Advisor Articles
The Bull is Back!
8/30/2009
Click chart to enlarge
Yes, the bull is back! I believe we are in the early stages of a new bull market. Even with all the bad news still on the table, this bull is showing some sturdy legs.
Supporting my view is the chart at the right. It's a picture of the S&P 500 over the trailing 10 year period. The choppy green line is the price line of the S&P 500, the solid orange line is the 10 month moving average. (I've simply converted the 200 day moving average to 10 months for clarity.)
Note the solid line turning up in late 2003, when the market went from a low of just under 800 to its peak of nearly 1600 in late 2007. Take a look at the same moving average line all the way to the right of the chart. It has finally moved up after a near free fall from late 2007 to it's current up position. This to me signals a new bull market, and it's time to buy.
But just a minute. This market has had a remarkable run-up since its early March lows. The S&P 500 is up 50% since that time. Could we be buying at too high a price at this stage? Are we due, even overdue, for a significant correction? Aren't we approaching the dangerous time of historical market corrections of early autumn?
In time Mr. Market will tell us the answers to those questions.
We have moved cautiously, in stages so far this year. We bought high quality bonds many months ago, and a S&P 500 index stock fund in early March.
Our plan is to continue to be cautious but at the same time more aggressive. We'll begin selling our more conservative bond holdings and replace them with more aggressive ones. We did just that recently with the purchase of an emerging market bond fund.
We'll likely continue that process by replacing our high quality bond funds with high yield, both municipal and corporate.
We'll continue to be patient and as market corrections take place over the next few weeks and months we'll use those as buying opportunities. We'll buy domestic and foreign stock positions, both mutual and exchange traded funds.
If this turns out to be just another short lived "bear market rally" we'll sell based on our protective "stop loss" points. However much we may believe this is the beginning of a new bull we will always remain vigilant and protect our clients' assets.
Having said all of the above it's worth pointing out this market faces some daunting obstacles. The usual suspects include an extremely weak economy, rising unemployment, still rising foreclosure numbers and so on.
One of the more worrisome statistics to me is the decreasing volume of stocks being traded on the major exchanges. It could be the summer doldrums, or it could be a lack of confidence in the longevity of this bull. We shall wait and see.
As always feel free to contact me with any questions or concerns you may have.
The Stock Market Bull is Back, Not!
5/29/2009Even though the stock market has rocketed skyward since the March lows we remain in a 'Bear' Market. You may be wondering how I can be so certain. After all, hasn't the market risen 35% or so since the March lows? The answer is yes it has. But some of the key indicators have not yet turned up enough to signal the resumption of a new 'Bull'.
One of the important indicators I use to help manage risk is called the 200 day moving average. I've analyzed it back to the early 1970's and it has demonstrated a high degree of reliability in signaling the beginning and end of both Bull and Bear markets. Not infallible, but reliable.
The 200 day moving average line turned down in early 2008, the beginning stages of the current Bear, and it has not yet turned up. Simply put when the 200 day moving average turns down it has in the past reliably signaled the onset of a Bear Market. Conversely the 200 day moving average turning up has usually signaled the beginning of a new Bull market.
If you check the dates 1/1/00 through 12/31/03 you will see the same indicator moving down in early 2000, a clear signal of the Bear market that marked the end of the 'dot.com' era and carried the major market indices down 45% or more.
Does this mean we all have to become short term traders? Absolutely not! Note the two periods of time indicated above culminated in only three transactions based on market trends. The first, a sell, took place in late 2000. The second, a buy, was in early 2003. That means a prudent investor remained out of the stock market for approximately 2 1/2 years, a period when the market crashed about 45%.
The buy transaction in early 2003 held until early 2008, when the 200 day moving average began moving down once again. And we all know what has transpired over the last year or more. This has been and continues to be one of the worst stock market crashes and recessions in our lifetimes.
There are a number of additional indicators I use to guide me. Based on these signals I purchased bond ETF's early this year and in March bought a 10% position in SPY, a S&P 500 index ETF. As other indicators flash green I will continue to buy, likely small company and emerging market ETF's. But I will not be fully invested in the stock market until the 200 day moving average begins to head north again.
The reason for the preceding explanation is to stress the idea of a money management system that will help you make decisions concerning your portfolio. A system based on logic, not guesswork or emotion. With a system in place you are able to make decisions based on a systematic action plan, well thought out in advance. Financial decisions guided by intuition and emotion rarely turn out well.
In the world of market risk investments we must have a system that includes having an entry and exit strategy. We must have a clearly defined method of deciding when we are buyers, and when we are sellers. Note I said nothing about holders, meaning "buy and hold." Two serious Bear markets in the last eight years should have removed that term from the minds of any investor who desires to remain financially solvent.
So the takeaway here is the 200 day moving average can be a valuable tool in helping you make decisions based on facts, rather than emotion, second guessing, or relying on the prognostications of the 'gurus' out there in 'Finance Land'.
Market Timing is Not a Dirty Word(s)
12/08/2008Many people, professionals and amateurs alike, believe in the old adage, 'Buy and Hold for the Long Term.' They believe once your investment program is in place you should not make changes due to market declines, even when those declines are as severe as they've been the last 13 months.
Just about all investment markets in the world have cratered 40% or even more over that 13 month period. The Dow Industrials, S&P 500, and NASDAQ stock indices are off 31%, 37%, and 42% respectively from January through late November 2008! I believe these losses, even though temporary, are too great for all but the most aggressive investors to endure. There has to be another way, a way we can reap the returns the markets have to offer without putting ourselves at risk of suffering these unbearable losses.
In fact, there is another way. The strategy we use is what I simply call 'Trend Tracking.' With Trend Tracking we don't try to predict which direction the market is going next, or when it may start a new trend. We simply allow the markets to show us, and then we act accordingly. If the market is in a long term uptrend we simply get on board with the purchase of appropriate stock ETF's and/or No Load mutual funds. If the indicators we track clearly illustrate a long term and deep 'Bear Market as they have since January of this year, then we sell those stock ETF's and No Load funds and move to money market and other safe havens.
Even though we hesitated this year and sold our stock funds in stages, we have for some time been in money market, treasuries and gold for our clients' accounts. These maneuvers have protected our clients significantly as our losses are modest year to date. We are not only preventing further losses but are actually reaping modest gains over the last month or so.
