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/