that we have no control over it nor does anyone else. Let me rephrase that, the only control we have over a portfolio is to make sure it’s as globally diverse and low cost as possible and that it is properly allocated for a client’s needs and risk tolerance. Beyond that, seeking higher performance or constantly tweaking our investment philosophy based on market gurus, economic prediction or other forecasting is simply a waste of time and money.

This doesn’t mean we’re not proud of how our philosophy performs. As many know, our portfolios utilize funds from Dimensional Fund Advisors, one of the top-performing fund companies in the country, currently managing more than $202 billion. Some thoughts worth passing along were found in Jessica Toonkel’s December 20, 2010 Investment News article,

“Of the 39 DFA funds with 10-year histories, 33 were in the top half of performance in their categories for that period as of Nov. 18, according to Morningstar. More than half (30) of the 51 funds with five-year histories outperformed their categories for that period - not a small feat, given the market downturn of 2008. In fact, 34 of 58 DFA funds were in the top half of their category just in 2008. And the firm has some of the lowest fees in the industry – with fund expenses ranging from 0.16% to 0.9%.”

The truth of the matter is, in any time frame, about half the people “win” and half the people “lose”. Picking who those people will be in advance is impossible. The middle of that road is the average market return, but the term "average" is a bit of a misnomer. Average return does not an average investor make. The average investor, over the long run in most any time period, earns well below average market returns. If you can earn close to what the market earns at the lowest possible cost and have the discipline to stay invested through thick and thin, you will likely enjoy a very successful investment experience over a 30-40 year retirement horizon.

We don’t really earn our money by providing our client’s with excellent performance. We earn our money by keeping the focus on what they can control; staying invested, being accountable to a sensible spending plan and helping address all the other financial questions that come up on life’s path. If we can do that, our clients will continue to meet their goals.

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

The Tipping Point?

2011-02-07T11:27:00.006-05:00

Why does it seem like it takes someone’s death for the world to realize the value of their message? Michael Jackson’s Thriller is on track to be the first album in

U.S.

history to go triple diamond, selling more than 30 million copies. The estates of Marilyn Monroe and Elvis Presley have made millions more in the year’s since these stars have died. Although The Investment Answer was released last summer, it was only after author Gordon Murray’s passing in January that the media has been buzzing about his book. The Investment Answer, co-authored by DFA (Dimensional Fund Advisors) advisor Daniel Goldie and his client Mr. Murray, a Wall Street veteran, is now #2 on the New York Times Hardcover and Advice List. The hour it will take you to read this book is worth every minute.

When I began my career over 20 years ago, stock picking was the name of the game and the public didn’t want to hear that gurus with crystal balls didn’t exist. Now that index funds are mainstream and many gurus have been exposed for having no more accuracy than the flip of a coin, America is finally ready to hear the message that The Investment Answer conveys; there five key decisions that will help increase the odds of investing success.

- Should I invest on my own or seek help from an investment professional?

- How should I allocate my investments among stocks, bonds, and cash?

- Which specific asset classes within these broad categories should I include in my portfolio?

- Should I take an actively managed approach to investing, or follow a passive alternative?

- When should I sell assets and when should I buy more?

Although we’ve mentioned the book in previous blog posts and monthly letters, I thought it was worth another blog. It’s very exciting for me to see the momentum this book is gaining. On Amazon, you are limited to ordering only three copies of the book and our local Barnes and Noble had only one in stock because they are selling so quickly. In the past few years books like The Big Short or No One Would Listen, which read like fiction, but were written about what went wrong on Wall Street during the financial crisis, have garnered reader’s attention. Finally - a best seller featuring sensible investment advice!

I can only hope that this snowball continues and the general public embraces the message of The Investment Answer, which is that investing success is achievable for everyone and that sophistication does not equal success. It’s just too bad it took Gordon Murray’s illness and passing to get most people to listen.

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

Ignore Cost at Your Own Risk

2011-01-31T10:17:00.003-05:00

When selecting investments or investment advisors, people get caught up in mutual fund star ratings and performance track records. Cost of investing is only briefly considered, regardless of the sophistication of the investor, until they start to realize they aren’t making much headway. I was reminded of this by a phone call today.

A client’s relative sits on a foundation board, and he’s concerned about the lack of communication and reporting he receives from the company that manages the foundation’s endowment fund. During our conversation I learned they’re being charged 1.25% on the entire balance of the fund each year. This is a HUGE fee for that size of investment. I calculated our management fee using the Asset Advisory Group’s schedule - only .35%. If the endowment grows by 6% per year, over a ten year period the savings would be $2.3 million – which doesn’t even include the fees charged by the mutual funds or sub-managers they use.

This same trap catches people trying to invest on their own. Index annuities are being recommended as a solution for investors afraid of the market – a way to experience stock market gains without the risk. I won’t address all the problems with these investment vehicles (you don’t want to read a 10 page blog) but they’re one of the most expensive investments you can make. The Florida Department of Financial Services describes them as “extremely complex investment products that contain many detrimental features such as hidden penalties, costs, fees, and massive, multi-year surrender charges.” Market value adjustments, administrative ‘spreads’ and internal costs of the mutual funds inside the contract run as high as 25% each year.

When selecting a mutual fund in their 401(k) plan, most investors look at past (especially recent) investment performance to choose. But cost, not an investment’s track record, is a better predictor of whether you will make money in a fund in the future. Morningstar, the company that provides mutual fund scorecards, published a report in August 2010 that concluded the best predictor of a mutual fund’s future results isn’t the genius of the investment manager; it’s the expense burden the fund carries. According to Russel Kinnel, director of mutual fund research at Morningstar, “In every single time period and data point tested, low-cost funds beat high-cost funds.”

If you don’t know what you are paying to invest, find out. Cost is important, and if you ignore it you do so at your own financial risk.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

The Danger of Stock Market Forecasts

2011-01-24T11:13:00.003-05:00

(from Carl Richard's New York Times' Bucks blog, 1/10/2011 - click here for the original post)

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog, and other drawings are available on his personal Web site, BehaviorGap.com.

January marks the time of year where gurus come out of the woodwork with their stock market forecasts.

I thought it would be valuable to review a few of them and try to understand what they might mean to real people investing in the real world. I’ll cover two recent forecasts and one from a few months ago, too.

Let’s begin with Robert Prechter. In July, 2010, he said that based on his version of something called the Elliott Wave principle, “the Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.” Since then, the Dow has been up sharply.

Then we have Robert Shiller of Yale. He recently put his price target for the Standard &Poor’s 500-stock index at 1,430. (At this writing, the index is currently about 1,280.) Before you get too excited, note that Mr. Shiller says that his prediction is for 2020. That works out to less than a 1.5 percent increase a year for the next decade!

Finally, there’s Laszlo Birinyi. According to a recent Bloomberg Businessweek article, Mr. Birinyi believes the S.&P. can hit 2,854. And in an amazing display of precision, he predicts this will happen on Sept. 4, 2013.

So there we have it. Three market gurus with three wildly divergent forecasts that were all covered and reported by reputable, mainstream news outlets.

What’s a real investor to think or do?

The problem with gurus and their guesses is not that they’re always wrong. Part of what makes these forecasts so tempting is that the gurus are right just often enough for us to believe that there’s merit in listening. Unfortunately, it’s incredibly difficult to identify which forecast will be right.

So what does a real person do with this information? I suggest you use it as kindling, as a starting point. I know it’s fun to chat with friends or colleagues about your opinion of the stock market. I also know it can feel like the duty of any self-respecting American to have an opinion about the market and the economy.

Having an opinion is fine. But acting on it with real money is often incredibly damaging. To move beyond opinion you can start by doing the following:

Realize that investing is a means to an end and not the end in and of itself. Take the time to define the end (your goals), and realize that good investment decisions are only made within the context of your life.
Once you define your goals, figure out what it will take to get you there. Part of that will obviously include a rate of return that you need to achieve. If that rate of return is unrealistic, then make adjustments to your goals. For example, you can try to save more, you can spend less or you can delay goals like retirement.
Once you have a realistic set of goals, build the most conservative investment strategy you can to get you there.