An important but often overlooked aspect of prudent money management is protecting our nest egg from the severe downturns that occur on a regular basis. We have experienced two such downturns in just the last 8 years. Many people lost so much from 2000 - 2002 they've just recently recovered those losses and now they've been clobbered by the latest 'Bear'.
Some say we will miss the big recovery when it comes. They say you have to be in the market in order to participate in the big early gains. Yes, we may miss some of those early gains. But I believe it's far more important to be in safe harbors when the serious 'Bear Markets' are on the rampage. When the markets begin a new long term uptrend we will have ample time to recognize it and buy our favored funds. We don't have to necessarily own those funds in the earliest stages of the new 'Bull'.
In the last 25 years there have been 21 positive years as measured by the S&P 500, which means just 4 down years. But some of those down years were killers, ranging from a modest loss of approx. 3% in 1990 to a whopping 22% in 2002, and a horrendous loss of 37% this year alone! These are not the kinds of setbacks the prudent investor can afford.
The very same indicators that flashed a 'Bear Market' signal early this year will at some point flash a new buy signal. We will keep our capital safe and await that signal.
Mauled by the 'New' Bear Market? 6 Steps to Financial Recovery
9/02/20008Has your portfolio been savaged by this new edition of a 'Bear Market'? Are you feeling there's no end in sight and have no hope of recovering what has been lost? Well, there are solutions and I hope to offer a few here.
Make no mistake, we are in a longer term 'Bear Market' and there is no way of knowing when it will end. Having said that there are a number of strategies you can use to protect yourself, as outlined below.
- Investor, Know Thyself The very first step in being a successful investor is having a good understanding of who you are. By that I mean you must know how much risk you are able to tolerate, financially, psychologically and emotionally. For example, if you have a $10,000 account are you able to experience a loss, even temporarily, of $1,000, $2,000, or more, less? If your portfolio of $100,000 slides to $90,000 of value, or $80,000, are you able to comfortably sleep at night? These types of temporary declines are very common in the stock market so you must understand in advance what amount of loss, if any, you are able to live with.
Solution: Carefully develop your investment portfolio to meet your personal risk tolerance. As a general rule you may reduce market risk by balancing your portfolio between a mix of stocks, bonds, and money market, and/or their mutual fund and exchange traded fund equivalents.
- Are You Investing for Income, Future Growth, or Some Combination of Both? It is very difficult and increases risk to use your investment account to receive income while at the same time attempting to protect and even grow your principal. For example, if you are withdrawing 4% annual income from your account and it goes down 10% in market value in one year, your account is worth 14% less than what you started with. Imagine three years in a row of market declines, as happened 2000 - 2002.
Solution: Build two portfolios, one for growth and one for income. The growth account could be filled with stocks and or the equivalent mutual and exchange traded funds. The second account, designed for income, could consist of income annuities, corporate and/or municipal bonds, or their equivalent mutual and exchange traded funds.
- Invest With Tax Consequences Firmly in Mind Don't let the tax tail wag the dog, but always build and manage your investment portfolio with strategies to minimize taxation. If your total return in one year is 9% and you give up 4% in taxes, you probably have not been as tax efficient as you could have been.
Solution: As much as possible use tax efficient strategies. For example you could place your income generating investments in municipal bonds, income annuities, and/or tax efficient vehicles like index income oriented mutual and exchange traded funds (ETF's).
- What to Do in an Existing 'Bear Market'? Assess the damage, keep the better performers, and sell those that have generated the greatest losses. Don't wait for them to get back to break even and then sell, a common mistake made by many. They may never come back, or it may take so long that you will have missed many other opportunities in the meantime.
- Keep Investment Costs Low Avoid buying investments that carry steep costs, many hidden from view. Front end loads, back end loads, markups, markdowns, internal expenses, surrender penalties and more await the unwary buyer.
Solution: If you are an accomplished self directed investor buy your investments through a discount brokerage firm like Schwab, TD Ameritrade, Fidelity etc. Buy only No-Load mutual funds, exchange traded funds, low transaction fee stocks and bonds. If you need guidance then at the risk of sounding self promotional seek out a registered investment advisor who works on a fee for service basis. This type of advisor has a fiduciary responsibility to place the interests of the client first and foremost, ahead of self interest and ahead of any financial services firm with which he or she may be affiliated.
- Can You Protect Your Assets in a Long Term 'Bear Market'? I believe the answer is yes you can. You do not have to 'ride out' a long term 'Bear Market', watching helplessly as you lose 20%, 30% or more as has happened to so many in the past.
Solution: Buy quality, low to moderate risk investments. If the long term trend is down, as is currently the case, sell those getting hit the hardest, move to money market or even partially to 'inverse' exchange traded funds. 'Inverse' funds are designed to do opposite of the respective index so if the major indexes are trending down you can reposition part of your portfolio into inverse ETF(s) moving in the opposite direction, as they are designed to do.
Note: Nothing in the preceding paragraphs are to be construed as specific investment advice. It is meant only as a general guide to possibilities available to today's investor.
The Most Successful Investors May Not Be Who You Think They Are!
7/03/2008If you ask people who the most successful investors are, you'll probably get responses like Warren Buffett of Berkshire Hathaway, John Neff, formerly of Vanguard's Windsor Fund, or George Soros, the famous hedge fund manager.
However, some of the most successful investors from a risk/reward perspective are the large university endowment funds. This group includes universities with endowments larger than $1 Billion such as Yale, Harvard and Vanderbilt.
Source: 2007 NACUBO Endowment Study
What Makes the Large Endowment Funds Different?
Large Endowment Funds consistently beat the market on a risk-adjusted basis! Why? Because they heavily diversify away from traditional asset classes like stocks and bonds, and into less well-known asset classes that have the capability to deliver profits over a business cycle. In fact, the average endowment fund with over 1 billion in assets as of June 2007 had less than 59% of its assets in stocks and bonds.
