Shifting to Savings in 2011

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

(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

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

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

(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"

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

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

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

(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

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

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

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

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

(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?

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

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

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

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

(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

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

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/

Hiring the "Best" Stock Pickers

This week, we thought we'd have a laugh via famed Dilbert cartoonist Scott Adams, a financial manager prior to starting the cartoon Dilbert that went on to earn him considerable fame and fortune. Adams, a noted fan of passive management, uses his character "Dogbert" to explain the logic, or lack thereof, of the brokerage industry. Enjoy your week!

www.taaginc.com

The Other Retirement Plan

Our mission statement is “to provide like-minded individuals with financial and emotional security.” While our day to day focus is managing investment portfolios and creating financial plans so that our clients can realize their retirement goals, we also want to help them to have a rewarding and fulfilling life once they have reached retirement. It is important to us to concentrate in our area of expertise and to seek other professionals who are experts in fields ranging from tax planning to elder care to travel. We keep a list of these contacts so that we pass along their names to our clients when they have a need for their services.

We recently became aware of a new company that focuses on the non-financial aspects of retirement, called LifeScape Retirement. They work with individuals to assess what a fulfilling retirement will look like, and then develop a plan so that their goals are realized.

I see many people who spend so much time focusing on whether or not they will have enough money to retire that they forget to think about what life will look like once they get there. Or they may have a list of all of the things they want to do in retirement, but after a few years they’ve checked everything off their list and do not know what to do next.

Since the average life expectancy for a 60 year old is 30 years, your retirement may last nearly as long as your career. My clients that seem to be the happiest after leaving the workforce are those with a purpose, whether it’s spending time with their grandchildren, traveling, starting a second career, volunteering or all of the above. Asking what you will do to challenge yourself in retirement is a good way to create your vision for the next stage of your life.

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

Financial Reform?

The Dodd-Frank Wall Street Reform and Consumer Protection Act that cleared Congress on Friday, like the health care reform legislation before it, is a complicated document. The US Chamber of Commerce estimated that the 2,319 page bill will generate 533 new regulations, 60 studies and 94 reports. Until the regulations are finalized, and the studies and reports completed, it won’t be clear how it will affect all of us, but there are some observations that can be made now.

Put Clients’ Interests First at All Times
Jane Bryant Quinn, the financial journalist, did a great job of describing the Fiduciary standard and its importance to consumers while the issue was still being debated: (http://janebryantquinn.com/2010/05/will-brokers-have-to-put-your-interests-first/). This standard, unfortunately, did not make it through the lobbying and political process. Insurance agents and investment brokers marketing financial planning and investment products will still NOT be held to the same standard of client care that the Asset Advisory Group follows as a Registered Investment Advisor. Instead, the financial reform requires the SEC to do a second study on the subject. Is it conceivable that someone could do a study and conclude the person giving you financial advice should NOT put your interests first? Stay tuned for the study…..

Consumer Protections
A new Consumer Financial Protection Bureau has been created with the purpose of ‘protecting consumers from unfair, deceptive and abusive financial products and practices.’ My first concern is how will they determine what products and practices are abusive and unfair? If they don’t think the financial community should have to put their clients’ interests first, will selling you a mutual fund that charges a high commission up-front with an annual expense of 2.85% a year be considered unfair? On the positive side, there will be a national, toll-free, consumer complaint hotline for people to report problems. This is a great first step, but how will they follow up on these complaints? Many people reported their concerns about Bernie Madoff to the SEC, but no action was ever taken against him.

Ending the Gambling Risk
Banks and brokerage firms sell products to clients, but they also use their own money to trade investments to make a profit for themselves, a practice known as proprietary trading. Problems developed because these trades were sometimes in conflict with their clients – brokerage firms would sell their clients a product while simultaneously betting against it in their own accounts. Banks also began to take more and more trading risk as they enjoyed the profits it added to their bottom line. When this trading contributed to the failure of companies like Merrill Lynch, AIG and Lehman Brothers, the government was asked to step in to save them. The Volker Rule, contained in the Act, requires regulators to implement laws that will prohibit proprietary trading, investment in and sponsorship of hedge funds and proprietary equity funds – the investments that took down Lehman and forced others to be bailed out. The problem is the laws will be developed after – you guessed it – another study; to be conducted by the new Financial Stability Oversight Council, so it remains to be seen how this will all work out.

The bottom line is there will be much more debate and discussion as the newly created Consumer Financial Protection Bureau and Financial Stability Oversight Council mentioned here, as well as the new Office of National Insurance, Office of Credit Ratings and SEC Investment Advisory Committee are formed. Their studies, decisions and regulations will change the financial industry landscape.

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

Free Agent Forecasting

What can LeBron James teach us about financial experts forecasting the future?

