May 12th, 2008 10:02am
Amy Barrett
Amy L. Barrett, MBA, CFA, CFP®, CDFA™
A previous blog dated March 5th provided a short risk tolerance questionnaire to help you, the investor, select a personal and appropriate level of stocks-to-bonds in your investment portfolio. With the right amount of investment risk (stock-to-bond ratio), you can withstand tough times — like current markets — without selling your investments. Armed with the knowledge of your risk tolerance, your next step in order to achieve a solid investment plan is to choose the stocks, bonds, and other assets to fill your portfolio. But, how do you choose your assets? If you are like most of our prospects, your investments are “all over the place” meaning that they are a hodge-podge of investments. Investors often collect assets without a thought of their overall strategy. Ideally, investors should purchase assets so that the portfolio may meet their life goals.
There are two investment philosophies, active and passive investing, that lead to different methods of building a portfolio. Active investors bet that they can pick the best stocks and funds plus they can “time the market” (buy when the market is low and sell when the market is high). Active investors believe their ability to select stocks and “time the market” will allow them to outperform all other investors. On the other hand, passive investing involves buying broadly diversified investment baskets - a broad variety of investments. Passive investors believe that their stock picking ability and market timing are not superior to the average investor’s ability. In fact, passive investors believe they have no more knowledge than average investors do. Though this view is not flattering, the fact is that passive investors routinely get better results than active investors do. A recent Savant analysis found that 70% of the large cap mutual funds (existing for ten years) had lower return than the S&P 500 Index return. After the investors pay taxes (which reduce return), perhaps 80% would fail to beat the index return. These funds fail because most fund managers are not superior at stock selection or market timing. Active investors may win for a while, but consistently winning over a long period of time is nearly impossible.
May 5th, 2008 07:40am
Dick Bennett
Richard A. Bennett, CFP®, CFSC, AIF®
Now that we have put the 2007 income tax year behind us, we need to start planning for 2008. In 2008, there is likely (unless the lawmakers change the legislation) to be an attractive tax break for individuals in the 10% or 15% tax brackets. That break involves the tax rate for capital gains dropping from 5% to 0% for the tax years 2008, 2009 and 2010 for people in those brackets. Thus, retired individuals or others who do not have income levels may be able to sell appreciated securities and pay 0 taxes on some capital gains. This break may allow individuals to diversify there portfolio or generate extra cash for special needs. A good article which discusses the tax break can be found http://www.nysscpa.org/cpajournal/2006/1206/essentials/p40.htm.
May 2nd, 2008 02:46pm
Tom Muldowney
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
Well-meaning, but financially strapped folks, usually have the best of intentions. I have no challenge to those of us who periodically go through periods of financial drought. So, from time to time a hand- made birthday card of tissue and paper clips may be entirely appropriate, and is truly appreciated. But, for lots of us, as we grow older and gain more responsibilities, our standard of living goes up too. This means that, in general, we make more money as we grow older. As our standard of living goes up, it is fair that the comment “it’s the thought that counts” should probably go away.
Suppose you bought a car that didn’t work as promised. Would you be content if the sales consultant simply said, sorry, but at least I meant well, after all, “it’s the thought that counts.” Suppose that the brand new house that you just built had drafty windows, poor heating, a leaky roof, and bad plumbing. Would you be content if your builder said “I meant well, after all it’s the thought that counts.”
How about this…suppose you made it to your 50th wedding anniversary. Would your wife be thrilled with an anniversary “toaster” as long as you just said “Honey, it’s the thought that counts.” (If you survive, there is good news…you won’t have to worry about a 51st anniversary present!)
How far can this go? Well imagine your own response if your investments did not grow as planned. Your retirement might be delayed. You would receive less in retirement income every year for the rest of your life. It could be worse. It could be both. If you have less in retirement cash flow, you could, at least, justify it by saying “I intended to do better.” You can say the same thing for every vacation that you don’t get to take, or every trip with the grandchildren that you give up. After all, you can say to yourself, “I meant to save expenses and it is the thought that counts.”
