In an industry that has no shortage of soothsayers and crystal ball holders more than willing to go on record as to what will happen in the market, why do we feel so strongly that this is such a waste of time?
The easy answer is that no one, not even those viewed as the best of the best, seem to be able to make good predictions over and over again.
Bill Gross, the renowned bond investor and Founder of PIMCO, has been in the headlines the last few weeks for missteps that have created significant losses in their funds. It seems that Gross, who was touted for some of his moves during the 2008 market downturn, was also loading up on Lehman Brothers debt over the same timeframe. Losses from this poorly timed investment have cost investors more than $3.4 billion.
His current bet is against U.S. Treasuries, for which he is under some scrutiny as they continue to rally. His explanation is that he’s not wrong, just not right yet. Not the comforting explanation you want to hear from someone you’ve paid handsomely to supposedly outguess the market. As the saying goes, even a stopped clock is right twice a day.
This reminded us of another guru we talked a lot about in 2009, Legg Mason’s Bill Miller. Miller was another manager held out to have these powers of intuition, only to have a few emotional reactions to the initial market downturn backfire on him spectacularly.
The point is not to drag out these experts and disparage them every time they’re wrong. These are smart people who are very good at what they do. It’s simply to suggest that the crystal ball is a fairytale, that no one has the ability to continually outguess the market time and time again.
The one expert whose investment prowess often gets held out above all others is Warren Buffet. In most cases, truth be told, we couldn’t agree more. However, what Mr. Buffet does is quite different from the average investor. In fact, it would be more correct to call Buffet a venture capitalist. His company, Berkshire Hathaway, often buys very large stakes or controlling interests in companies giving them significant say over day to day operations, management and other company functions. Even when they don’t have direct involvement, he is often able to set very attractive terms for his investments, such as his investment in GE in late 2008. The average investor obviously doesn’t have this kind of control over their holdings.
While thinking about Warren Buffet, consider his quote from a Berkshire shareholders’ meeting a few years ago. Buffet said, "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees."
Ultimately, we believe that you need to work with someone that can help you put a plan in place and then stick to that plan, helping you make the sound decisions that you do have control over to help meet the financial aims surrounding your life’s goals.
In the end, the best investment forecast is to make no forecast at all.
Wednesday, June 15, 2011
Wednesday, June 8, 2011
When Television Feeds the Urge to Trade
(from Carl Richard's New York Times' Bucks blog, 6/6/2011 - click here for the original post. Carl is a Certified Financial Planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)
Traveling last week, I shared some workspace where CNBC played all day on television. For most people, I realize that it’s often comforting background noise. However, since I almost never watch television, I found it amazing how bipolar I felt as they shifted from one commentator to another.
Given how wild the markets were last week, I imagine that there were many people tuning in trying to figure out what to do. And that’s the problem.
Watching CNBC might be entertaining, but unless you fancy yourself some sort of day trader, it will not help you figure out what to do with your life savings.
This won’t apply to all of you, but I’m going to make some assumptions here. I assume that for most of us the purpose of earning money, saving it and actually doing financial planning is to hit some sort of goal. I’ll also assume that those goals are typically things like getting out of debt, establishing a rainy-day fund and saving for retirement or college for kids.
If that’s true, what are you going to learn from watching hours of endless chatter about new-home sales or the jobs report that will be helpful in meeting those goals?
Things change so fast, and on television the reactions in the markets are amplified by the need to have something to talk about to keep everyone watching so they don’t miss the latest breaking news. This constant stream of information makes us feel like we should be doing something.
But the question is, what?
What should we be doing? What changes should we make based on the latest breaking news? Do you see the potential problem? If we’re tuning in to figure out what the latest news means for our investment plans, and we make changes based on what we hear … well, that’s an awful lot of changing.
Doesn’t it make much better sense to design our investment plans based on our goals, and then make changes when those goals change, instead of trying to react to the minute-by-minute updates? The only thing we know for sure is that things will change. Does your financial plan help you weather these changes or are you tempted to jump every time a new headline pops up on television?
Traveling last week, I shared some workspace where CNBC played all day on television. For most people, I realize that it’s often comforting background noise. However, since I almost never watch television, I found it amazing how bipolar I felt as they shifted from one commentator to another.
Given how wild the markets were last week, I imagine that there were many people tuning in trying to figure out what to do. And that’s the problem.