I’m probably in the minority of those of us who participate in this blog as a fan of the National Basketball Association, so some of this information may be new to some of you. That said, if you have picked up a paper, watched a news broadcast or have even a fleeting interest in sports, you have probably at least heard LeBron James’ name over the last several weeks.

For the uninitiated, LeBron James is one of the top players in the NBA. As of the end of this season, he’d spent his entire career playing for his hometown Cleveland Cavaliers. On July 1st, LeBron became an unrestricted free agent and could choose to stay at home or test the waters in a new market.

When did the media start forecasting where he would go? Last week? Last month? Actually, the first news stories speculating about his future began as early as 2008. Things built to a roar over the last basketball season and ended in full blown mayhem over the last month. The event culminated in LeBron dictating terms to ESPN for a one hour prime time TV special last Thursday in which he announced his decision to leave home for the warm air and blue waters of Miami, Florida.

The point to all of this is how important it was for someone, anyone to break the story of where he was going in advance of the announcement. Reporters and other so-called “experts” postured and positioned to be first to break the story and reap the rewards if they did. If you were to believe each report, it was all but guaranteed by these experts that LeBron was to sign with six different teams at any given time.

Did these reporters really have trusted sources that could verify each and every one of these scenarios? No, they were placing a bet. The bet was that they’d leak a scenario based on flimsy information and, if proven right, would claim that they broke the news first.

So what does all of this teach us about reporting on the markets? Part of the 24 hour news, sports and entertainment cycle that we all live with are lots of business writers, economists and other experts that benefit greatly if their forecasts end up paying off. Like with the sports reporters, it can mean book deals, lucrative media contracts and other such offers that can certainly boost the lifestyle of said “expert”. These industry incentives have shifted and are now there to encourage guessing or betting on the correct forecast over focusing on accuracy.

In the end, someone is going to be right, but can you pick that person in advance and would you be comfortable enough if you thought you could to risk your savings on that bet? For most of us, the answer is no, yet many investors choose that path on a daily basis.

The race for accuracy has been replaced by the race to be first. To sports fans, the misinformation that results is a minor annoyance as we watch egos pick which city will earn the right to pay players millions of dollars each season. But with investing, it’s a dangerous game that can toy with investors’ emotions. Rise above the fray, have a concrete plan in place, stick to it and tune out the noise.

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

Investor Protection Gets Knocked Out of the Financial Reform Law

(from Jane Bryant Quinn's website, janebryantquinn.com, 6/25/2010 - read the article directly here)

Senator Tim Johnson socked investors with what might be a knockout punch, during negotiations on the financial reform bill. Investor protection is down for the count. The new law, when passed, is going to leave you out.

Johnson, a South Dakota Democrat, laughs at the concept of “fiduciary duty”—the idea that people who advise you on investments should to put your financial interests ahead of their own.

At present, registered Investment advisers have a fiduciary duty toward you and your money. But there’s an exception for stockbrokers and insurance agents. They can—and do—advise you to buy financial products that benefit themselves more than they benefit you.

For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.

The version of financial reform passed by the House of Representatives would have stopped all that. The House brought brokers and insurance agents under the fiduciary rules when they offer personal financial advice.

The bill passed by the Senate punted, by telling the Securities and Exchange Commission to study the issue. The House and Senate are now negotiating their differences.

Suddenly, out of the blue, Johnson swept in—not with a compromise, but with an even broader anti-investor proposal. When the SEC eventually does the study, limits will be put on its findings. It won’t be allowed to decide that brokers should be subject to the fiduciary rules unless there is virtually no other way of protecting investors from unscrupulous advice.

Barbara Roper, director of investor protection for the Consumer Federation of America, calls the provision a “poison pill.” It ensures that brokers can continue to violate your trust. The Senate negotiators passed Johnson’s proposal on a voice vote, without revealing the names of the Senators who supported it.

Johnson, known as the “senator from Citibank,” habitually sides with the financial industry and against consumers. He’s the only Democrat who opposed last year’s legislation to curb credit card abuses.

Next year, he’s in line to become the chair of the Senate Banking Committee. If that happens, you can kiss any further reforms good-bye. You can also expect his committee to be sympathetic to bills that roll current protections back.

At this writing, nothing is final. But the House will probably accept the Senate’s punt. Johnson’s aggressive language might be watered down, but brokers and insurance agents won’t have to change their ways anytime soon. Remember this, when they give you advice. You can’t trust them. They put their own interests first.

AARP Revamps Their Web Presence

A few weeks ago, AARP launched a new website which makes it easier to search for information and share it with your on-line community.