You need to realize that no one can tell you with any sense of precision where the stock market (or any market) is going. If you’ve learned nothing else during the last 10 years, I hope you remember that the stock market won’t perform in a set way indefinitely. At some point the market will go down, and it may be for a long period of time.

Just as likely, the market will often go up a lot over a long period. So for the real investors who are investing real money in the real world, take note that you should build your investment strategy around your life and your goals and not the annual guesses of gurus.

Resolutions - Part I

2011-01-18T09:26:00.001-05:00

Brad Steinman, Director of the Canadian arm of Dimensional Fund Advisors, offered up 10 important investment resolutions to start off the new year. Brad’s goal was to warn investors away from “ill-advised practices that are detrimental to their wealth” and hopes that “a set of New Year’s Investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.”

Rather than rattle them off in what would be a rather lengthy blog post, we’ve decided to take a few resolutions at a time and provide some commentary on each periodically over the next several weeks.

Resolution #1: I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.

TAAG Thoughts: This is a topic we’ve covered at length in this space. There’s no question that what once passed as tabloid journalism has become “the news” across all fronts. Be it Jim Cramer, Brett Favre or the Kardashians, it can be difficult to differentiate between the evening news, CNBC and TMZ. The line between entertainment and information has been severely blurred if not erased altogether. We fully agree with Mr. Steinman that the best media to listen to when it comes to long term investment strategies is no media whatsoever.

Resolution #2: I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.

TAAG Thoughts: This touches on several of our firms core values, most notably the notion that gurus, much like the media, are to be ignored. Those who “get it right” are impossible to identify in advance, rarely repeat their success and the actual return investors receive in chasing these soothsayers after the fact pales in comparison to the returns as advertised. For more on the obstacles and dangers related to this manner of investing, see Dan Solin’s blog from last year.

The thoughts on capitalism and the long term expected return on capital ring true as well. In the long term, the only bet an investor needs to place is that the companies of the world will continue to grow. There will be lots of bumps in the road, some wild successes and some companies that cease to be, but, in the long run, the world will continue to develop new innovations and grow its collective balance sheet as it always has. You can participate in that growth by holding a globally diversified portfolio that seeks not to beat or outthink a market that, in the short term, will almost always disappoint.

These resolutions may seem like simple ideas, but we see time and time again that it is so easy to get caught up in the media hype or the promise of something out there that will allow investors to hit that home run without taking the required risk. Neither is an accurate depiction of real life or where our expectations should lie when it comes to our portfolios.
We hope you enjoy these and the other resolutions to come.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

Planning Your Philanthropy

2011-01-10T12:26:00.000-05:00

At year’s end, many people find themselves rushing to make last minute charitable contributions. Often, the intent of helping out an organization is lost when a deadline looms. Since we’re just beginning the year, it is a good time to create a charitable giving plan so that your gifts will have the most impact.

There are many ways to support a charitable or non-profit organization other than simply writing a check. You can gift shares of stock which have a low cost basis. You will receive a tax deduction for the market value of the shares but do not have to pay tax on the gain from the sale. Many of our clients do this by transferring stock directly from their Fidelity or Schwab account to their church, alma mater or other organizations they wish to support.

Another way to gift highly appreciated assets is a Charitable Remainder Trust (CRT). With a CRT you can receive an income for your life (and your spouse’s) and a charity will receive what is left. You get to choose the amount of income you will receive annually (typically 5-10%). You can maintain control over how the assets are invested, receive a tax deduction in the year you make the transfer of assets to the trust and no capital gains are due on asset sales because you are benefitting a charity.

To make an impact without a personal financial contribution, there are many organizations that hold marathons, triathlons, bike races or walks in which you can take part and raise money. I have personally raised over $6,000 in the past two years for the Leukemia and Lymphoma Society by participating in two half marathons through their Team in Training program. This is a great way to get in shape and support a cause close to your heart.

If you would like to support our local community, The Greater Cincinnati Foundation provides several ways to do this by making grants in arts and culture, community and economic development, education, environment, health, and human services.

An alternative if you want to make a contribution in a certain year for tax reasons but do not have a specific cause in mind is a Donor Advised Fund. Both Schwab and Fidelity have Donor Advised Funds. They allow you to make a contribution, take an immediate tax deduction, direct how the assets are invested for tax-free growth and then recommend which non-profit organization(s) receive funds either today or in the future.

After retirement, a great way to give back to your community and stay active and healthy is volunteering. We have clients who contribute their talents to build houses through Habitat for Humanity, visit hospitals with their therapy dog, have gone on mission trips to do dozens of daily surgeries on animals in need, have traveled with Operation Smile to restore the smiles of children with cleft lips and palates , and are active in Kindervelt, which supports Children’s Hospital Medical Center. If you want to volunteer but do not have a particular organization in mind, a good place to start is www.volunteermatch.org.

No matter what organization you support with your time or money, you should do the research to ensure they are good stewards of their money. Charity Navigator is an independent source to research a charity’s financial health and how their funds are allocated.

I’ve touched on only a few of the ways you can support non-profit organizations. And, as you can see, being philanthropic does not have to involve vast sums of money. There are ways that everyone can give back. We are happy to help you determine your best avenue for giving, based on your charitable intentions.

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

Planning Ahead

2011-01-03T10:38:00.004-05:00

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 that was signed into law on December 17th clears up the uncertainty hanging over tax and financial planning decisions – but only until the end of 2012. Here are a few things to think about as you plan for the next two years:

Income tax rates will hold at their current levels for 2011 and 2012, and tax rates for long-term capital gains and qualifying dividends will remain the same as well. You now have two more years to sell appreciated investments at the current 15% maximum long-term capital gains rate, and if you are able to manage your income into the 10% or 15% marginal income tax bracket, the special 0% rate will apply to you. If you have stock options to exercise, you can do so at the maximum federal income tax rate of 35%. Now may be a good time to review your cash flows over the next 24 months to see if anything should be changed in your diversification or income recognition plans.
Social Security taxes will be 2% lower in 2011, reduced from the current 6.2% to 4.2%. If your earnings are over the $106,800 wage base limit this translates into a $2,136 savings. Self-employed individuals will owe 10.4% vs. 12.4%, so if you plan on doing consulting work in retirement 2011 is the year to recognize as much income as you can! The tax-free distribution to charitable organizations from IRAs was retroactively reinstated for 2010 and extended through 2011. If you are over 70½ (and therefore must take a Required Minimum Distribution or RMD) you can transfer up to $100,000 from your IRA to a charity and not pay income taxes on the distribution. If you have other resources for your income needs, want to benefit a charity, and don’t want to pay income taxes on your RMD you should consider paying your RMD to a charity versus taking it as income. Because the change took place so late in the year, you can treat distributions made from an IRA to a charity in January 2011 as if it were made in 2010.
The federal estate tax went through some major changes, but those are all temporary too. The estate tax exemption amount is now $5 million per person and the top estate tax and gift rates are 35% until the end of 2012. For the next two years, if one spouse dies, any unused portion of that spouse’s estate tax exemption amount may be transferred to the surviving spouse. All these changes are a huge benefit to families, but there is no guarantee that they will be extended beyond the current two year term. Many people have delayed updating their estate plans until the new rules were set. I think this is as good as it is going to get, so it’s time to set an appointment to get your documents updated if they are over five years old. We’re happy to help with a referral to an attorney if you need one, and will attend the meeting with you as well if you think it will help overcome procrastination.

Remember, we are always here to work with you to determine the best plan of action to reach your goals. If you have any questions or want to meet to review your situation, don’t hesitate to contact us.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

Shifting to Savings in 2011

2010-12-27T13:35:00.002-05:00

As we enter the last week of the year, we hope that all of you are enjoying the holiday season. This week is one of reflection and resolution for the year to come, and for many that includes a somewhat uneasy scan of the December credit card statement to see how much damage was done over the holidays.

There will be countless articles out there in the coming week with suggestions on how to trim the coming year’s budget. To add to those, we’ve compiled a few of the more unique ways to eke out a little more value from your day to day life that we’ve seen over the last few months. Heading into 2011 seemed as good a time as any to walk through a few of them . . .

End of Year Giving

Problem: You feel charitable and enjoy giving to those causes that are important to you, but have no idea how much you gave, who you gave to and how any of it fits into your budget throughout the year.

