A Plan for 2012 That You'll Actually Follow

(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

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?

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

(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"

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!

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

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?

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

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

(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

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

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:

1. Do you have a plan?
2. Are you diversified?
3. 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"

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

(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

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

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?

1. 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. 
2. 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.
3. 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

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

(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

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

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?

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

(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

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/