Watching CNBC might be entertaining, but unless you fancy yourself some sort of day trader, it will not help you figure out what to do with your life savings.
This won’t apply to all of you, but I’m going to make some assumptions here. I assume that for most of us the purpose of earning money, saving it and actually doing financial planning is to hit some sort of goal. I’ll also assume that those goals are typically things like getting out of debt, establishing a rainy-day fund and saving for retirement or college for kids.
If that’s true, what are you going to learn from watching hours of endless chatter about new-home sales or the jobs report that will be helpful in meeting those goals?
Things change so fast, and on television the reactions in the markets are amplified by the need to have something to talk about to keep everyone watching so they don’t miss the latest breaking news. This constant stream of information makes us feel like we should be doing something.
But the question is, what?
What should we be doing? What changes should we make based on the latest breaking news? Do you see the potential problem? If we’re tuning in to figure out what the latest news means for our investment plans, and we make changes based on what we hear … well, that’s an awful lot of changing.
Doesn’t it make much better sense to design our investment plans based on our goals, and then make changes when those goals change, instead of trying to react to the minute-by-minute updates? The only thing we know for sure is that things will change. Does your financial plan help you weather these changes or are you tempted to jump every time a new headline pops up on television?
Wednesday, June 1, 2011
Do You Know Who Will Inherit Your Money?
When you start a new retirement plan at work or roll your money into an IRA account you will not only need to decide what investments to buy, but you also need to name a beneficiary for your account. If there is not a beneficiary named, your account will be distributed to your estate which could cause your heirs to have a much larger tax burden.
Many people do not realize the importance of their beneficiary designation. I was just reading about a court case where a man’s first wife passed away and he named his three children as beneficiaries of his 401(k) account at work. He eventually remarried and died just six weeks later. His new wife ended up inheriting the 401(k) even though his children were the intended beneficiaries. This is because a spouse is automatically the beneficiary in a workplace retirement account unless he/she has signed a waiver of spousal rights AND a new beneficiary form is completed.
This is a two step process. You cannot simply change the beneficiary form without the waiver and you cannot have the waiver signed without a new beneficiary form. This is also the case in a divorce. Your former spouse might indicate in the divorce decree that they are waiving their rights to your retirement account, but if you have not changed the beneficiary form as well, they can still inherit your assets.
Once you roll your account into an IRA, you are free to name anyone as a beneficiary and there is no need for spousal consent. It is good practice to review the beneficiary designations on your life insurance policies, annuities, and retirement accounts at work or held elsewhere on an annual basis. When you do this, make sure that they match the estate planning you have done. If you have a trust account, has your attorney recommended naming the trust as a primary or contingent beneficiary? If you have any questions about whether your accounts are set up properly, don’t hesitate to ask your advisor.
Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/
Many people do not realize the importance of their beneficiary designation. I was just reading about a court case where a man’s first wife passed away and he named his three children as beneficiaries of his 401(k) account at work. He eventually remarried and died just six weeks later. His new wife ended up inheriting the 401(k) even though his children were the intended beneficiaries. This is because a spouse is automatically the beneficiary in a workplace retirement account unless he/she has signed a waiver of spousal rights AND a new beneficiary form is completed.
This is a two step process. You cannot simply change the beneficiary form without the waiver and you cannot have the waiver signed without a new beneficiary form. This is also the case in a divorce. Your former spouse might indicate in the divorce decree that they are waiving their rights to your retirement account, but if you have not changed the beneficiary form as well, they can still inherit your assets.
Once you roll your account into an IRA, you are free to name anyone as a beneficiary and there is no need for spousal consent. It is good practice to review the beneficiary designations on your life insurance policies, annuities, and retirement accounts at work or held elsewhere on an annual basis. When you do this, make sure that they match the estate planning you have done. If you have a trust account, has your attorney recommended naming the trust as a primary or contingent beneficiary? If you have any questions about whether your accounts are set up properly, don’t hesitate to ask your advisor.
Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/
Tuesday, May 24, 2011
What's Your Philosophy?
One of the most difficult things to do as a human being is to walk your path without being diverted or discouraged by other people’s opinions.
When you were young, your choice of clothing and music was influenced by your friends. As you got older, more important decisions such as where you went to college and what career you chose, were all influenced by others. Investing isn’t any different.