Solution: Be more strategic in your giving. This is not a suggestion to give less, just more efficiently. Sit down now and determine a budget for next year’s giving, divide those resources amongst those causes that are most important to you and give accordingly. Make sure to leave room for other opportunities that move you to add to your circle of giving through the year.

Coinstar

Problem: You have a mountain of change scattered in various jugs, piggy banks and containers throughout the house. You’d like to put it to use, but who has time to sprawl out on the floor and roll up piles of change? You could go to a Coinstar, one of those little green boxes at the grocery store, but you’ve heard (correctly) that it’s one of the biggest rip-offs out there, charging somewhere in the 10% range for this convenience.

Solution: Were there items on your Christmas list that you didn’t receive? Did you receive a new iPod and need to beef up your music collection on iTunes? Are you tired of cooking for family and friends and need a night out? Use your loose change to treat yourself. See, Coinstar machines also give you the ability to purchase gift cards at retailers from Lowe’s to Gap to Starbucks and the retailers pick up the fee on your behalf. In fact, now through the end of the year, they’ll kick in an extra $10 for every $40 in change that you process, so grab those coins and pay for that morning cup of coffee for the first few months of the year!

Auto Loans

Problem: There are great interest rates being offered on auto loans, but you’re in the middle of paying off your current loan and have no plans to buy a new car anytime soon. Have you missed the boat on these great rates?

Solution: With rates near historic lows, refinancing your car loan may be worth considering. The short term nature of these loans has meant that you need a substantial rate reduction to make the process worthwhile. But, with rates as low as 4.5% on used cars at small banks and credit unions in the area, relatively substantial savings are possible if you have a higher-rate loan. It’s important to note that the refinancing process on an auto loan is much easier than a typical home refinance and can often be done in one visit to the bank.

Gas

Problem: Did I just see gas for $3.05/gallon?

Solution: Maximize the benefits of grocery store loyalty programs or your warehouse club membership. Many of us rack up points on a weekly basis at our local grocery stores or have memberships to Costco, Sam’s Club or other warehouse clubs that give us access to discounted fuel. The problem is, when it comes time to fill up, we’re as far away from those discounts as could be. The solution is to be a little more conscientious when you fill up. Time fill ups to trips to the grocery or the warehouse club. For example, if you use a Kroger card and spend $400 in a month on groceries, you can save 40 cents per gallon. On a 25-gallon fill-up that’s $10 back in your pocket.

These may not be cure-all savings tips, but they are a good start in putting your money to work for you and maximizing your budget in 2011. Starting off the year with a plan and the right mindset can do wonders for achieving greater peace of mind.

Much like any resolution, don’t fall into the trap of trying to do too much. When we overwhelm ourselves with choices, we typically wind up doing the same thing…nothing.

From all of us at The Asset Advisory Group, have a very safe & Happy New Year!

The Asset Advisory Group
www.taaginc.com

New Index Returns Astound Wall Street

2010-12-20T15:22:00.003-05:00

(from Dan Solin's Huffington Post blog, 12/7/2010 - click here for the original post)

It's hard to be modest about this achievement, but I am going to try.

In January, 2010, I created the Solin Random Stock Index (SRSI). For those skeptics who want to verify this claim, please see this blog I wrote at the time.

I wish I could report that my index was a complex algorithm, but it was really very simple. I just took the spelling of my last name, and punched each letter into a quote engine. I selected the first two stocks (listed on a U.S. stock exchange) that appeared for each letter. Here's the list of ten stocks that comprised the SRSI:

1. Sprint Nextel (S)
2. Sirius XM Radio (SIRI)
3. Realty Income (O)
4. Oracle (ORCL)
5. Loews (L)
6. Las Vegas Sands (LVS)
7. Intel (INTC)
8. International Business Machines (IBM)
9. Netsuite (N)
10. Nvidia (NVDA)

Now that we are coming to the end of the year, I thought this would be a good time to see how the stocks in my index have performed. I know my competitors are busy getting the performance data of their funds together so they can show how well they did. Morningstar will be analyzing this information in order to figure out which funds get the highest "star" ratings.
Investors rely on performance history. High performing funds can expect an influx of revenues. More revenues means more fees. It's a high stakes game. I want a piece of it.

So, how did the SRSI do from January, 2010 through November, 2010? Hold on to your hat. It's up an astounding 45.14%! No kidding.

The S&P 500 is only up 5.87%.

Let's put this stellar performance in perspective so you can really appreciate it. In an article published February 24, 2010, US News recommended its top mutual funds for 2010. It's methodology was impressive. It relied on "some of the brightest minds conducting investing analysis" and used ratings from Morningstar, Lipper, Zacks, TheStreet.com and Standard & Poor's.

Hard to see how you could miss if you followed these recommendations.

Let's compare some of these top funds with the SRSI. The performance data is as of October 31, 2010.

The Yackman Fund (YACKX) is up 9.07%. It was the top ranked Large Value Fund;
The FMI Large Cap Fund (FMIHX) is up 5.15% It was the top ranked Large Blend Fund;
The Parnassus Workplace fund (PARWX) was up 8.35%. It was the top ranked Large Growth Fund.

The SRSI clobbered the returns of all these top rated funds. I didn't have access to any of the "brightest minds" who do sophisticated analysis and I don't even have a subscription to any of these ratings services.

So what can I expect next? I assume invitations from the cable financial shows so that I can educate investors on how I did it. Maybe all those impressive ratings services will start to follow the SRSI. If I was set up to receive funds, I assume I would have to brace for a massive influx. I would wear "back office problems" as a badge of honor.

My real goal is to win Morningstar's Fund Manager of Year award. Bruce Berkowitz was the pick for U.S. stock-fund manager in 2009 for his stellar performance running Fairholme Fund (FAIRX). His fund has $10 billion in assets. Mr. Berkowitz is a highly regarded stock picker, holding only about 20 stocks. The SRSI holds 10 stocks, so we have the over-concentration thing in common.

Fairholme is only up 12.96%. Clearly, my stock picking skills are vastly superior. It should be no contest for 2010. I'm a shoo-in.

I'll still have time to write this blog. I really enjoy it. But I suspect that being known as a "stock picking guru" will have its perks as well.

Sorry, I have to run now. The phone is ringing. I'm hoping it's Jim Cramer. Maybe he will anoint me as "one of the great ones in this business", an accolade he is reported to have bestowed on

Lenny Dykstra, the ball player turned stock picker.

Dykstra filed for bankruptcy in July, 2009.

I'm no Lenny Dykstra.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Preparing for the Unexpected

2010-12-13T11:34:00.003-05:00

I was planning to write this week’s blog on the provisions of the most recent tax bill, but Congress isn’t cooperating. It’s interesting that a major point of contention is the estate tax. Most people were hoping to go back to the $3.5 million exemption and the 45% tax rate we had in 2009. As many of you know, when the Republicans and President Obama originally negotiated the newest tax bill, a $5 million exemption and 35% rate were included. It’s anyone’s guess when a new bill will be negotiated. We didn’t expect to get this far into 2010 without any estate tax at all. As you make your to do list for 2011, don’t let an act of Congress prevent you from preparing for the inevitable.

One aspect of estate planning covers the disposition of your property after your death but just as important is who will manage your property or oversee your healthcare if you are no longer able to during your lifetime.

The documents that should be included in your estate planning include:

Durable Power of Attorney – to give another personal person legal authority to act on your behalf to do things such as:
• use your assets to pay your everyday expenses and those of your family
• buy, sell, maintain, pay taxes on, and mortgage real estate and other property
• collect Social Security, Medicare, or other government benefits
• invest your money in stocks, bonds, and mutual funds
• handle transactions with banks and other financial institutions
• file and pay your taxes

Durable Power of Attorney for Health Care – to allow you to name someone to oversee your healthcare wishes and make any necessary medical decisions for you.
Living Will – this is your written declaration regarding life support if you are unable to speak for yourself. In most states you will specify whether or not you want to receive life-prolonging treatments at the end of life.

HIPPA Release – the Health Insurance Portability and Accountability Act of 1996 requires healthcare providers to make reasonable efforts to limit the release of protected health information. This document will allow you to name one or more persons to have access to all of your medical information. It is especially important because you want to ensure your Healthcare Power of Attorney has all of the relevant medical information if they need to make decisions on your behalf.