AARP decided to overhaul their site after soliciting feedback from users and finding that the digital demands of people over age 50 continues to grow. Their survey revealed that social media was the primary interest among visitors to their website, with Facebook preferred by 23%. In addition to the new site launch, AARP has also increased their presence on Facebook and Twitter.

The original five content channels have been expanded to thirteen and there are buttons to easily share content via several avenues such as email, Facebook, or a blog. The new content covers areas such as Personal Growth and Relationships and includes subtopics such as Transitions, Spirituality and Faith, Parenting, Grandparenting and Caregiving. Instead of the general Leisure category, you can explore Food, Travel, Entertainment and Home and Garden. There is also new content for Work which contains information on Job Hunting, Working after Retirement and Work Life.

In July, most of the site’s content will become available on e-readers, smartphones and mobile phones. Planned enhancements include applications for both the iPhone and iPad and travel destination guides from Frommer’s. Whether you have reached the magic AARP age of 50 or are still a few year’s shy, the new site is packed with useful, easy-to-find information and is worth perusing.

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

Summer

I’m 50 years old and I have never outgrown the effect summer has over me. Every year when the days get longer, the temperature climbs into the 80’s and the lightening bugs appear at night, I feel like a kid again. I want to get up early, stay out late, and enjoy every minute of the season before its gone.

I grew up on a small farm, so our summers were full of picking strawberries, hoeing rows of corn, shelling peas and climbing apple tress. From dawn to dark we were outside – and with a flashlight we extended the day with a game of flashlight tag. Our parents taught my brother, sister and I how to grow all the farm’s vegetables and fruits. We learned the names of all the birds we heard and could pick them out by their calls. As a biology teacher, our father taught us the name of every tree, bug, weed and flower we saw.

So what did I do with this “nature girl” background? I grew up, majored in accounting and finance, and have worked in an office environment since I was 18! Still, every summer I want to move my desk outside.

Today when I read about the obesity epidemic in children in the US, I can’t help but wonder if a summer spent outside would help slow the trend. We can’t push back the tide of soft drinks, McDonalds , video games and all the changes that they have brought to childhood, but getting out and involved in the outdoors would be a great defense.

My grandson is only four months old, but I am already looking forward to climbing trees and chasing lightening bugs with him in the summers to come!


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

Defining "The Market"

All too often, we hear the term “the market” being used by the most concentrated of its definitions. It is commonplace to refer solely to the Dow Jones Industrial Average as “the market”. The truth is the Dow, while a decent indicator of what is occurring in U.S. large cap growth stocks, is far from the total stock market available to investors.

As of December 31, 2009, the world stock market represented approximately $28.6 Trillion in market capitalization. All U.S. stocks, including large, mid and small-cap comprise just 42% of that market. A truly diversified portfolio has broad exposure to as much of the overall world market as possible in markets that are reasonably stable, liquid, and available at a reasonable cost.

For example, within our moderate portfolio containing 60% equities and 40% fixed income, the thirty stocks that comprise the Dow made up 3.41% of the portfolio as of March 31, 2010. Concentrations in the Dow across the full range of our allocation models measure from a high of 5.55% all the way down to 0.91% as of that same date. That means in a $1 million portfolio, somewhere between $9,144 and $55,482 is invested in those 30 stocks via the funds we use at any given time when balanced.

It is very tempting to allow our emotions to be controlled by the daily fluctuations of the Dow. It is the most widely reported indicator in the US media market and what we hear about on drive-time radio, the evening news and most other daily reports on “the market”.

We preach diversification and know that our clients appreciate and understand the value in having a broad, total market approach to their investments. But sometimes a disconnect exists in what we allow to drive our emotions on a day to day basis. Confusion over why a portfolio actually increases on a day when “the market” is down or vice versa is fairly common.

The fact is that looking at the market’s performance on a daily basis is an unhealthy exercise to begin with, but that’s a different discussion for a different day. If you are a market watcher, make sure you take a moment to realize what “the market” truly represents in your portfolio. If you find your emotions rising and falling each day based on what occurs to just 30 companies, ask yourself what the significance is to your overall portfolio and you’ll hopefully find your pulse slowing.

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

Changes Are Coming to Medicare Supplements

If you have a Medicare supplement (Medigap) policy or are turning 65 this year, you need to be aware of the changes that are occurring this month. These changes have nothing to do with health care reform and were suggested by the National Association of Insurance Commissioners in order to better protect consumers. Effective June 1, 2010, these changes were and designed to close coverage gaps in the existing plans. Here are the highlights from Medicare’s web site.

• Basic Benefits – Starting with policies effective on or after June 1, 2010, Hospice Part A coinsurance (outpatient prescription drug and inpatient respite care coinsurance) will be covered. Plan K will cover 50% of the costs and Plan L will cover 75% of these costs.