These days, people are trying to capture lost opportunities – they want to make up what they lost during the 2007 – 2009 market drop. As a result, people who intellectually agree that it is NOT a good idea to use the TV talking head’s market outlook to determine their next investment move find themselves unsettled by a friend’s recommendations to sell their stocks and put the cash in silver and commodities.
But time and experience have taught us that successful investors work from a philosophy vs. an outlook on the market. People who work from a market outlook are reacting to the events around them, the opinion of their friends, and the news; which ultimately creates a very confused and directionless investment plan.
An investment philosophy dictates how much risk you will take, when you will buy, when you will sell, and what you will hold. This philosophy should be based on your personal goals and objectives, and what you are trying to accomplish in your lifetime and beyond – not what Fox news or CNBC is telling you today.
As we head into the wedding, graduation and golf season, and your discussion with friends turns to investing, ask them – “What’s your investment philosophy?” You’ll probably be met with blank stares. If they don’t have a coherent philosophy for investing, they probably don’t know what they are doing, and they certainly shouldn’t divert you from your path.
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
When you were young, your choice of clothing and music was influenced by your friends. As you got older, more important decisions such as where you went to college and what career you chose, were all influenced by others. Investing isn’t any different.
These days, people are trying to capture lost opportunities – they want to make up what they lost during the 2007 – 2009 market drop. As a result, people who intellectually agree that it is NOT a good idea to use the TV talking head’s market outlook to determine their next investment move find themselves unsettled by a friend’s recommendations to sell their stocks and put the cash in silver and commodities.
But time and experience have taught us that successful investors work from a philosophy vs. an outlook on the market. People who work from a market outlook are reacting to the events around them, the opinion of their friends, and the news; which ultimately creates a very confused and directionless investment plan.
An investment philosophy dictates how much risk you will take, when you will buy, when you will sell, and what you will hold. This philosophy should be based on your personal goals and objectives, and what you are trying to accomplish in your lifetime and beyond – not what Fox news or CNBC is telling you today.
As we head into the wedding, graduation and golf season, and your discussion with friends turns to investing, ask them – “What’s your investment philosophy?” You’ll probably be met with blank stares. If they don’t have a coherent philosophy for investing, they probably don’t know what they are doing, and they certainly shouldn’t divert you from your path.
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
Wednesday, May 18, 2011
How Will Changes in Social Security Impact You?
With Secretary Geithner back in the news last week pressing Congress to take action on the growing concerns with Social Security, it’s likely we’ll soon see Congress return to the slew of proposals presented over the last few months.
In this world of non-stop information, it’s tough to discern between news and opinion, truth and fiction and everything in between. Many of our clients have asked for a basic breakdown of the primary issues and proposals floating around Capitol Hill and how it directly impacts them. A summary of some of the basics are below.
Increasing the retirement age
* Asset-based testing that could be based on all assets a participant holds, or allow for
omission of certain assets like residences or automobiles
* The tests could be assessed all at once when an individual’s benefits begin or over regular
intervals
* The tests could either gradually phase out benefits, eliminate them altogether or a combination
of both.
- This group recommends starting some loosely defined form of means testing in 2050 for middle
and upper income earners.
* Paul Ryan’s “Roadmap” Budget Plan
- This plan suggests preserving the current Social Security system as-is for all people age 55 or
older and doesn’t get into great detail as to what other action should be taken to help keep the
program solvent for those under 55.
* Lindsey Graham’s Social Security Solvency & Sustainability Act
- This plan suggests raising the retirement age to 70 by 2032 and starting means-testing for new
retirees in 2018, with benefits beginning to tier down for retirees with income starting at
$43,000. Anyone currently age 56 or older would maintain under the current rules.
Hopefully this summary has at least given you some idea of the issues at hand. Obviously, a lot is still up in the air, but it will be important to separate the details from the rhetoric as this issue starts to be bantered about again. It is an issue that, one way or another, will impact all of us.
Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/
In this world of non-stop information, it’s tough to discern between news and opinion, truth and fiction and everything in between. Many of our clients have asked for a basic breakdown of the primary issues and proposals floating around Capitol Hill and how it directly impacts them. A summary of some of the basics are below.
Increasing the retirement age
- An eventual increase in the retirement age for Social Security is likely to be a part of almost any proposal. This process is very likely to be gradual in nature, grandfathering anyone currently at or near retirement age. For those readers still in their working years, there’s potential for a wide range of impact based on what age is agreed to and when it goes into effect.