Multi-Asset Diversification
Endowments invest across many different asset classes and pay as little as possible in fees and expenses. Until the recent explosion of low-cost Exchange Traded Funds (ETF's) it was almost impossible to diversify as cheaply and as broadly as the large endowment funds. Now investors can invest in the same sectors as hedge funds and endowment funds utilizing low cost ETF's. It is now possible, through Exchange Traded Funds, to invest in assets like:
Timber - Currencies - Private Equities - Venture Capital - Commodities - Absolute Return Strategies
Introducing the Gradient Endowment Series Portfolios
Based on groundbreaking research conducted at Vanderbilt University, it is now possible for the individual to invest like an endowment fund. Five diversified portfolios are available based on your personal Risk Tolerance Analysis. Each portfolio is allocated across the universe of investment vehicles in increments most suited to each individuals risk tolerance, time horizon etc. Some of the asset classes are illustrated below.
Real Estate - Fixed Income - International Stocks - U.S. Stocks - Private Equity - Hedge Strategies - Commodities - Hard Assets
Why ETF's Make Sense Often times, ETF's allow us to take advantage of:
Lower Expense Ratios - Tax Efficiency - Diversification - Intraday Trading - Transparency
Reprinted with permission of Gradient Investment Group
Exchange Traded Fund (ETF) A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETF's experience price changes throughout the day as they are bought and sold.
ETF Definition Source: www.investopedia
Why Many Retired Women Live in Poverty - And What You Can do to Prevent It
3/20/2008Retirement for women is different than for men, and unless this fact is recognized and acknowledged, a woman's retirement may become something less than golden. My intent in this article, based on 28 years of experience in the financial services industry, is to discuss what women can, even must do, to assure their years in retirement are some of the best years of their lives.
There are many reasons for women living in poverty during their 'Golden Years'. Below are some you may recognize, and suggestions and solutions you may wish to consider.
Problem #1: Many women rely too heavily on their spouse
For income during the working years, for pension and social security benefits during retirement, and for ongoing financial guidance and advice throughout the years, with unforeseen and tragic results in many cases. (3 of every 5 elderly women face retirement without a husband).
Problem #2: Work Patterns
Women often have irregular work patterns, due to marriage, children, care giving and other responsibilities. This often leads to women not earning full pension benefits, or any benefits at all.
*Only 32% of retired women who have worked in the private sector had pension benefits, whereas well over half of men received them. *U.S. Census Bureau
Even when women do earn pensions, their benefits tend to be a fraction of what men receive because of their lower earnings and complicated vesting schedules that penalize them for moving in and out of the workforce. For these reasons men's pensions tend to be upwards of two and a half times that of women.
Problem #3: Divorce
In all too many cases a divorce occurs, sometimes even later in life, and the financially inexperienced woman is set adrift in unknown waters. Often times the assets are divided in what appears at first glance to be equal, but the woman's share may include the family home with a hefty mortgage payment, while the husband gets the pension and 401k plan, assets that will serve him well during his retirement years.
In addition, the ex-husbands income is not disturbed, while the woman's income may be dependent on temporary alimony and/or child support. Whatever income she is able to generate by going back to work, often with little or no job skills and being out of the work force for many years, brings lower pay, therefore lower future pension and social security benefits.
Problem #4: Widowhood
Upon the husbands death the pension often ceases and social security benefits usually decrease, putting the widow in a financial bind.
One-third of women who become widowed are younger than 60. Half of all women who become widowed are younger than 63.
Widowhood can severely jeopardize a woman's economic prospects. Elderly widows receive, on average, only $5,964 a year in Social Security benefits as compared to an average of $14,580 for the joint Social Security benefit received by a married couple.
Only 21 percent of widows receive survivor pensions based on their husbands' benefits.
Of those who do receive a benefit, half receive less than $4,800 per year.
According to the *U.S. Census Bureau, 80% of women live longer than their spouses and often by many years -- 14 years on average. The risk here is if she tries to maintain her current living standards she may deplete her savings over time. As health expenses or long term care needs arise she may be forced to reduce her standard of living, or spend down assets in order to get assistance. Neither of those choices bode well for her quality of life.
*U.S. Census Bureau
Solutions, Recommendations and Strategies
First, educate yourself about the family finances. Make sure you have a good overview and understanding of what assets are owned, how they are titled, who the beneficiaries are, etc. Prepare yourself to manage your own finances, as the odds say you will need to do just that at some point. Make sure you are named on all family accounts as owner, co-owner, or beneficiary. This establishes your legal right to these assets should the marriage end in divorce, death, or even if your partner becomes incapacitated.
Next, build what I call the Three-legged Stool of Lifetime Financial Security:
1) Inflation protected lifetime income
2) Growth/income investments for future needs
3) Long term care protection in the form of assets or insurance, or some combination of both
Some of the solutions to ensure your lifetime security could consist of:
1) your social security retirement benefit
2) a secondary inflation adjusted income you can't outlive
3) a prudently managed growth/income account to keep pace with the cost of living
4) a creative and flexible method of protecting your potential long term care needs
5) time tested strategies of ensuring you pay no more than your fair share of taxes
Last but not least, seek out the assistance of an independent, experienced financial advisor, preferably one who is compensated by fee for service, much like an attorney or tax accountant. This would rule out the commission driven advisors, where there is a distinct conflict of interest.
Many of my clients are single, mature women, so I have been a witness to what they have experienced through my 28 years of advising and guiding them. My experience in working with them has given me insight into their unique needs, and has perhaps qualified me to better serve them, both during their working years, and throughout their retirement years as well.
A Reverse Mortgage May Have Saved Her Life
11/26/2007Margie was a vibrant and active woman, younger in spirit and vitality than her 76 years would seem to indicate. But problems were mounting, life was closing in, and Margie was just about at her wits end.
You see, Margie's beloved Bill had died some years ago, and his generous pension died with him, as it did not pay a spousal benefit. To compound Margie's financial problems, due to Bill's death her social security income was greatly reduced as well.
Margie was able to hang on for a few years by reducing her activities. She resigned from the local golf club where they had been members for more than thirty years, and curtailed her favorite activities with friends. Fewer lunches together, fewer theater dates, and travel was definitely out of the question.
But now things had progressed to a point that was no longer tolerable, even dangerous to Margie's health. For you see, because of increases in day to day living expenses Margie was faced with making even deeper cuts in her lifestyle, and not just in those areas we might see as luxuries.
