Playing to Fear, Not the Plan

After combing through what’s become a lengthy “future blog topics” list for this week, I was sidetracked by the recent onslaught of advertising by the world’s largest asset manager, BlackRock.

I don’t have anything against the firm, per se.  They aren’t managing more than $3 trillion just by accident.  It’s just the message behind their most recent ad campaign seems to be a perfect example of what we try to warn against on a regular basis; Wall Street playing to investors’ fears.  Even in a market that has been more positive than most might have expected since the fourth quarter of 2011, the message persists; what are you afraid of and how can I create a product to sell you that answers that fear? 

What’s wrong with that process?  In traditional business, absolutely nothing.  Our society has been built on the successes of those producing products to fit a need.  However, with investing, the process tends to completely disregard the question of whether or not the product is actually an appropriate investment for the investor’s situation. 

The product answers to fear, it should answer to a plan.

The ad states “2% ISN’T A RETURN; IT’S A RETREAT.”  Ok, I’ll agree.  The return on safe instruments such as cash and short term, high quality bonds are, as can be expected in this environment, paltry at best.  However, that doesn’t mean they don’t play a vital role in your portfolio.  “Mattress money” is meant to be just that, a place to safely store the returns earned on the risk you take in the stock market or other investments. 

What does BlackRock suggest you do?  Try some of their products, of course.  One they mention specifically, the BlackRock High Yield Bond Fund, might certainly boost your expected return, but at what cost?  Well, if you look back to Morningstar as to how the fund performed in 2008, it lost 27.8% of its value.  That doesn’t make it a bad investment, but it’s not something I’d want in my mattress.

Another suggestion is the dividend-focused BlackRock Global Dividend Income Fund.  Dividends are certainly a hot topic of late, and, for all I know, this particular fund, despite its 1% expense ratio (and up depending on share class), may be a perfectly reasonable way to access a global portfolio of dividend paying stocks.  But, just like the High Yield Bond Fund, that doesn’t mean it’s a reasonable replacement for cash or high quality fixed income instruments.

We’ve said it more than a few times in this space, there’s nothing in investing that can’t be boiled down to the relationship between risk and reward, fear and greed.  There are lots of ways to seek out returns that might outperform lower yielding instruments, but not without taking the appropriate amount of corresponding risk. 

What’s more important is to understand why you hold various asset classes, what amounts you hold and how that relates to your tolerance for risk and your long term goals and dreams.  It is our goal to assist our clients with this very important process.  If you ever have questions on how this relates to your plan or know someone who might, please let us know.

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com  

That's Why We're Here

At TAAG, we work only with individuals and their families, so we can focus on getting to know each of our clients well.  While we manage your investments and provide financial planning, we can also help in other ways you may not be aware. 

   

I recently met with a client, her son, and her son’s partner to help them with their budget planning.  They had just purchased a home and were having difficulty adjusting their spending and tracking how they were doing.  We provided help with ideas, resources and ways to track their expenses that were not so burdensome.  My client contacted me later to let me know her son was happier and was more engaged in the on-going financial discussions, something that made HER happier.  

Another client is having health issues, and needed assistance filing for disability retirement benefits.  We helped complete the application request and coordinated the paperwork between her employer, her physicians, and the retirement plan administrator.  With our paperless filing system we have copies of all the documents in case anything is needed later.

Chip has been meeting with the second generation owners of a family-owned business, helping their estate planning attorney map out a plan to take care of their children and transition the company if something happens to them today, while planning for their continued growth into the future. 

Chris has been working with P&G employees that have been referred to us in the recent downsizing, helping them determine if they should take early retirement offers.  She’s also been working with current retirees designing option exercise plans, helping them exercise their options, and diversifying their portfolios afterward. 

During the year, we hold planning meetings with our clients and their CPAs, report investment activity, and consult with them before creating gains when given permission.  We have relationships with a variety of CPA firms, and when a client needs a CPA, we help match them to the best firm based on the complexity of the client’s situation, the specialization of the CPA and cost considerations.  We feel it is in your best interest to have an independent CPA, versus one employed by TAAG, so we can each specialize in what we do best and provide independent oversight of each other’s work.  We provide the same assistance with finding and working with attorneys.

So if you are struggling with a decision or you have a financial issue that’s causing you stress, call us.   

That’s why we’re here. 

Jeannette A. Jones, CPA, CFP®

jjones@taaginc.com

www.taaginc.com

Articles of Interest

There have been several articles of late that have grabbed our attention or garnered significant national press that we thought we would take the time to share this week.  Please see a brief intro to each and a link to access below . . .

Why I am Leaving Goldman Sachs
Now former Goldman Sachs employee Greg Smith wrote an op-ed piece for the New York Times last week on how watching clients' interests being routinely and systematically ignored for the betterment of the firm led to him feeling like the only ethical option was to resign.  The piece has been much publicized as an indictment against Goldman and the entire wirehouse business model in general.