- Since its inception in 1935, Social Security has always been paid based on an individual’s wages regardless of their other wealth or non-wage based income. The system’s current situation has shifted talk to proposals that could include means testing. Means testing refers to reducing or eliminating benefits based on a pre-determined formula for wealthier and/or higher income participants. This formula gets a little tricky depending on who gets their way in Washington based on a wide range of testing factors, such as…
* Asset-based testing that could be based on all assets a participant holds, or allow for
omission of certain assets like residences or automobiles
* The tests could be assessed all at once when an individual’s benefits begin or over regular
intervals
* The tests could either gradually phase out benefits, eliminate them altogether or a combination
of both.
- It’s important to note that there does seem to be some growing support in Washington that, if means testing is determined to be necessary, that it be done against career earnings as opposed to retirement assets.
- Long story short, it’s still far too early to determine what the impact of means testing on a given individual could be, but it is an important piece of the puzzle to understand.
- There are multiple budget plans out there right now that all treat Social Security a little differently. It’s unlikely that any of these plans pass as-is, but much like means testing, it’s important to understand what is included in each at a basic level to understand how it might impact you.
- This group recommends starting some loosely defined form of means testing in 2050 for middle
and upper income earners.
* Paul Ryan’s “Roadmap” Budget Plan
- This plan suggests preserving the current Social Security system as-is for all people age 55 or
older and doesn’t get into great detail as to what other action should be taken to help keep the
program solvent for those under 55.
* Lindsey Graham’s Social Security Solvency & Sustainability Act
- This plan suggests raising the retirement age to 70 by 2032 and starting means-testing for new
retirees in 2018, with benefits beginning to tier down for retirees with income starting at
$43,000. Anyone currently age 56 or older would maintain under the current rules.
Hopefully this summary has at least given you some idea of the issues at hand. Obviously, a lot is still up in the air, but it will be important to separate the details from the rhetoric as this issue starts to be bantered about again. It is an issue that, one way or another, will impact all of us.
Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/
Wednesday, May 11, 2011
The Best Investment Advice: Stop Losing Money
(from Carl Richard's New York Times' Bucks blog, 5/9/2011 - click here for the original post. Carl is a certified financial planner in Park City, Utah. His sketches are archived on the Bucks blog and on his personal Web site, www.BehaviorGap.com.)
I’m more convinced than ever that Mark Twain was correct when he decided that he was more interested in the return of his money than the return on his money.
A couple of weeks ago, we discussed how often people in their 60s and 70s say that their primary residence of over 30 years was their best investment. This belief exists despite the fact that home values barely kept pace with inflation. How can this be, given that during the same time period average annual returns in various stock market indexes ranged from 8 to 13 percent?
Because for most people, it was the only investment that didn’t lose money!
While the same outcome may not apply to housing in recent years, the principle still applies to investing in general. Most of us are chasing the highest return, because that’s what investing is all about, right?
But the experience of many people has been that the well-intentioned search for the best investment actually cost them money. They bought at the peak and sold at the bottom, and their overall returns ended up being meager. I suspect lots of these people would gladly trade their actual experience over the last decade or more with simply having their money returned to them.
So, what if the key to investment success is to start by making sure that you don’t lose money? Could it be that accepting a lower rate of return might result in having more money than continuing the wild goose chase of this magical 10 percent we hear that the stock market delivers over time?
Part of the problem is that we focus on the wrong thing, like finding the very best investment or beating a particular stock market benchmark. Both are a wild goose chase. Having the money for a dignified retirement, however, is not. By setting real financial goals, we can quit chasing investment performance and focus instead on creating a plan for the future that makes sense.
Once a plan is in place, it may very well be that the best thing we can do with our investments is to simply not lose money and take the time and energy we were spending in the chase and focus on those things that we have more control over. Things like finding creative ways to earn or save more, or just enjoying the one life we have to live.
I’m more convinced than ever that Mark Twain was correct when he decided that he was more interested in the return of his money than the return on his money.
A couple of weeks ago, we discussed how often people in their 60s and 70s say that their primary residence of over 30 years was their best investment. This belief exists despite the fact that home values barely kept pace with inflation. How can this be, given that during the same time period average annual returns in various stock market indexes ranged from 8 to 13 percent?