It had now come down to reducing her grocery bill, and worse, cutting her prescription pills in half to make them last longer. Some of these medications were of extreme importance to Margie' quality of life, and even life itself.
There were medications to lower her blood pressure and heart rate, others to combat her diabetes. Without these medications Margie's life was actually at risk, and she knew it.
Added to this of course was the stress Margie now experienced, knowing she was putting herself at risk, but not knowing what to do about it.
One day Margie saw an ad for what was called a 'reverse mortgage', a term with which she was unfamiliar. The ad described in some detail what a reverse mortgage was and how it could help a person in her situation.
Margie and Bill, like many, had relied on their pension and social security to provide a lifetime retirement income, but now much of that was gone due to Bill's death. However, again like many, Margie and Bill had purchased their home many years ago, it was fully paid for, and had increased in value a great deal over the years.
Yes, Margie was 'house rich and cash poor.' But the ad gave her a glimmer of hope. Maybe this reverse mortgage could work for her.
The following day Margie called the mortgage specialist who had run the ad. She visited Margie at her home, explained the details of how the program worked, and told her there were many safety provisions in place to protect homeowners.
Some of the commonly held myths held by many were dispelled by the specialist. No, a person does not lose their home. Yes, the heirs will still inherit the home if the homeowner desires. No, monthly payments by the homeowner are not required at any time.
In fact, if the homeowner wishes, he or she can actually receive monthly checks, or simply take an open credit line and use the available cash as she sees fit, or both.
After a number of counseling sessions, including one mandated by an agency of the federal government, Margie signed the papers and received her reverse mortgage loan. She opted for the monthly check because she reasoned this would supplement her current income and allow her to live the life she was accustomed to, and more importantly, allow her to live her life healthy and stress free.
The details of a reverse mortgage are beyond the scope of this article, but feel free to contact us to receive a Free Report on 'Answers to Your Questions About Reverse Mortgages.'
Nine Surefire Ways to Increase Your Retirement Income
8/13/2007The old saying 'money can't buy happiness' is not necessarily true. My contention is that money can absolutely contribute to a higher quality of life, which in turn can contribute to a higher level of happiness. And at no time in our lives is this more important than retirement, because it's unlikely most of us will be able to increase our income by going back to work in our 70's or 80's.
Whether you're approaching retirement, or have been retired for many years, income is crucial to your financial security, and even to your very health. Many studies have shown insufficient income during our working years, but particularly during retirement, can cause worry and insecurity in our day to day living, which can lead to ill health over time.
I hope the following will give you some ideas about how you can increase your retirement income, enhance your quality of life, and contribute to your happiness now, and in the future. So without further ado, here they are.
1. Tax Reduction Where to start? How about at the beginning? Almost everyone can save significant amounts of tax just by making a few modest tweaks and adjustments to their financial strategies. For example, are your stock dividends and CD interest earnings being taxed even though you're not spending it all? What if you could receive interest income and save a bundle in taxes at the same time? This and other tax saving strategies could go a long way toward increasing the amount of money you have to spend each month.
2. Income Annuities Buy an income annuity, designed to pay you a tax advantaged lifetime income at a higher rate than many conservative investments, even if you live to be older than Methuselah.
3. Structured Life Settlements Are you insurance rich and cash poor? Convert your life policy into a living benefit, enabling you to access cash long before your final ride off into the sunset.
4. Conservative and Moderate Allocation Mutual Funds Invest a portion of your assets in the rock solid world of No-Load Conservative and Moderate Allocation mutual funds, some of which posted positive returns during even the darkest days of the recent 'Bear' market.
5. Reverse Mortgage Convert 'lazy' money trapped in your home equity into an excellent long term cash flow, enabling you to enjoy greater income and financial security without putting your cash in any high risk investments.
6. Real Estate Lending Be a real estate lender, generating potentially double digit cash flow to you. You can even use your IRA to accomplish this.
7. Real Estate Ownership Own real estate properties generating 6% to 7% cash flow to you, with the very real potential of increasing over time as rents increase. An additional benefit is the aches and pains of property management could be transferred to a professional while you stretch out in the hammock, walk the greens of your favorite golf course, or cruise the worlds oceans, all the while receiving those nice checks directly to your bank account.
8. TIC's - Tenants in Common Transfer the headaches of real estate management and generate a significant income for you. This can work particularly well if you own appreciated real estate, i.e. rental houses, commercial properties, land etc.
9. Separate Asset Baskets Maintain separate accounts for specific purposes. For example, place money for emergency needs in liquid money market accounts and short term bank CD's.
Use another account like income annuities for regular monthly income. An additional account with a brokerage firm could be used to purchase Conservative and Moderate Allocation mutual funds for growth and future income needs.
The purpose of developing and managing your financial affairs in the above manner is to maintain your financial independence and a high quality of life throughout your retirement years. By following these steps you can accomplish many objectives.
First, you will always have sufficient cash reserves at your fingertips if and when needed with your money market account and bank CD's.
Second, you will have sufficient retirement income and be able to avoid withdrawing income from variable accounts during market declines. And finally, your variable accounts have the potential to grow for future use to handle the ever rising cost of living.
Beware, The Annuity Salesman Cometh
7/15/2007Be on guard, for the annuity salesman cometh, and he/she is poised to take advantage of you, your lack of knowledge, and yes, even your fears.
This breed of salesperson is most often seen at luncheon and dinner seminars, which are marketed heavily to retirees, for retirees have the money. As the infamous bank robber Willie Sutton, when caught robbing banks for the umpteenth time, was asked why he continued to ply his trade, Willie purportedly replied, "...because that's where the money is."
It is also retirees who have the greatest concern, even fear; fear of the stock market, and fear of whether they'll have enough money to last a lifetime.
It is these fears that so many annuity salespeople prey upon. They tout the lifetime income benefits of annuities and guarantees built into the contracts, while at the same time stoking the twin fears of the next great stock market crash, and the terrible consequences of running out of money before running out of life.
But what so many annuity agents leave out are the negatives, negatives that can come back to bite the annuity owner if there is not full disclosure, and far too often full disclosure is sorely lacking. Many retirees are not told of the painfully high and long term surrender penalties if cash is needed, or the excessive built in commissions paid to the salesman, upwards of 10%, even higher in some cases. And in the world of finance high costs usually means a bad deal for the investor.