Really Big Claims Based on Too Little Data
TAAG Blog favorite Carl Richards posted this New York Times Bucks blog recently.  Carl takes on the dangers of looking at data over the short term and building conclusions based upon not enough information.  He also does an excellent job of explaining why, ultimately, the data supports a low cost, globally diverse portfolio over finding the best fund manager du jour every time.

The Real Cost of Paper Savings Bonds
This was a post from a guest blogger to the FPA All Things Financial Planning Blog that Chip contirbutes to monthly on the potential risks of hanging onto physical, paper savings bonds and the electronic deposit program the Treasury has established to make tracking and redeeming your bonds safe and simple. 

Have a great week!

The Asset Advisory Group
Website / E-mail

Stop the Madness!

This week begins March Madness.  Friends, families and co-workers have begun selecting their picks for the 2012 NCAA Basketball Tournament.  As I contemplated my brackets, I realized that the selection process I was using to get to my winning team is similar to the process many people use when selecting investments. 

First, there’s usually a hometown bias.  This may be geographical or the team that is your alma mater.  I attended both Indiana University and the University of Cincinnati.  My attachment to these schools as well as my familiarity with their basketball programs typically leads to me advancing them farther in my tournament brackets than they often should go. 

This is not unlike buying stock from a company in which you have ties.  Oftentimes, I see clients that not only hold their company stock in their retirement plan, but they also purchase additional shares of the same company in an outside account as well.  It is also commonplace to see a new client’s portfolio that has a large weighting in local companies such as P&G, GE, Cinergy and Kroger.  These companies are familiar which can give an investor the false impression that this also means they are a safer.

Next is the equivalent of Morningstar’s star ratings.  Each team in the NCAA tournament is given a seed, ranking them in their region based on their past record and strength of opponents they’ve faced.  If you have not followed basketball all year, it’s easy to fall into the pattern of picking teams with a higher seed because they seem more likely to succeed.

Many investors chose mutual funds that have outperformed their peers in the past because they have a higher star rating.  Unfortunately, this does not guarantee the same results going forward.  This is similar to the NCAA tournament.  Not many people probably picked VCU to go to the Final Four last year or George Mason in 2006.  Both teams were 11 seeds.  In fact, I had to refresh my memory to what VCU stands for – Virginia Commonwealth University.

Whether you have the proclivity to pick stocks, mutual funds or basketball teams, keep in mind a saying from sportscaster Dick Vitale that “Anything can happen, baby.”  I wouldn’t want to invest my savings using a methodology similar to tournament betting – would you?  

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

The Games are Coming

On March 1^st, tickets went on sale for an event many of you have likely been hearing about for some time, the 2012 World Choir Games.  The Games, billed as the Olympics of choral music, will be held in Cincinnati on July 4 – July 14, 2012.  The event will be the largest international event, arts event and, indeed, one of the largest events of any kind in the city’s history.  An estimated 200,000 visitors will come to town from as many as 70 countries to watch up to 20,000 participants perform and compete in 23 different categories of choral music.  Downtown will be transformed into a mini-Olympic village and a wide array of music, languages and culture will fill our streets.  It promises to be an incredible event and opportunity for the region.  For a great look at what the Games are all about, check out this short video.

To break down the numbers a little further, the UC Economics Center estimates that the economic impact to the area will reach $73.5 million, primarily stemming from visitors eating, drinking, sightseeing and booking more than 40,000 hotel nights, the most ever for a single event.

Cincinnati is the first city in North America to host the event which is held every two years.  It was selected due to an outstanding effort by local officials and for its rich cultural and musical heritage, the quality of its arts venues and the “walkability” of the city from major hotels to most of the choral venues.

I was fortunate enough to become involved with the Games as part of my participation in the 2011 class of C-Change, the Cincinnati Chamber of Commerce’s Development program for emerging leaders.  Part of my year was spent working in a small group focused on developing a speaker’s bureau charged with going out to various community groups and professional organizations and speaking on all that the Games will bring to the region.  That work has continued into this year and we are as busy as ever filling requests from a wide array of interested groups.

While it is certain to be a wonderful few weeks, it can’t be done alone.  More than 4,000 volunteers are expected to be needed to fill a dizzying number of assignments.  More information on those opportunities can be found here.

If volunteering isn’t feasible, but you would like to know more about the concerts, event schedules and how to buy tickets, that information can be found here.  Many of the concerts will be free and there will even be opening and closing ceremonies, which promise to be a prime attraction. 

While trying to avoid this being too much of a sales pitch, I thought it was important to share some of the details surrounding this event with our clients, the trusted professionals we work with, and other readers as many have heard about the Games, but are not fully familiar with the scope of what is coming to town in July.

I strongly encourage all of you to get involved in this once in a lifetime event.  Try and find some time to volunteer, attend one of the many concerts, or just make a point to visit the downtown area during the Games.  For those clients of ours that are out of town and have been looking for an excuse to come back and see friends or family, this just might be the perfect excuse.

Have a great week!