Once you have take the time to draw up your estate plan, it is critical to make sure it remains current. If you no longer want one of your representatives (such as your executor or healthcare proxy) to serve in this capacity, or they are no longer able to do so, make sure you update your documents. Moving to another state may also be a reason for an update. State or Federal law changes can impact your plan, so at the very least, make sure to review your documents with your estate planning attorney every five years.

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

Holiday Stuff

2010-12-06T13:01:00.003-05:00

For those of us that celebrate and haven’t realized it yet, Christmas is about 2 ½ weeks away. Up until yesterday, I was completely in the dark on this, and I know I’m not alone. Didn’t I just carve a turkey last week? Didn’t the pool just close a few weeks before that? Maybe they changed the date this year.

Saturday, my family participated in our annual drive out to the country in search of this year’s Christmas tree. Yes, we pass several tree farms on the way and countless tree lots, but it’s something we truly enjoy every year. Some light snowfall and a great stock of trees made this year’s trip that much richer.

Sunday brought another favorite tradition, lunch with Santa Claus. For my four year old, when Santa walks in the room, time stops. Clifford, Curious George and Sid the Science Kid (think Clooney, Roberts or Hanks for the uninitiated) could appear in the flesh and she wouldn’t take her eyes off the big man for a second. She spent close to a month preparing her list and planning the precise words she’d say. When she arrived in St. Nick’s lap, she just stared and smiled. We finally had to approach her and remind her of some of the things she hopes to find under the tree.

I don’t want to make this too much of the clichéd “remember what’s important this time of year” blog, but I’m afraid that’s exactly where I’m headed. I won’t pretend this will be the year we all admit that the gifts are truly unnecessary and just another way to fill the basement, attic, or storage unit with more Stuff (it deserves a capital S these days). There’s little that can be done to stop the precious moments captured this weekend from being quickly replaced by mad dashes to various stores, outlets and kiosks all to make sure every “i” is dotted and “t” is crossed. But, much like financial planning, small incremental improvements and regular reminders about which of our goals are truly important can have a dramatic impact in shifting our focus in the long term.

In the meantime, I hope this reaches you all early enough in the season to take it to heart. Truly enjoy the experiences you have with your family, friends and others around you. Worry less about the Stuff and more about the moment. When thinking of unique gifts, give the gift of time, whether it’s dinner and a play, a sporting event or some other outing, the experiences we share with those we care about truly do make the best gifts of all. There is no whatzit, whirligig or doohickey that could possibly bring as much joy.

For my last blog of 2010, I mostly just want to wish you all a very happy holiday season and best wishes for health, happiness and balance throughout the year. We appreciate you taking the time to read the blog and hope that, at least on occasion, the topics discussed provide real value, whether financial, health related or just as a good time to reflect for you and those around you.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

Time for a Reality Check

2010-11-29T11:30:00.003-05:00

(from Dan Solin's Huffington Post blog, 10/28/2010 - click here for the original post)

As year-end approaches, this seems like a good time for a reality check.

On October 9, 2007, the Dow Jones Industrial Average closed at its all time high of 14,164. At that level, it had gained 94% over the preceding five years. The euphoria of the bulls was palpable.

On March 9, 2009, the index reached a new twelve-year low, closing at 6,547. The bears became the talk of Wall Street. Doom was in the air.

How you dealt with your investments during this period is indicative of everything that is wrong with the securities industry and why you need to fundamentally change the way you invest.

Few brokers predicted the greatest financial crisis since the Great Depression. Almost no one predicted both the meltdown and rapid recovery of the markets. Yet more than 90% of individual investors maintain brokerage accounts and rely on the flawed advice of their "investment professionals."

What if you didn't panic and did nothing from October 9, 2007 to date? I call it the Seinfeld approach to investing. You were in a globally diversified portfolio of low cost index or passively managed funds in an asset allocation (the division of your portfolio between stocks and bonds) appropriate for your tolerance for risk and investment objectives.

As of September 30, 2010, if your allocation to stocks was 50%, your portfolio has fully recovered. Investors with with an allocation of less than 50% to stocks have positive returns. If you were among the small percent of investors for whom an allocation of 100% stocks was appropriate, your total return is down almost 20%.

Check your portfolio returns. How do those results compare? Most likely, not well if you were listening to the financial pundits and "fled to safety" when the market crashed.

Almost all clients of brokers invest in actively managed funds, where the fund manager attempts to "beat the market." The use of these funds is another reason why investors typically underperform the market. If there is one compelling reason for terminating your relationship with your broker, it's the fact that recommendations of actively managed mutual funds are the way brokers make a living.

In a recent blog, Eugene Fama and Kenneth French, two of the most distinguished Professors of Finance in the country, explained the folly of investing in actively managed funds. They concluded that, when you factor luck into the equation, they expect 97% of actively managed funds to underperform a passive alternative.

Their conclusion is consistent with other studies that have shown over 99% of active fund managers have no genuine stock picking ability.

If your personal reality check persuades you to enter the New Year with a new investing approach, don't necessarily assume you can do it yourself. Studies over a 30 year period show that even those who pursue an indexing strategy on their own fail to capture 100% of market returns. They still do far better than investors in actively managed funds, but their failure to rebalance their portfolios and the lack of discipline to stay the course when times get rough, take a heavy toll.

A competent passive advisor, who focuses on your asset allocation and recommends investments only in index funds, passively managed funds or Exchange Traded Funds, can be a wise investment.

Lessons from "The Big Short"

2010-11-22T12:20:00.004-05:00

So much has been written about the credit crisis caused by the real estate bubble and the government’s reaction to the resulting recession that it may be difficult to even consider reading a book on the subject, but “The Big Short” by Michael Lewis is worth the time.

Most books written on the subject provide a timeline of events and try to determine who was to blame. Instead, Mr. Lewis chose to focus on the few people who saw the crisis forming and bet against Wall Street, based on the strength of their convictions. The book isn’t a ‘get rich quick’ instruction manual, but it provides a fascinating look inside Wall Street thought the eyes of a few unusual people, and several important lessons for investors in the process:

Don’t believe that something is right just because so many people are doing it.

I know, it sounds like something your mother would say. But history is crowded with examples of investment booms and busts that were caused by the pressure of the crowd. In the last 40 years we’ve experienced energy tax shelters in the 80’s, the dot-com stocks of the late 90’s and the recent real estate boom. It’s easy to recognize how ridiculous prices were AFTER the fact, but in the height of a boom it’s tough to watch your brother-in-law get rich flipping Florida condos and your friends making money overnight without feeling you’re a sucker for staying out. But the last man standing when the music stops can lose it all.

Brokerage firms are rife with conflicts of interest that damage the wealth of individual investors.

In the credit boom leading up to the bust, brokerage firms made bets on bonds for their own accounts and created new investment vehicles by pooling together low quality mortgages. Bonds the firms no longer wanted to keep for themselves were dumped onto unsuspecting investors. We need to move to a fiduciary standard in the industry where all investment firms have to act in the best interest of their clients. Investors, in the meantime, need to pay attention to how their advisor is compensated and where his loyalty lies.

It takes guts to maintain your course of action when so many people tell you you’re wrong.

I actually felt sorry for the man who made $100 million for himself and $700 million for the investors who stuck with him. Michael Burry created a hedge fund, Scion Capital, and began betting against the real estate bubble in 2003, before the rest of the world caught on. Because he was early, real estate and mortgage backed investments continued to go up in value, and his hedge fund suffered losses. In 2006, when the S&P 500 was up more than 13%, he lost 18.4% for his clients. He was physically threatened and harassed, and some of his investors organized to sue him in the fall of 2006. By June of 2007, the real estate house of cards began falling in the credit markets, and his bets paid off spectacularly. But Burry was so traumatized by all the years of harassment and doubt that he closed his fund.

If you have an investment plan in place to reach your goals, it’s emotionally difficult to stick with it when you feel the sky is falling or everyone is getting rich and you aren’t. But don’t allow CNBC’s Jim Cramer or a friend at a holiday party cause you to doubt yourself.