Various hidden fees, long term surrender penalties, and ever changing terms of many annuity contracts can trip up even the most wary of investors. It has become clear to me that many annuity contracts clearly put the interests of the company and agent first, and well, you know whose interests bring up the rear.
Does this mean all annuities are bad, and that no one should ever invest in them? Absolutely not! One of my favorite expressions is I've never met an investment vehicle I didn't like. Stocks, bonds, CD's, mutual funds, annuities, real estate, gold, precious gems, I like them all, and have used, and continue to use many of them in my managed portfolios. And the fact is, under the right terms and circumstances, annuities can fit very nicely into many clients financial plans.
What it all boils down to is the importance of two of the cardinal rules of successful investing. One, suitability and two, terms. Suitability simply means, is this investment appropriate for your needs? Does it fit your tolerance for risk, is it tax advantaged if that's important to you, is there cash flow if that's one of your requirements, is there a growth element to it if that's important and necessary? In short, does this investment vehicle meet your personal, financial, emotional and psychological needs and requirements?
The second element is terms. Are the terms fair and reasonable? Are the costs, including front end sales charges/commissions, back end charges/surrender fees, internal operating charges if any, and any other fees or expenses incurred fair and reasonable? Is the maturity date or holding period reasonable and fit within your needs?
In the end all investment vehicles must be carefully analyzed in detail before one makes a commitment. Each investor must understand the pros and cons, either through self analysis and/or with the help of a trusted financial advisor, an advisor who puts the interests of his/her clients before his own, and before any company he/she may represent.
Jeri's Story - How Inexperience and Bright Lights Blinded the Way
6/19/2007She was a hard working single woman, owned her own business, and seemed headed toward a comfortable retirement just a few years away. Unfortunately she became blinded by the bright lights of the 'New Economy' and technology boom. What she didn't know is those bright lights shielded the horrors of a looming disaster, and she would not be able to extricate herself until it was too late.
I met Jeri at a class I was conducting on retirement planning at the local community college. She asked for a no obligation meeting and so at a later date we sat down to explore her needs and objectives.
Jeri was a middle aged small business owner and her most pressing objective was to assure a comfortable retirement, just ten years away. She had put away a fair amount of money into her small business retirement plan and now felt professional management was necessary as it was more than she felt qualified to handle, and it was everything she had.
She related the story of placing money with another financial advisor some years ago but felt she had been taken advantage of due to her own naivet© and inexperience. The prior advisor had placed her money in ultra conservative annuities and Jeri later learned the one who made out best was the advisor. Commissions were high, and returns were low.
This experience soured Jeri on the advisory profession so she took control of her money and invested in bank certificates for a few years. Because interest rates were relatively high her account grew in value very nicely. Things had changed however. Rates were low and Jeri had been hearing and reading about the excellent returns provided by the stock market and she wanted to take a closer look.
She felt comfortable with me due to the classes and also because I managed money on a fee basis; that is, my clients did not pay and I did not receive commissions. My compensation was strictly a quarterly management fee. She felt that was fair and removed potential conflicts of interest inherent in commission compensation.
We proceed to open Jeri's accounts and placed her in our Moderate Risk, growth oriented management program. Things went well for a couple years and Jeri's accounts grew in value, right within the range one would expect from a moderate risk portfolio.
I then began to field phone calls from Jeri suggesting we should increase the risk level of her accounts because some of her friends were getting much higher returns than she. She told me about another money manager who got 20% to 25% returns two years in a row, and the 13% per year we attained for her was no longer sufficient.
I told her I could not in good conscience move her to a higher risk level because everything I knew about her screamed moderate risk investor. Because she pressed the issue I said I could not do what she asked but she could certainly move her accounts to the advisor she was touting. And that's just what she did.
Over the next few weeks I began receiving purchase confirmations of what her new advisor was buying for her. It was a mix up by the brokerage firm and I informed them of that fact and they soon fixed it. Meanwhile I recorded the purchases and tracked their performance over the next two years or so.
It was an unmitigated disaster. The portfolio was composed of relatively unknown (at least to me) small company stocks, and the account lost over 50% of its value through that two year period.
I just hope Jeri was able to get out and salvage the bulk of her portfolio, because I'm afraid many people did not. You see, the period I've described was 1997 - 1999 during the technology boom and later the bust of 2000 -2002 when she was with the other advisor.
I guess the moral of the story is to be certain the level of risk is suitable for you in everything you do. One of the biggest mistakes I see in the investment world is so many people take far more risk than is appropriate for them, and the irony is they don't have to do it. There are many quality investments and investment management strategies that will get you where you want to go, and the journey can be made in relative ease and comfort.
Widowed, Ripped Off, and Alone
5/31/2007She's an intelligent woman, seemingly well to do and living in a high rise condo in Florida. Retired, active lifestyle, involved in many activities with her friends, giving of herself to her community, church, and local charities. She did everything right, at least right for her generation, place and time in her life.
She was the loving wife of an auto company executive. She kept a beautiful home, entertained lavishly, and hosted parties for her husband and his business colleagues. She was always there for the children, active in the community, in short, she lived the American dream.
But below the surface was fear, uncertainty, and pain. What's happening here, how did it happen, and can she save herself?
Why is she now living a nightmare, through no fault of her own?
There are many reasons, for her life was and is complex. But high on the list is the fact she relied entirely on her husband to make all the financial decisions throughout their years together. After all, he was an MBA and a financial wizard. He ran the company's financial division and had an extremely successful career. But he did something neither counted on, nor planned for. He died.
He died but left her with a sizeable pool of investment assets, life insurance, and a fine home, seemingly more than enough for her to continue a comfortable lifestyle. But there were two crucial things she lacked. She did not have a high financial I.Q, and she did not have a trusted financial advisor. Having just one of the two would have protected her, but unfortunately having neither led to a number of unwise decisions, which ultimately led to severe financial difficulties later.
After the death of her husband she moved to Florida, purchased an upscale condo, and developed new friends and activities. Because her pool of assets was ample she was able to draw income from it to support her lifestyle. Her financial advisor, whom she had retained due to her husbands relationship, soon advised her to make changes in her portfolio, changes he said would be beneficial to her.