• Part B Coinsurance – Plans K, L, and N will require you to pay a portion of Part B coinsurance and copayments, which may result in lower premiums for these plans. All other Medigap policies pay them at 100%.

• New Plans Offered – Plans M and N are new choices.

• Plans D and G – Plans D and G effective on or after June 1, 2010 have different benefits than D or G Plans bought before June 1, 2010.

• Plans No Longer for Sale – Plans E, H, I, and J will no longer be sold after May 31, 2010. But, if you already have or you buy Plan E, H, I, or J before June 1, 2010, you can keep that plan.

Another plus is that companies will be able to reset their premiums because of the added hospice benefit. This means that there will be more competition in the marketplace, possibly leading to lower cost coverage.

Medicare has published a guide to help you when selecting the plan that will be most beneficial for your individual circumstance.
http://www.medicare.gov/publications/pubs/pdf/02110.pdf

If all of this seems overwhelming, don’t worry. There are insurance specialists who receive continuing education on plan availability. We will be hosting a Lunch and Learn in June to help you decide if your current plan remains your best coverage option or whether one of the new plans would better suit your situation.

Chris Carleton, CFP®

clcarleton@taaginc.com

http://www.taaginc.com/

Don't Just Do Something, Sit There!

No, this isn’t a blog about a clever phrase to use when market volatility rears its ugly head (although it would be a good one, and you may see it again!). This is a quick post from all of us at The Asset Advisory Group to say Happy Memorial Day!

Forget about planning the perfect weekend. Forget about the ad showing a couple waking up to a freshly cooked breakfast in their staunch white bathrobes while the sun shines brightly throughout the house. Those ads leave out the hours spent grocery shopping, cooking, doing laundry, scrubbing the kitchen and cleaning the windows to get that moment just right. Few, if any can truly meet the standards imposed on us by popular media.

Instead, make it a priority over the next few days to enjoy the unofficial start to summer, take some time to remember those that have served this nation honorably and take some time for yourself. Whether that means turning off the cell phone for a few hours, putting down the remote or avoiding surfing for blogs, news and other information you probably don’t need right at this moment, take 30 minutes, find a corner of the house to rest your eyes and do something to reduce stress or invest in some “me” or “we” time.

Whatever you do, have a very Happy Memorial Day weekend! We’ll be back with our regular posts on Monday, June 7th.

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

Our Age of Uncertainty

Over our lifespan, we baby boomers have lived through the Cuban Missile Crisis, JFK’s assassination, the Vietnam War, Richard Nixon’s resignation, the Iranian hostage crisis, the AIDs epidemic, and many other important and terrible historical events that are too numerous to mention - but they were not reported to us in real time like the news of today.

This negative information overload, discussed in Chip Workman’s blog last week, creates a constant sense of crisis and increases our anxiety level about our financial security. We’re getting older, and we realize we have less time to accumulate the savings we need to retire, or we are fearful about running out of the funds we currently live on in retirement. The 2007-2010 stock market gyrations haven’t helped. We want someone to tell us what is going to happen next.

The media capitalizes on our anxiety, and makes a living feeding our need to hear from ‘experts’ who tell us which way the market is headed and why. But seeking out predictions and acting on them is not a solution.

I can offer hundreds of examples of economic and market predictions that turned out to be horribly wrong over the last three years alone. In a September 1, 2007 Forbes article entitled, “The Fall 2007 Rally, ” Ken Fisher, a well-published money manager wrote, “This is a phony credit crunch… a few months from now we will be wondering what all the fuss was about.”

There were others that were right in their predictions, but terrible in their timing. Dr. Nouriel Roubini correctly predicted the housing bubble would cause a recession, but he made the prediction in 2004. If you took his advice and moved out of the market, you missed the 2004, 2005 and 2006 stock market returns. After three years of waiting for the fall, you probably gave up and moved back into the stock market in time for Bear Stearns and Lehman Brothers to collapse and kick off the recession.

Others are right in their timing, but wrong about what to do about it. Peter Schiff, President of Euro Pacific Capital, became a media darling in 2008 for predicting the market fall. But to protect his clients from the coming drop he moved them into commodities, international stocks, and shorted the dollar. As a result, their portfolios fell 60- 70% when they could have remained in the S&P 500 and lost 38%.

Our world is too complex for anyone to accurately predict what is going to happen and successfully reposition their portfolios to prepare. Yet the question – “What do you think is going to happen?” - is asked over and over by some people.

I have been a Certified Financial Planner since 1988, and based on my experience, the people who ask me this most often are the same people who refuse to create a financial plan. As a result, they feel uncertain about their future, anxious, and more vulnerable to panic when yet another negative news report about the Dow crosses their TV screen.

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