If you have some time over the holidays, I recommend you spend it with “The Big Short.” You might even walk away with a few more lessons of your own.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

Running from the Bear

2010-11-15T09:01:00.002-05:00

While walking my dogs in Symmes Park on Halloween morning I encountered a black bear. I knew the bear had been spotted in the area because signs have been posted for about two months. When the signs first went up, I did my due diligence by going to the websites for the township and Ohio Department of Natural Resources. I found out how you should react if you encounter a bear – make noise, don’t approach or feed the bear (really?) and don’t run away. I had my plan in place. In the unlikely event that I saw him for myself, I would slowly back away and change my route. Unfortunately, when staring my fuzzy black fear in the face, all of my planning went out the window and I did exactly the opposite of what you should do – I ran away as fast as I could!

As I have played this scene over in my head, I began searching for something that would have made my response different. Maybe if I wasn’t alone, and had my husband, or another person with me, I would have been able to respond more rationally. Even though I had done my research, maybe I should have created a different plan. I’ll never know…hopefully.

What does this have to do with investing? A lot, actually. My incident with the bear and my response is very similar to what investors face each day. Although you can put a plan in place by creating a portfolio based on your past tolerance for risk and discussing the best course of action when facing a bear market (now I understand where the name comes from!), your actual reaction may be far different than your plan.

With bear markets occurring about once every five years, what can you do to make sure you don’t run from the bear and endanger your goals? The first step is to ignore the media. They will typically make you feel as if you need to make a split second decision whether to flee or not- and you don’t. When staring the next bear market in the face and your inclination is to run, turn off the TV or computer, take a few deep breaths and call your advisor.

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

Preventing Identity Theft & Fraud

2010-11-08T11:47:00.007-05:00

I recently had the priviliege of hearing Detective Jim Kelley of the Blue Ash Police Department give a presentation on preventing identity theft and fraud. There was great information shared in the session and well worth passing along in this week’s blog.

Perhaps the biggest surprise was how little most of the tips had to do with computer and internet security. That’s certainly something we’ll touch on, but in this rapidly growing digital age, it seems the easiest targets for crooks continue to be your mailbox, your phone and your garbage can. Yes, dumpster diving is alive and well in the world of fraud.

Some of the top tips from the sessions . . .

1. Buy a Shredder
Detective Kelley said that if he could buy each and every home in this country a gift, it would be a simple shredder. He recommends that any piece of mail, receipts or any other document that we are disposing of get shredded. Criminals are more than happy to root through your trash cans for any information that might help them. If your trash is full of shredded documents, they’re much more likely to move on to the next victim.

2. Mind Your Mailbox
Putting outgoing mail in your mailbox and putting up the red flag doesn’t just get the attention of the mailman. It’s also a literal “red flag” that you have mail with potentially sensitive information ready to steal. Whenever possible, use an alternative method to send any outgoing mail, especially when personal information is involved.

3. Hang Up
The older we are, the more likely we’re a part of a generation that was taught to be polite on the phone. This, however, was likely when the home phone was a tool for communicating with friends, neighbors and family and not a sales tool for every scam under the sun. Detective Kelley stressed to not be too polite to just hang up on stranger or unknown callers. Your bank, credit card company or other trusted institution will never ask for your account information or personal data over the phone unless you’ve called them to resolve an issue and are asking to verify your identity. If you think the call might be legitimate, hang up and call a number that you know connects you with the right entity to confirm.

4. Be Diligent
One of the biggest things criminals bank on is that you’ll be as lazy as they are. You need to be diligent in your affairs. Go over bank and credit card statements when they come to make sure nothing fishy is on the statement. It doesn’t require hours of time or a fine-tooth comb, just a basic review to make sure everything is legitimate. The same goes for your credit report. Visit http://www.annualcreditreport.com/ to review your free credit report and check for any potential errors. You’re entitled to one free report from each of the three major credit bureaus, so set up a reminder every four months to do this today.

5. Don’t Trust E-mail
Yes, your computer is still a concern, too. Use virus protection software and be diligent in what you do online. Be especially careful with your e-mail. More and more, your e-mail contact list is the prime target. If you get a strange e-mail from a known friend or family member’s address asking for money or encouraging you to click on a link that seems out of character, just hit delete. Detective Kelley gave examples of dear friends sending an e-mail that they’re overseas, mugged and desperately need money wired, or the famous lottery that you’ve won that you just need to send a check to cover the taxes. These sound like obvious scams, but those that wish to separate you from your money will continue to get more and more sophisticated in how they go about reaching out to their victims.

6. Quick Tips
- Soak your prescription bottles and peel off the labels and shred. Labels carry a lot of personal information, and you don’t want a potential burglar to know that you’re using Ambien on a nightly basis.
- Use gel pens exclusively to write checks to avoid a fraud known as “check washing”.
- Keep personal information locked up and out of reach if you have cleaning people, home health care or other services in the home where subcontractors might be used from time to time.
- Carry around only what you need on a day to day basis. There is almost never a reason to carry your social security card, little used credit cards or other information besides the basics.

7. Listen to the Experts
Detective Kelley provided excellent information from the National Crime Prevention Council. They have a well-done brochure called “Preventing Identity Theft: A Guide for Consumers”.

The bottom line is there is still no such thing as a free lunch. No one out there wants to give you money for nothing and there’s no reason for you to send anybody money so that they can send you more money. Be vigilant, take the necessary precautions within reason and when something seems too good to be true, take a pass. If there’s any question of legitimacy when it comes to these issues, don’t be ashamed or have too much pride to ask for help. If you have been victimized in some way, report it quickly. Especially when it comes to credit card fraud, if you don’t report it quickly after discovering the discrepancy, you could be liable for the loss. Call the bank, credit card or other company first, then the authorities.

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

Seduced By Complexity

2010-11-01T11:01:00.004-04:00

(from Carl Richards' newsletter Behavior Gap, 10/28/2010 - click here to link to the original post)

Why do we say we want simplicity and then chose complexity? It often starts when we get caught in the trap of two competing stories. In the first one, we tell ourselves we want to simplify, simplify, simplify. In the second story, we tell ourselves that the solution to an important problem has to be complex. The reality is that getting something simplified is the ultimate form of sophistication, so why don’t we choose simplicity when it comes to financial planning? Even though people list simplicity as their number goal on survey after survey, we still seem to opt for the more complex solution because complexity can appear easier on the surface.

Too many times, I’ve seen people disappointed when I’ve proposed a simple solution to their investment or financial planning problems. Often the solution can be reduced to a simple calculation on the back of a napkin, but clients somehow take comfort from a 100-page paperweight packed with a thousand calculations. Logically they know that complexity isn’t a guarantee, but it seems to make people happy.

Pleasure in complexity even shows up in emergency rooms, too. According to a physician friend, patients are often disappointed when the diagnosis is relatively simple like, “Go home and get some rest,” or “Stop smoking and eat a little less junk food.” The patients appear to hope for a terminal disease because it’s “easier” than going home and following simple, but hard, health rules.

We spend $40 billion a year on weight-loss programs and products even though we know that for most of us the answer is simple, but difficult. It comes down to either consuming fewer calories, burning more calories with exercise, or both. But it’s tempting and far more interesting to look for complex solutions that appear easier, but aren’t effective.

What part of human nature attracts us to complexity instead of a simple solution? Maybe we’re counting on a magic bullet, something to save us from the simple, but often hard work. Maybe debating complexity is more fun than the day after day grind of just getting the work done. We even have a tendency to believe that complexity is a sign of intelligence. In reality, the simplest solution almost always turns out to be the most effective, but also the most difficult.

One example in a recent Reuters article highlighted a family that put their kids through college with no debt. They managed it on a modest family income by driving the same car for 10 years and putting money away month after month. The author asks, “Is this a fairytale?” If it is, then we’ve forgotten the basic tenants of financial success. Based on my experience boring, simple things like saving money, avoiding speculative investments, and repeating that process over and over isn’t sexy or appealing.

We need to understand our attraction to complexity because it impacts the way we approach our financial goals. The reality is that the simple options with the largest impact on your financial success can be difficult to implement. They require discipline, patience, and hard work. And they require that we apply those basic, fundamentals over and over for years. It's much easier to entertain ourselves with the thought of finding an investment that will give us a fantastic return than to save a little bit more money each month.