With her agreement, but also with lack of understanding, her investment portfolio soon began to resemble the high flying NASDAQ and technology indices of the late 1990's. As long as the market was going up, everything seemed fine. She was making substantial monthly withdrawals from her portfolio, and her accounts continued to grow. Life was good.
But then, things began to go badly. The market began to swoon in 2000 and her account began to decline precipitously. She began to worry but her advisor said, "Oh, don't worry honey, the market always comes back in the long run. I'll keep a close eye on it for you." And every now and then over the next few years, the market did bounce back, at least temporarily. But it didn't come back to its previous level. She continued to trust her advisor, and her accounts continued to lose value. Over the next three years, with continued withdrawals and market declines, she lost over 50% of her money!
By the time I met her in late 2002 she was a nervous wreck, and didn't know where to turn. Because of her new found distrust of financial advisors, she brought her son along to our meeting. After a lengthy discussion I agreed to analyze her situation and in a second meeting, provide a full written report, including recommendations to help turn things around.
Upon careful analysis two glaring details jumped out at me. First and most obvious, her investment portfolio was totally unsuitable for her needs and life situation. Her primary objectives were protection of capital and supplemental monthly income, but her portfolio consisted largely of technology and telecommunications stocks and mutual funds.
But there was more. The costs of her portfolio were egregious! The financial advisor, and I use the term loosely in this case, had "diversified" her portfolio across six different front end load (commission) mutual fund companies, even though every company had dozens of its own branded funds. This had the unfortunate consequence of costing her far higher commissions than necessary.
You see, load fund companies have what are called breakpoints at different investment levels. For example, the load might be 5% on the first $25,000 invested, 3% on the next $75,000, and only 1% over $100,000. By spreading her accounts over so many fund companies she did not receive the full benefits of these lower loads from any of the companies. Therefore her total commission costs were much higher than otherwise would have been the case. Of course, her advisor benefited from these higher loads as his commissions were tied directly to them.
As promised I returned to the client with my report and recommended course of action, which included radical adjustment of her portfolio to meet her needs for income and substantially lower risk. I presented our fee-based asset management program as an alternative, based on it's objectives of protection of principal and income production.
At this point her son interjected and declared another financial advisor was unnecessary and instead, he would help her. (This from an individual who previously stated he had no specific financial expertise and had himself lost over 50% of his investments in the Bear Market).
We parted company on good terms but I could only wonder what would become of this fine woman who had done so many positive things throughout her life but was now dependent on the advice of an incompetent and unethical financial advisor, and a son who was well intentioned but as financially illiterate as she.
Annie's Story: Early Retirement Gone Bad
5/17/2007She retired young, 49 to be exact, and made the big move from the dreary rain soaked Northwest to the land of palm trees and eternal sunshine. But all was not well, and the consequences of misguided judgment would soon come home to roost.
Annie had been in banking for 30 years, most of those years at that same stuffy old bank. So when the retirement party came around, well, Annie was ready. She had already picked the area of Florida that would become her new hometown, and was ready to make the cross country trek and settle into her new community.
She had carefully developed her plan with the guidance and help of her financial advisor, an experienced veteran of nearly 20 years in the investment world. She was rolling over her 401k, stuffed with the accumulation of 30 years of labor and investment, to an IRA. It would be prudently managed by her advisor. Everything looked rosy. It was 1999. The first year went well. Annie settled in, busied herself with home and garden, met new friends, and rekindled her relationship with family members who had lived in the area for many years.
The first cracks in Annie's financial plan began to appear in less than two years. You see, Annie had no pension or other income so she relied on withdrawals from her new IRA rollover, worth well over one half million dollars when she retired. The plan was to draw income from the IRA at a fairly high rate until she reached age 62. She could then lower the IRA withdrawals because her income would be supplemented by social security retirement benefits. It sure looked good on paper.
But there was a huge flaw in the plan, and it began to show in 2001. The flaw was the financial plan did not account for a possible severe and long term 'Bear Market', and of course that's exactly what came to pass. This contributed to a very dangerous decline in Annie's account values, and a lot of sleepless nights for her as well.What had gone so wrong? Unfortunately for Annie it was the 'perfect storm' of events. First, we experienced a severe 2½ year market decline early in her retirement years. Contributing to the calamity was the decision, made jointly by Annie and her experienced advisor, that it was OK to withdraw 7% per year from her portfolio for income needs. This was not a prudent decision. And finally, there was no backup plan for Annie's long term financial protection in case something didn't work out as planned. This series of events resulted in Annie's account values being reduced from the original one half million plus to $374,000 by October 2002, which as it turned out, was the market bottom. And remember, this is the nest egg that must sustain Annie for another 30 plus years!
There is a happy ending to the story however. Annie's portfolio has recovered along with the markets recovery. But Annie's most important savior turns out to be a small business she bought in her new hometown. It captured her interest and she bought it more as a new endeavor to add to her life's' fulfillment rather than a money making plan. It doesn't produce a lot of income but it will go a long way toward providing a successful financial future for Annie. That's because the business includes a significant amount of real estate, and that real estate has appreciated in value a great deal over the last few years. When the time arrives the business and real estate can be converted to income producing vehicles like bonds, annuities, and mutual funds.
And what has become of Annie's financial advisor, the one who guided her down the path to near ruin? Well, I am that advisor, and through all the ups and downs Annie and I continue to maintain our relationship. We both learned valuable lessons from that experience, and I have used those lessons to become a better advisor; better able to help and serve my clients in ways that protect their financial interests throughout our journey together.
A Man is Not a Financial Plan
4/27/2007Do not rely on the man in your life, or the future man, to provide your financial security.
With the deck stacked against you in so many ways, you must form your own plan. For the litany of challenges you face, look at what the statistics say.
*On average women earn 25% less than men. *Women have smaller pensions and social security benefits. *Women, on average, live 10 to 15 years longer than men. *Almost 1 in 4 women is broke within two months of her husband's death. *The average age of widowhood is 56. *Over 75% of women are eventually widowed. *87% of the adults living in poverty are women. ***At some point in their lives 90% of women will be in charge of their own finances.
Now isn't that enough to make you sit up and take notice? All is not lost however. Now for the good news, again, based on a number of studies.