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

Why Wealth Can Be Fleeting

The recent announcement of P&G’s decision to lay off 5,700 workers reminded me how vulnerable financial security can be.  Even though our economy is recovering, many people are still afraid of losing their jobs.  In January, my sister learned her company is laying off 40% of its workforce on April 2^nd.  As the sole income earner for her family, she has to wait and worry while she manages her staff until the announcements are made.

Obviously, the Great Recession of 2007-2009 had an impact on the financial well-being of many families, but it appears the impact on upper level executives and high net worth retirees was much more severe.  According to the Wall Street Journal, one third of all people considered wealthy in 2007 were no longer in that group by 2009, and the income of the top group fell 34% over the same period.  By contrast, the average income of the bottom 90% of the population fell less than 3% over the same period. 

Published in December, The Truth About Wealth pointed out affluence today is much more unstable than it was in the past.  While the article focused on families in the top 1% of the population (those earning more than $343,000 in 2009) the issues it raised were relevant to anyone who is trying to build and retain wealth.  If you have a high income job with great benefits, or have accumulated several million dollars to live on in retirement, you might be secure; but there are risks you may be taking that can cause a fast reversal of your fortune if you ignore them:

Concentration

The risk of wealth concentration is difficult for many people to accept if they have created their wealth by putting all their eggs in one basket, and watching that basket most of their lives.  A Hewlett Packard Company executive who held only HP stock in his 401(K) plan and exercised HP stock options to supplement his lifestyle suffered a severe financial shock when he lost his job in 2007.  Meanwhile, his HP stock fell from trading at $52 a share in October 2007 to $27 a share in March 2009.  You can definitely become wealthy by concentrating your investment in a single company or asset class, but when it drops in value, you have no safety net.

Before retirement, if your livelihood is dependent on an industry or a specific company, you should not concentrate your investments there as well.  You should have no more than 20-30% of your net worth in any single asset – even if you own your own company.  In retirement, your lifestyle should be supported by a diversified portfolio of investments, with no more than 3-5% of your holdings in one company.

Leverage

Over the last decade, debt was the rocket fuel that propelled people into homes and lifestyles their parents only dreamed of.  But when you have a significant mortgage or other debt, and your source of income is reduced or eliminated, you may be forced to sell assets at the worst of all possible times.

Your total debt load should be no more than 25% of your total combined liquid (savings and investment accounts) and non-liquid assets (such as your home).  Many financial articles recommend your total principal and interest payments for all your loans, including your mortgage, car, credit cards and student loans, should not exceed 35% of your gross income.  But after observing people as a financial advisor over the last 24 years, I think 25% to 30% is much more realistic and gives people more room to weather a financial surprise such as a job loss or illness. 

Spending

Many people don’t really know what they’re spending on an annual basis.  As a result, they may be one crisis away from a financial collapse and not even know it.  This is the biggest issue for most people contemplating retirement, and the one that causes me the most stress when counseling clients. 

It doesn’t matter how much you have saved for retirement if you aren’t sure what it takes to support your lifestyle.  If you retire, and find you are spending nearly 10% of your savings each year, it’s very difficult to adjust after the fact.  You will be much more financially secure if you ‘practice’ retirement by living within the income you think you will need in retirement, before you retire.  If you find you aren’t happy living within your planned income limit, you have time to adjust.  You can work longer and save more, or eliminate expenses that might not be as important to you as retiring when you planned.

Wealth might be more fleeting today than it was before the 80’s, but there are steps you can take to keep yours intact. 

Jeannette A. Jones, CPA, CFP ®

jjones@taaginc.com

http://www.taaginc.com/

America Saves!

This week, we wanted to do our small part in furthering "America Saves Week".  Slated for February 19-26th and coordinated by the America Savings Education Council, America Saves Week is celebrating its 6th anniversary.  The goal is to encourage employers, organizations and others to promote good savings behavior and for all of us to evaluate our saving and spending habits.

If savings hasn't been on your radar, or that of a loved one, in quite some time, focus first on basic emergency savings.  Most of us should have anywhere from 6-12 months of expenses in a very liquid account somewhere that we can access reasonably quickly.  This can be tough to do, and we hear this all too often, but it's amazing what one less latte a week, using a water bottle instead of bottled water, only buying fruit and vegetables you're actually going to eat (Americans threw out $32 billion worth last year) or some other simple habit change can make to our long term plans. 

If emergency savings are covered, spend some time focusing on college, retirement, or other goals you might have.

Below are some links to details on America Saves Week and related articles that we wanted to share in the hopes that they help you or someone you know. 

America Saves Week - main site of a week focused on savings

America Saves - the non-profit organizations' home site

On Your Mark, Get Set, Save - A savings "how-to" article from Forbes magazine

Take America Saves Week to Heart - An article from Visa's head of financial education programs

ING Encourages Savings in Support of America Saves Week - a CNBC article on ING's recommendations to jump start savings

If there's ever anything we can do to help you sort out what your savings goals might be, please let us know.

Have a great week and happy saving!

The Asset Advisory Group
info@taaginc.com