Hindenburg Omen

2010-10-25T10:06:00.002-04:00

Whatever Happened to the Hindenburg ?

September was an excellent month for US stock market returns – the S&P 500 index was up 9.92% - the best September since 1939. October hasn’t been too bad either, with the S&P up over 3% for the month-to-date. Small company stocks have fared even better. We are constantly telling you not to focus on the short-term performance of the market, so why am I bringing it up now?

Well, based on the Hindenburg Omen we were supposed to experience a “market meltdown” in the month of September.

Jim Miekka, the author of a stock market newsletter, created a technical indicator he calls the “Hindenburg Omen.” It combines various technical indicators tracking moving averages and the number of issues setting new fifty-two-week highs and lows. The Omen allegedly flashed a “sell” signal on August 12th, and the internet was buzzing on Friday the 13th about the looming disaster in the stock market. We received a few phone calls and emails from clients who had been alerted to the warning by friends, and wondered if they should be concerned. Obviously, people are still shaken by the market events of 2007 and 2008. If they had followed Mr. Miekka’s advice, and sold out of their US funds on August 13, they would have missed 9% plus gains in their large US company funds and over 15% in their small company funds as of Friday, October 22nd. Now they would be worrying about when they should get back in.

There are hundreds of stock market trading models and many more newsletters that sell advice to investors, but none have been consistently successful. Professor Eugene Fama of the University of Chicago, and one of the earliest advisors to the DFA funds, learned this early in his career. One of his first jobs was to conduct research on timing indicators for the publisher of a market newsletter. As a statistics whiz, he had no trouble coming up with technical signals that did very well in predicting market moves. Unfortunately for fans of timing models, he also found that they only worked on past data, and none of them continued to work once he identified them.

Predictions based on models will be made every day. Some might even be right, but as the saying goes, even a stopped clock is right two times a day. Why is it that the newspapers and TV shows rarely revisit the predictions that were made to acknowledge whether they were right or not? Mr. Miekka, whatever happened to the Hindenburg?

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

The Essential Problem

2010-10-18T10:19:00.003-04:00

When we sit down with someone nearing retirement, we address what we refer to as “the essential problem” which is ensuring they do not run out of money before they run out of life. For the average 62 year old couple who does not smoke, at least one spouse will live to the age of 92. That means you need to plan for at least a thirty year retirement. This is one instance where being above average literally doesn’t pay. Every additional year that you live the cost of everything you need to buy increases. But that doesn’t mean you need to put Dr. Kevorkian on your speed dial or hope that you don’t live to be 100.

Given these facts, your retirement goal should be to safely draw an income from your investments that will rise through time at a pace equal to these increasing costs. This will allow you to maintain your lifestyle and sustain your dignity and independence during your retirement.

Sounds easy enough, right? Unfortunately, as the name implies, a fixed income strategy will not work. This includes investing exclusively in things such as bonds, cash, CD’s and fixed annuities. If you invest only in fixed income, the problem is not if you will run out of money but when will you run out of money.

The only asset classes that have always kept up with rising living costs over a 30 year period are equities – small and large companies both in the United States and abroad. There was a 48-year stretch from 1941 -1989 where Long Term Government Bonds did not keep up with inflation, while the S&P 500 outpaced inflation by 7.1% annually.

But, knowing where to invest your money won’t necessarily make you a successful investor. Staying disciplined will. If history is any guide, nearly 4 years in 5, the values of the great companies in America and the world will go up; at least once every 5 years, they will temporarily go down and scare nearly everyone out of them.

The easy part of our job is helping you to pick the best mix of stocks and bonds to meet your lifelong income needs. However, where we provide the most value to our clients is not predicting the direction of the economy or the stock market, but keeping them from panicking when the next bear market arrives.

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

Peeking Behind the Curtain

2010-10-11T08:45:00.000-04:00

Peggy Noonan wrote an excellent article in the Wall Street Journal recently framing the coming November elections as a battle between, as she puts it, the enraged and the exhausted.

Part of her argument is that much of the growing distaste for our elected officials on both sides of the aisle stems from the almost constant access to information about the goings on in the government. As Tennessee congresswoman Marsha Blackburn is quoted, “The more they (the public) know, the less they like Washington.”

I won’t begin to suggest that I can sort out our government’s issues, but the availability of information about the recent turmoil in the markets and economy have shed the same light on Wall Street. Investors are learning more and more about how the Wall Street game has been played, and it has not been pretty.

Salespeople posing as advisors pushing products of ever-expanding sophistication that make fantastic promises, but rarely benefit anyone but those very salespeople and the firms they represent. The allure of can’t miss products without an increase in risk has been a powerful tools for these “financial wizards” for decades. But, be it uncovering Madoff-like scams, watching supposedly safe bond funds plummet in value, or finding out that structured products aren’t structured quite as advertised, these too good to be true miracle cures have proven to be just that.

Peeking behind the curtain in Washington and on Wall Street has allowed us to see holes and problems that we may have never seen in the past. It’s always admitting the problem that’s the first step in any recovery. It’s a painful process. These problems have no easy answers and will take tough choices and sacrifice to resolve.

When it comes to Wall Street, we must be more vigilant in seeking out those advisors that truly have our best interests at heart. Who they serve, how they’re compensated and what drives the investment decisions they make should be as transparent to the average investor as possible. The curtain should not just be pulled back, it should be removed altogether.

In seeking the right tools to put a plan in place for our financial future, we must understand that there are no magic answers. The wizard behind the curtain isn’t interested in anything other than counting their own money. Controlling that which we can and adhering strictly to a disciplined plan may not be as exciting as what the wizard is selling, but it won’t leave you exhausted and enraged, either.

Have a great week!

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

Too Much Information

2010-10-04T09:19:00.004-04:00

When my husband was first diagnosed with cancer I immediately read everything I could on the subject so we could put together a plan to fight it. The information I found was not encouraging.

Three out of ten Stage III melanoma patients do not live to five years, and forty percent of those who do have had a relapse of the disease. Interferon, the primary FDA approved treatment followed after surgery, boosts your survival chances by only 5 – 10%. I was overwhelmed.

I gave myself a break from all the reading, because I realized I was afraid, and this was only reinforcing my worst fears. Belief can alter our observations. Psychologists have identified this as human confirmation bias - a person with a particular belief will only see things as reinforcing their belief, even if another observer would disagree. I was afraid, so regardless of what I read my mind fixated on the information that confirmed my worst fears.

How is this relevant to you?

The last three years have not been kind to investors. You experienced the credit freeze in 2007, the plunge in the market in October 2008 followed by more drops in early 2009. This year we experienced a “flash crash” in May and 15% market correction over the summer. Some financial commentators have said that investors are suffering from a very real case of Post Traumatic Stress Disorder, and it will take years, not months, to get over it.

If you are already afraid of what is going to happen to your investments due to US government spending, continued unemployment, or any other negative economic scenario, it is likely you will only see information that reinforces your fear. You will stop being rational. You won’t notice your US real estate fund is up over 19% for the year-to-date, your US small company funds are up over 10%, or your overall investment holdings are up significantly since March of 2009. You filter out what doesn’t match your beliefs.

Too much information can be a bad thing sometimes. I could not see the fact that 7 out of 10 of Stage III melanoma patients are well after five years, and 60% of those patients have not had a relapse. Give yourself a break from all the “information” out there, and maybe you can approach your financial situation later with a much clearer, and less biased, view.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

5 Reasons Our Aging Society Doesn't Mean Stock Market Doom

2010-09-27T11:45:00.003-04:00

(from Larry Swedroe's Wise Investing blog at CBS's Moneywatch.com, 9/22/2010 - click here to link to the original post)

A significant part of my time at Buckingham Asset Management is spent calming investors down, assuring them that what they’re concerned about is nothing more than noise meant to grab your attention, but has no basis in reality. The following is a recent example.

After reading an article, a client asked: “If 43 percent of Americans working are going to retire in the next decade, what are they going to live on? Are they going to liquidate their holdings in the stock market and, at a minimum, shift more into bonds? Won’t this restrain market growth more than the historical levels?” Here are five reasons why this type of consternation was unwarranted.