** Women tend to focus on the longer term. **Women tend to make fewer investment mistakes than men. **Women earn higher investment returns than men. *Women are starting new businesses at twice the rate of men.
So, what to do? The place to start is education, no matter your age. Educate yourself on investments, retirement planning, tax and estate planning, and all those areas that will help you become a better steward of your life situation. There are a myriad of good books and websites that will help you.
Do I mean you need to become a walking talking expert in all phases of financial planning? Not by a long shot, unless you want to. For most a good overview is sufficient. After all, financial planning and successful investing is not rocket science.
After a period of time you may feel proficient enough to do a great deal for yourself, or even all of it. Or you may feel the need to retain a professional(s) for a full time, full service engagement, a one time advisory session, or any number of ways in between.
The time to start is now, because you are not getting any younger, and life is not getting any cheaper. I am convinced that each of us, women especially for the reasons cited above, must take that proverbial old bull by the horns, or, the cow by the udder, (ouch), and take the necessary steps to provide a lifetime of financial freedom and security.
*WIFE: Women's Institute for Financial Education
**Oppenheimer Funds, 1992 Report - Women and Investing
***Business Week Investor December 1999
A Man Is Not a Financial Plan is a trademarked phrase and is used with permission of the non-profit Women's Institute for Financial Education (WIFE.org).
Ruth, My Friend and Mentor, In Memory
4/20/2007I write this letter today struggling with sadness, for we have lost a beloved member of our family. Dear, sweet Ruth, my friend, my client, my mentor, recently left us for another place, after 90 years of gracing us with her presence.
I met Ruth in 1983, all 4 feet ten inches and 95 pounds of her. She came to see me because she was retiring from her long career as a bookkeeper for a successful insurance agency in town.
Over the years we visited each other on a regular basis, on occasion even sharing a wonderful dinner or lunch she prepared at her home.
My most memorable moment, of which there were many, came during the time known as "Black Monday", October 19, 1987. That was the day the Dow Jones Industrials crashed, down over 500 points, from 2700 to 2200, all in one day! That would be the equivalent of a free fall in today of nearly 2800 points.
Even though I thought of myself as a grizzled veteran with my seven years of experience in financial services, I found out I was not experienced at all, nor was I prepared for this kind of event.
As I recall I spent most of the morning holding my head in my hands, but finally bucked up enough to do what I knew I had to do.
I picked up the phone and began calling my clients. My plan was to explain that which I did not understand, and reassure those who were almost certainly upset and concerned.
After a number of calls and conversations I finally came to Ruth, because alphabetically she was well down the list. She answered and I began my monologue, but about one minute into it she said, very sharply I might add, "Stephen, stop right there!"
Now the only person who ever called me Stephen was my mother, so naturally this stopped me in my tracks. Ruth went on to tell me she had experienced and lived through a great deal in her life, including the 'Great Depression', world war, the Communist and nuclear scare of the 1950's, massive demonstrations and protests in the 60's, political upheaval in the 70's and well, a little old stock market correction in the 1980's just was not about to unnerve her after the lifetime of events she had experienced.
We talked a bit more then I went on to call the rest of my clients, most certainly in a calmer frame of mind than before my conversation with Ruth.
I have thought about our talk many times since and have come to believe Ruth must have heard the fear and uncertainty in my voice and decided to give me some perspective, which I sorely needed.
I believe to this very day she helped me get over being pulled emotionally one way then another when the markets go into steep decline. I can not say I have overcome it completely, but she helped provide the perspective I so needed, and she unknowingly helped shape how I handle stock market declines, as well as the rest of the unexpected twists and turns in life. I will always be grateful for her wisdom, and her caring.
So now as I say goodbye to our Dear Ruth, although diminutive in stature, she will remain always, a giant in my heart.
11 Crucial Retirement Planning Mistakes, and How to Avoid Them
4/03/20071) Underestimating the effects of inflation: If you retire on $4,000 month today, in 15 years @ 3% inflation you will need $6,232 month just to stay even with the cost of living. Moral: Do not invest solely in fixed interest investments; build part of your portfolio with inflation hedges, i.e. mutual funds, exchange traded funds, real estate etc.
2) Not properly allocating your investments: Putting all your assets in fixed interest accounts runs the risk of falling behind the cost of living. (See above) Conversely, all your assets in inflation hedges puts your assets at risk of principal loss, at the time of your life you can least afford it. The Watchword here is Balance!
3) Underestimating the effects of taxes: Uncle Sam and his progeny (states, municipalities) continue to want their pound of flesh. Design your portfolio and strategies to keep them at bay. Potential Solutions include tax advantaged investments like mutual funds, exchange traded funds, tax-exempt bonds, real estate, annuities etc.
4) Underestimating your lifetime spending needs: The old rule of thumb was most people needed 60% to 75% of their pre-retirement income during retirement. Nothing could be further from the truth, unless your retirement highlights will consist of a regular diet of bean suppers and watching the grass grow.
5) Having unrealistic investment expectations: The 1970s taught us that the stock market does not go straight up always and forever, the 1980s taught us CDs don not pay 16% forever, and recent Bear Market helped us remember the stock market lesson we forgot from the 70s.
6) Underestimating time you will spend in retirement: Long gone are the days we retired to the rocking chair at 65 and to our final resting place at 68. We are routinely living through our eighties and even into our nineties, and that is a lot of years we must take care of ourselves. Solution: Make certain you design your retirement plan to pay you a quality of life income you cannot outlive.
7) Mismanaging your deferred assets: There is a time to use your tax deferred assets i.e. IRAs, 401ks, annuities etc., and a time to defer. And it is extremely important to understand the difference.
8) Failing to plan for unexpected illness: If not properly planned for a cataclysmic illness can decimate your nest egg, or at the very least leave you financially strapped for life. Solution: Be certain to carry sufficient insurance and employ available legal strategies to protect you and your family.
9) Failing to plan for life after retirement: Many so look forward to retirement they forget to consider just what it is they will do with all that free time. The time for plotting your new life course is before you retire!
10) Failing to plan for incapacitation or death: Either event can leave the family in a difficult situation. There are many solutions, but they must be implemented before they become necessary.