Because for most people, it was the only investment that didn’t lose money!
While the same outcome may not apply to housing in recent years, the principle still applies to investing in general. Most of us are chasing the highest return, because that’s what investing is all about, right?
But the experience of many people has been that the well-intentioned search for the best investment actually cost them money. They bought at the peak and sold at the bottom, and their overall returns ended up being meager. I suspect lots of these people would gladly trade their actual experience over the last decade or more with simply having their money returned to them.
So, what if the key to investment success is to start by making sure that you don’t lose money? Could it be that accepting a lower rate of return might result in having more money than continuing the wild goose chase of this magical 10 percent we hear that the stock market delivers over time?
Part of the problem is that we focus on the wrong thing, like finding the very best investment or beating a particular stock market benchmark. Both are a wild goose chase. Having the money for a dignified retirement, however, is not. By setting real financial goals, we can quit chasing investment performance and focus instead on creating a plan for the future that makes sense.
Once a plan is in place, it may very well be that the best thing we can do with our investments is to simply not lose money and take the time and energy we were spending in the chase and focus on those things that we have more control over. Things like finding creative ways to earn or save more, or just enjoying the one life we have to live.
Wednesday, May 4, 2011
How Not to Help
In a recent meeting, Jeff Albrinck, an estate planning attorney at Rendigs, Fry, Kiely & Dennis, met with clients whose 45-year old son was diagnosed with Parkinson’s. The clients were concerned about their son’s long term ability to provide for himself. They wanted to amend their estate plan to leave everything to him, leaving out their other beneficiaries. After discussing their situation with Jeff, they realized the best thing they could do for their son and his family was to leave him nothing and create a special needs trust that would be available to him if needed, but never counted against him if he applied for government-sponsored benefits.
Many times when a loved one is diagnosed with an illness, family members focus on ways to help. Often, this will include gifts of money, stock, or a future inheritance. What many people don’t realize is they are actually doing more harm than good. This may inadvertently disqualify a person with special needs from government benefits. To qualify for Supplemental Security Income (SSI) and Medicaid, disabled individuals age 18 and up cannot have more than $2,000 in assets (excluding cars and homes).
Frequently, the individual with special needs is a dependent child who has been diagnosed with a condition like Autism or Down Syndrome. Even if a parent does not think they will need SSI and Medicaid for their child, it still makes sense to qualify them for benefits. This will allow the child to participate in training programs, housing arrangements and transportation that is funded by the government. It would also be a safety net if a parent loses a job or becomes disabled and can no longer provide health insurance for their child.
So, how can you help? Encourage the parents to set up a special needs trust which will protect their child’s government benefits and pay for everything except the basics such as food and shelter, which are covered by SSI. Once a trust has been established, you can gift assets or cash to the trust or make the trust a beneficiary of an insurance policy or retirement account.
If you have a child or other relative with special needs, it is important to start planning for their financial future as early as possible. We work with several attorneys, such as Jeff, who specialize in this area. We are happy to provide you with a referral, if needed.
Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/
Many times when a loved one is diagnosed with an illness, family members focus on ways to help. Often, this will include gifts of money, stock, or a future inheritance. What many people don’t realize is they are actually doing more harm than good. This may inadvertently disqualify a person with special needs from government benefits. To qualify for Supplemental Security Income (SSI) and Medicaid, disabled individuals age 18 and up cannot have more than $2,000 in assets (excluding cars and homes).
Frequently, the individual with special needs is a dependent child who has been diagnosed with a condition like Autism or Down Syndrome. Even if a parent does not think they will need SSI and Medicaid for their child, it still makes sense to qualify them for benefits. This will allow the child to participate in training programs, housing arrangements and transportation that is funded by the government. It would also be a safety net if a parent loses a job or becomes disabled and can no longer provide health insurance for their child.
So, how can you help? Encourage the parents to set up a special needs trust which will protect their child’s government benefits and pay for everything except the basics such as food and shelter, which are covered by SSI. Once a trust has been established, you can gift assets or cash to the trust or make the trust a beneficiary of an insurance policy or retirement account.
If you have a child or other relative with special needs, it is important to start planning for their financial future as early as possible. We work with several attorneys, such as Jeff, who specialize in this area. We are happy to provide you with a referral, if needed.
Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/
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