Information Isn’t Wisdom
The first thing I pointed out was that the investor should not confuse information with wisdom (information you can use to produce above benchmark returns). It’s only unanticipated events that move markets, not those that are fully anticipated. Think of it this way: If you know something (like a large segment of the population is nearing retirement), it’s a virtual certainty that other investors also have this knowledge and have acted on it. Thus, the expected impact of equity sales by retirees should already be reflected in today’s prices. It’s only if the level of equity sales is greater than expected should there be a negative impact on future equity prices. And, it’s certainly possible that sales will be less than expected or that there will be an unexpected offsetting increase in demand for equities from other sources. If that’s true, all else equal, equity prices would increase.

Conventional Wisdom Is Often Wrong
A second point I raised was that often what one reads (even if it sounds logical and the arguments are persuasive) may still be wrong — as conventional wisdom often is. One of my favorite sayings is “It ain’t what a man doesn’t know that gets him in trouble, but what he knows for sure, but ain’t so.”

The conventional wisdom about the relationship between age and investment allocations is actually wrong. There’s no evidence that investors dramatically reduce equity exposure as they age. As Jim Davis of Dimensional Fund Advisors pointed out in a 2005 article, the evidence actually suggests that investors “accumulate equity positions during their years of greatest earning power and do not dramatically reduce those positions as they enter retirement.”

Will Everyone Retire as Expected?
I also pointed out that it’s certainly possible that people won’t retire as expected. They may decide to continue working. Many people are now working well into what was considered the retirement years. Extending working years reduces the need to draw on portfolio assets.

It’s Not Just About the United States
I next pointed out that the U.S. equity market isn’t solely dependent on U.S. investors. The rapid growth of sovereign wealth funds and rapidly increasing per capita GNP in developing markets could lead to increased demand for U.S. equities from non-U.S. investors. Thus, it’s quite possible that when a U.S. retiree sells, the buyer will be a young software engineer from India or China. Thus, even if U.S. retirees become large net sellers of equities, it doesn’t mean valuations will be negatively impacted. There might be offsetting increases in demand from other sources.

The Savings Rate Has Been Climbing
In the most recent decade, one of the biggest concerns of policy makers was the very low rate of savings in the U.S., as the rate was so low that it was in danger of dropping below zero. The financial crisis has caused investors to reevaluate their savings patterns. Today, the savings rate is around 6 percent. And in the 1980s, the savings rate was around 10 percent. A rising savings rate could translate into an increased demand for equities.

The bottom line is this: Because today’s market valuation is based on all that is knowable about the future, it’s likely that currently unforeseeable events will have a far greater impact on prices than anticipated demographic shifts. And because what we don’t know is by definition unforecastable, the biggest impact on equity markets will likely come from events that few (if any) even have on their radar screens.

Thus, you’re best served by ignoring market forecasts and focusing on what you can actually control:

- Your risk level
- How well you’re diversified (eliminating or minimizing the diversifiable risks
of single companies, sectors and countries)
- Your costs
- Your tax efficiency

And finally, the fact that future returns are likely to be impacted by events that are not forecastable is why investors have historically demanded a large premium for taking the risks of equities. It’s also why equities are risky no matter how long your investment horizon.

What Do We Do?

2010-09-20T10:31:00.004-04:00

Some of us here were involved in an interesting presentation last week on left versus right-brained thinking. We learned that, as advisors, we tend to spend quite a bit of time on the left side of the brain, which is driven by logic, numbers and data. The right side of the brain, on the other hand, is the emotional side, where pictures get painted, goals are envisioned and, most importantly, where decisions get made. This got us thinking about how we define what we do and, more importantly, how we communicate this to our clients and those trusted advisors with whom we work.

Our ultimate goal as fiduciary advisors is to provide for our clients’ financial and emotional security through comprehensive financial planning and investment management. That statement means a lot to us and, in theory, does an excellent job of summing up what we do. That said, it is a fairly left-brained concept that does not always translate well. While it makes sense that most of our time with clients is spent on the left side of the brain, using data and other logic to set a path with our clients towards their goals, it is the right side of the brain where our clients imagine those goals.

So, with our admittedly left-brain leaning ways, can we paint a better picture of what we do?

What we do is aim to understand our clients’ life goals and help them build a plan. This plan provides a clear path to achieving those goals, leaving our clients free to live their lives as envisioned, knowing the financial components of those life goals are in the hands of someone they trust and know to always act in their best interests.

We will continue to be analytical and fairly left-brained when it comes to what we do, but will strive to communicate with the right brain in mind as well. We will continue to make recommendations on investments, insurance, retirement and estate planning, but do understand that these are merely tools our clients use to help their families, protect their lifestyles, achieve comfort in retirement and build some kind of legacy for the future.

We encourage our clients and trusted advisors who read this blog to help us in furthering this definition. What do you value in what we do? How do you perceive our role as it pertains to you or your clients’ goals? What do you expect from an advisor in general? Use the comment button below to start the conversation and thanks, as always, for taking the time to read the blog.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

Necessary Losses

2010-09-13T09:13:00.002-04:00

On August 24th my husband and I learned he has Stage III melanoma. Gregg is what some people might call a “health freak” who has exercised nearly every day of his life since grade school, ingests a diet of organic fruits and vegetables, and uses sunscreen religiously. He has done everything within his power to maintain a healthy body; but we have learned, along with many other things over the past few weeks, there are things you can’t control, and DNA is one of them.

My way of coping with bad news is to try to obtain as much information as possible about it, and then determine a plan to deal with it. Unfortunately, the more I read about Stage III melanoma, the more discouraged I became. So I turned to a book, Necessary Losses, by Judith Viorst, to help me cope. In her book, she discusses the many illusions, dependencies and impossible expectations that all of us have to give up in order to grow as individuals. As I read, I recognized that I have been stuck in an illusion she describes as “omnipotent guilt, which rests on the illusion of control – the illusion, for example, that we have absolute power over our loved ones’ well-being. And so, if they suffer or fail or fall ill, we have no doubt that we are to blame, that had we done it differently, or had done it better, we surely would have been able to prevent it.” I know I have felt this way many times. Ironically, this illusion is probably why I became a financial advisor, and why I take my relationships with my clients so personally. Making sure that all the clients of our firm remain emotionally and financially secure has always felt like my life-purpose, not a job.

I’m a CPA and Gregg is an engineer by training, so I am sure we will both be struggling with the issue of control as we deal with his cancer. But instead of being frustrated by the things we cannot control, we have decided to focus on those we can. We are learning about expert doctors and clinics in the field, making sure that Gregg is getting the best treatment possible, and continuing to help him stay healthy, so his body can fight it.

We are also focused on the positive. We are thankful for the gift of meeting each other when we were so young, being happily married for over 30 years and enjoying and appreciating each sweet day of life. I hope you remember to do the same.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

Labor Day Reflection

2010-09-02T12:11:00.005-04:00

I have just finished reading Where Men Win Glory by John Krakauer and it is a story that stays with you. The book is about Pat Tillman, the NFL player who was killed by friendly fire in Afghanistan on April 22, 2004. The thing that struck me the most about Pat’s character is that he never chose the easy path and was always true to his values.

The picture most Americans have about Pat Tillman as a hero does not extend beyond the government propaganda about his life and death or video from ESPN. Pat was not your stereotypical professional athlete who seeks the largest possible paycheck in exchange for his services. He was an example of the power of determination and demonstrated that mental attitude can drive your physical abilities to their outer limits.

After being told that his size would make it difficult to play high school football, Pat’s tenacity and outstanding play at Arizona State led to him being drafted in the 7th round in the 1998 draft by the Phoenix Cardinals. While with the Cardinals he was never was paid more than the league minimum. In 2000, his talents led to the offer of a five year $9.6 million contract with the Super Bowl Champion St. Louis Rams. He turned the offer down to stay in Phoenix with the team who had believed in him and earned $512,000 that year.

After watching the Twin Towers fall, Pat Tillman gave up his football career to defend our country. As he always did, Pat acted on his beliefs and tried to have a real impact on the things he considered important. He was a private person who had no desire to be the Army’s poster boy – in life or in death. Unfortunately, that is exactly what Pat Tillman became. The tragic irony is that the country that Pat fought so valiantly to defend chose to deliberately deceive his family and the American public about the details of his death. If only the Army could have shown the same level of integrity as Pat did during his lifetime.