11) Choosing the wrong assets for generating income: The wrong choice(s) could cost a great deal of unnecessary tax, whittle away at your principal, or expose you to a high level of market risk. (See #1 and #2)
12) Choosing the wrong retirement plan payout options: Selecting the wrong option could leave a great deal of cash on the table, or a spouse financially strapped after the death of the pension owner. Possible solutions may include selecting a spousal benefit payout plan, or purchasing an insurance policy on the life of the pension owner, or some combination of both.
13) Investing haphazardly rather than prudently managing investment assets: Managing your assets in a prudent and formalized manner can lead to far superior results over the long term.
Prologue: Well, it turns out to be a bakers dozen, not to mention many I probably have not discussed! I could not help myself because another would come to mind as I went along. In my 26 year career I have seen every one of these mistakes made by many, many people. My job, and my hope, is to provide guidance to all those I can so mistakes can be avoided. Your long term retirement should be a fulfilling and rewarding journey, with no concern or worries of financial shortfalls or setbacks.
Yes Virginia, Women Do Live Too Long
3/20/2007Yes, it is true, women live too long. The numbers say the average lifespan of women is 79, whereas for men it is 72. Why do I say women live too long? It is due to the very real risk of a reduced standard of living in a her later years.
Consider the following facts. On average women still earn less than men. Women have smaller pensions and social security benefits than men. The average age of widowhood is 56. Approximately 75% of women are eventually widowed. 87% of the adults living in poverty are women. (Statistics from WIFE, the Womens Institute for Financial Education)
On the other hand, there is some good news. Women tend to be better investors than men, and this fact could greatly aid them during their lifetimes. Hmm, could that have something to do with women finding it easier than men to ask for directions?
In my 26 years as an investment advisor, and with a large number of single women as clients, my observation is it is also because women tend to be more security conscious than men. This security consciousness begins early and holds true for a lifetime. In addition, women tend to focus on the longer term, and make fewer investment mistakes than men.
So, where does all this leave us? Based on the longevity of women, indeed, women and men alike, it is certainly in our interests to provide sufficient sources of income to carry us comfortably through our seventies, eighties, nineties, and even beyond. The question is, how?
Social security will be one part of the answer for most, although we may have to face the likelihood of diminished benefits at some point in the future. Pensions are an additional part of the equation, although pensions are fast disappearing for much of the work force. This leaves it up to the third leg of the income puzzle, our own investment nest egg.
A solution we have used for many years on behalf of our clients is to divide the investment nest egg into a number of parts, based on an individuals age, financial needs, amount of assets available, etc.
The next step is to determine the amount of supplemental income required to fund the desired lifestyle. Then, place enough of the nest egg into a monthly income annuity, designed to pay the amount required for her lifetime, and the spouses lifetime, if applicable. Why an income annuity? Because it is the only investment I am aware of that will pay a lifetime income, no matter how long the recipient may live.
But what about inflation? To answer that challenge we place the remainder of the nest egg into an investment portfolio composed of what we call "All Weather" mutual funds, the term all weather meaning lower volatility funds that have a long term record of consistent, year in year out performance, and that withstand declining markets exceptionally well. Those kinds of funds are not in abundance, but they can be found. Why mutual funds? Because they can be a simple, low cost yet effective way to manage your portfolio.
When the need arises for additional income, as it most surely will, we then take a portion from the mutual fund portfolio, which presumably has been growing in value for a period of time, place this into another lifetime income annuity, and the process is repeated.
We can slice and dice this process in any number of ways, but the above is a big picture view of the challenge, and potential solution, to living long, and living well.
How To Tame The Big Bad Bear
3/13/2007Is the next "Bear Market" just around the corner? Was the recent market correction a harbinger of things to come? No one can know the answer to these questions, but there are a number of steps each of us can take to prepare for the next Bear which, sooner or later, is surely on the way.
The preparation should begin now, whether you are a new investor, or have already amassed a sizeable portfolio. The objective is to protect it from the ravages of the bear as it emerges from its four year slumber.
The first step is to evaluate yourself, your financial objectives, and your emotional and psychological tolerance for risk, (your account values going south in a hurry), and invest accordingly. Investing accordingly simply means building a portfolio that reflects your risk tolerance and financial objectives. If you are a relatively conservative investor then your portfolio should reflect that, whereas if you are a bona fide risk taker, then your portfolio will be designed to reach for higher returns.
Next, build a portfolio from the ground up, much like you would build your home. For example, our strategy is to build portfolios with a solid foundation of consistently performing hybrid mutual funds. Hybrids are funds composed of stocks and bonds, and the ones we use have demonstrated consistent performance over a number of years, in both good markets and bad.
Next, we layer the portfolio with a healthy dose of what we call "All Weather" stock funds, again, funds that have performed well in Bull and Bear markets. These funds tend to practice a value management strategy, buying under priced stocks in the marketplace. Many of these funds exhibit strategies similar to legendary manager Warren Buffet, the worlds most well known and respected value strategist.
The preceding describes how we build portfolios for the more conservative investor, whereas additional steps are taken for those willing and able to accept a higher degree of risk.
For those able to accept the additional risks involved, we seek to add value and capture the best performing market sectors by adding Exchange Traded Funds (ETFs) to the portfolio. These ETFs cover the range of economic sectors, i.e. energy, metals, real estate, health care, utilities etc., and/or regions of the world, i.e. Asia, Europe, Latin America, and even individual nations, Japan, Spain, Germany, China etc.
And finally, an additional technique that can be used by everyone is the "contrarian" fund. They come in many flavors but the two we use are the contrarian mutual funds and exchange traded funds. Contrarian funds are designed to do the opposite of what the market is doing. In actual practice we will buy this type of fund when a serious market correction is underway, which allows us to protect the value of the portfolio. Our "All Weather" funds described above tend to give ground grudgingly, and some have even gone up in past market corrections, while at the same time our contrarian funds are actually going up in value during the market decline, as they are designed to do. The objective is to be able to hold our investments through the correction and protect our capital at the same time.
Every situation is unique of course, and each investment portfolio should be compatible with ones own goals, financial needs, and risk tolerance.
Above all, never forget the two most important rules of successful investing. One, never ever suffer large losses, and two, never forget rule number one.