As we approach the anniversary of 9/11, it is a good time to reflect upon how our lives have changed since that day and what we are doing to honor all of our fallen heroes and the soldiers still fighting to ensure our freedom. I think a good first step is to embrace the opportunities our country’s freedom affords us and make sure we are living our lives to their fullest potential, just like Pat Tillman did.

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

Hire an Advisor, Not a Salesperson

2010-08-30T10:05:00.003-04:00

A common misconception about the investment world is that the person giving you financial advice is either commission-based or fee-based. At The Asset Advisory Group we are neither. We are fee-only. This means that we do not receive any compensation from the investment companies whose products we use to implement our client’s financial plans.

A commission-based salesperson will always have a temptation to make a recommendation based on what would be best for themselves or the company they represent, not their client. I’m not saying this is intentional, but I have seen it happen time and again.

If a client comes to me with $500,000 to invest, I will charge them a 1% annual management fee and allocate their funds to low cost institutional no load mutual funds. I receive no compensation from the mutual fund company. If the same client were to walk into a broker’s office, they may end up with a $500,000 annuity which pays the broker a $24,000 commission. When looking at an immediate payout of $4,000 or $24,000*, which would most salespeople choose? And do you think they will continue to give on-going advice to this client or look for their next prospect?

There are many advisors that are fee-based which accept both an ongoing management fee from their clients as well as a commission from the company whose products they are selling. Sounds like a great plan – for the advisor!

While I feel very strongly that fee-only advisors have the best opportunity to serve the interests of their clients, the bottom line is to know how your advisor is compensated. Anyone who gives you financial advice should not have a problem revealing exactly how much money he will make based on his recommendations for your portfolio.

*assumes a 6% commission and an 80% payout on the annuity and an 80% payout on the management fee

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

How Mutual Fund Managers are Like Cigarette Makers

2010-08-20T10:56:00.004-04:00

(from Jennifer Saranow Schultz's article on the New York Times' Bucks Blog, 8/18/2010 - click here to link to the original post)

Last week, my colleague Tara Siegel Bernard wrote about a recent Morningstar study that found that expenses were the most dependable predictor of fund performance and actually helped investors make better decisions than Morningstar’s star-rating system. Then, on Tuesday, Carl Richards wrote about how the study’s results stacked up with his own findings that the fund with the lowest expenses tended to win.

So, we apologize for coming back to this study one more time, but we couldn’t resist noting the nastiness of the rhetoric in a recent e-mail in which the founders of MarketRiders, an online service that helps investors build E.T.F. portfolios, compared actively managed mutual fund managers to tobacco companies.

They also compare Russel Kinnel, director of mutual fund research at Morningstar and the person who explained the study’s results on Morningstar’s Web site, to whistle-blowing tobacco industry insiders. We’ve excerpted some of the choicer parts of the e-mail, which went out to a MarketRiders e-mail list, below.

“For nearly 40 years, unbiased research from every corner of academia and industry has demonstrated that buying a portfolio of actively managed mutual funds is a “loser’s game” and that the Morningstar 5-Star rating system has little predictive value. Sadly, investors using it have lost billions in retirement savings to unnecessary fees, taxes and under-performance.

A portfolio of actively managed mutual funds is absolutely, without question, as bad for your wealth as smoking is for your health. In 1953, Dr. Ernst Wynder published a groundbreaking study that established the health risks of cigarette smoking. In response, the leading tobacco manufacturers organized a massive counterattack by forming the “Tobacco Institute Research Committee.” What sounded like an unbiased research organization was really a well-funded public relations ploy to calm down the public. For over 40 years, these manufacturers engaged in brutal litigation and campaigns to manipulate public opinion. Finally, industry insiders, Dr. Ian L. Uydess, Dr. William A. Farone and Jerome K. Rivers stepped up and testified against their employer Philip Morris, which forever changed the industry.

For years, the mutual fund industry has waged a similar war against the passive index investment methods that we support. Like big tobacco, the mutual fund industry is large, profitable and immensely powerful. With large advertising budgets to influence “unbiased” mainstream media, they guide investors into bad investments. Morningstar has lined its pockets as a willing accomplice. Mr. Kinnel directs Morningstar’s research and has just announced that their rating system is a little bit better than bogus. In 50 years, will he be heralded as the first industry insider to finally tell the truth?”

Them sound like fighting words to us. What do you think?

Morningstar Says Fees Foretell the Future Better Than the Stars

2010-08-16T10:25:00.003-04:00

Morningstar Inc., one of the most well known mutual fund evaluation companies, published a study on August 9th that concluded low fees were the best predictor of a mutual fund’s future success – even better than Morningstar’s own star-rating system.

This is a big deal; because Morningstar’s business consists of looking at past returns of mutual funds using a complicated evaluation system, assigning a star-rating to each one, and selling this information to individual investors, libraries and the financial industry. Mutual fund companies take out full page ads touting their 5 star rating because they know it will attract new deposits. For years, financial magazines have instructed people to invest only in Morningstar 5-star ranked mutual funds if they wanted to own the “best performing” funds.

“If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds,” wrote Russel Kinnel, Morningstar director of fund research and the study’s author. This conclusion is very important, because many creators of hedge funds and active mutual funds acknowledge that they are much more expensive than other alternatives, but insist that their outperformance will overcome costs. Based on the study, in every single time period and data point tested, this was not the case. It is too difficult to overcome the burden of high costs.

The investment industry is required to remind people that past performance is no guarantee of future returns. I believe people are deaf to this warning because research shows mutual funds experience a flood of new deposits after they publish high returns, and they are usually severely disappointed with the results. A better tactic is to focus on what you CAN control – what you are paying to invest in the fund. Mr. Kinnel at Morningstar came to the same conclusion: “Perhaps the most compelling argument for expenses is that they worked every time--because costs always are deducted from returns regardless of the market environment. The star rating, as a reflection of past risk-adjusted performance, is more time-period dependent. Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

I couldn’t have said it any better myself.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

5-Star Weekend

2010-08-09T13:06:00.004-04:00

This weekend, I had the honor of joining my father for the Pro Football Hall of Fame induction weekend as a guest of one of the enshrinees, Emmitt Smith, the NFL’s all-time leading rusher. It was an amazing weekend with lots of legends of the game, family, friends and fans all celebrating the accomplishments of the new class and the sacrifices they made to achieve greatness.

All weekend, I felt very much like an ad for a must-buy mutual fund in any number of financial publications. All sizzle and no steak, if you will. On multiple occasions, my father and I, along with a thousand or two other friends and family of the inductees, were bused from venue to venue, cutting ahead of throngs of fans as we were ushered to various events. We met some great people and had a wonderful time, but these buses were full of, for lack of a better word, nobodies. That didn’t stop a lot of fans dying to be steps away from fame to surround us as we arrived at each location to study each and every one of us, guessing who we might be. People waited for hours, pushing and prodding their way to the fronts of roped off areas with the promise of something great. What they got was a sunburn and lots of disappointment. Apparently, my autograph isn’t all that in demand.

Why did this make me feel like a hot mutual fund? Much like the tinted windows of the buses held the promise of famous faces, the glossy ads touting 5-star ratings and recent outstanding performance are nothing but window dressing.

Human perception and the need for status is a curious thing. It’s intriguing how we can perceive great value or the promise of a big payoff just based on the way something is presented or packaged without doing any thinking or homework to see if it really makes sense. If any of the people who waited hours to see some famous athletes would’ve taken a few seconds to think through what they were investing their time in, they probably would have realized that the NFL isn’t likely to bring Jerry Rice, Emmitt Smith or any of the other players in attendance right through crowds of people on their way to the ceremonies.

In that same vein, the next time you see an ad, talk to a friend, or see something on TV about a new can’t miss investment product or other idea, ask yourself if you truly understand the investment philosophy of the product being offered and believe it can help you meet your financial goals. More often than not, you’ll realize that it’s just another fund and that the only thing on the other side of the velvet rope it presents itself behind is another experience of chasing returns with disappointing results.

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