Some folks manage their own investments (or in their own words, they ‘play the stock market’). After all, there is a whole series of no-load investment funds out there and it is easy, just sign your name and send in the money. These folks usually only tell us about their winners. This allows them to sweep the losers into the dust bin of “experience” and avoid keeping score. They never know if they gave up investment returns or paid unusual costs. In fact, most people don’t know the real costs. They may know that a trade only costs them $7 on the newest internet trading platform. They are usually unaware of the costs of bad timing or wrong stock picks or poor returns. Actually there is a whole dictionary of costs that most investors overlook. So, by itself, the $7 buck trade looks pretty cheap. But the costs of doing it yourself may be borne by you for the duration of your retirement.
There are some things that most of us want done well. A car that works as promised is a good enough treat. A piece of fancy jewelry would probably work a lot better as a gift for your 50th wedding anniversary. Come to think of it, I really like plumbing that works, too!
Consider this for your investments, too. Making sure that they actually work as promised is a lot better than hearing your investment broker say “Sorry. You could have done better, but it’s the thought that counts.”
Good luck and may all your financial endeavors be successful.
May 1st, 2008 02:47pm
Dick Bennett
Richard A. Bennett, CFSC, CFP®, AIF®
On Thursday, May 8th, Savant Capital Management, Inc. has the pleasure of presenting Burton Malkiel, Ph.D. at its next Wise Wealth Forum event. Dr. Malkiel, a professor of economics at Princeton University, was one of the leaders in the development of the Efficient Market Hypothesis. This concept indicates that markets process all the know information about securities causing the security prices to fairly reflect the true value of the entity. Dr. Malkiel’s book, A Random Walk Down Wall Street, has sold over 1 million copies and is in its ninth edition. Dr. Malkiel also has a new book entitled From Wall Street to the Great Wall. This book discusses how investors can benefit from China’s booming economy.
Dr. Malkiel will be presenting key concepts from both books. A book signing will follow the event. If you would like to attend, the event will be at 7:00 pm on May 8th at Giovanni’s Restaurant in Rockford. Please call Savant to make a reservation at (815) 227-0300 or email us your RSVP at rsvpRockford@savantcapital.com. Reservations for the event are required.
April 28th, 2008 09:50am
Tom Muldowney
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
A learned professor was hiking through the mountains. Pondering as he walked, he glanced skyward just in time to see a majestic eagle drop a small snake from its talons. The snake was hurt badly when it fell on the rocks.
The professor, moved with pity, picked up the snake and put him in his knapsack, took him home and excitedly nursed him back to good health.
The professor was so fascinated with his ward that he took him wherever and whenever he hiked. One day while walking through the mountains, he reached in to his knapsack intending to release the snake back to the wild, when at once, the snake bit him poisoning him with his venom. The professor asked him “Why did you bite me?” As the snake slithered away into the rocks, the professor laid there dying. On reflection, he said “I shouldn’t have been surprised, after all, you are a snake and this is in your nature.”
The season of winter comes as surely as do the other seasons, every year. Winter includes shivering cold, snow shoveling, drifts, and slippery roads. But winter also brings some benefits for some folks. Some folks earn their living in the winter. The snow plowing crews come to mind. The cold and the snow do allow us to snowmobile, ski, toboggan, and sled. We can make snowmen and snow angels. And, let’s admit it, when the snow is fresh and the ground is covered with a blanket of snow, the landscape is truly beautiful.
Just as seasonally, after winter comes spring. This year, when it arrived, temperatures were in the mid-70o’s, with lots of sun and balmy spring breezes. Spring means the daffodils are up and the trees are in bud.
Just when we took off our jackets we were shocked back to reality when the temperature dropped enough to give us snow flurries. We shivered and asked, “what happened here?” and “I am so tired of winter” and “I worry whether summer will ever get here.” It can and does still get cold in April. This is no surprise. After all, it is spring and it is April. Cold or snow are not out of the ordinary nor are they totally unexpected. This is the way that the seasons work. It is in their nature.
In the scheme of things financial, we need cash to meet our living needs. “Cash” ranks up there with oxygen. In order to get that cash to meet our living needs, we have two choices, “It is either man at work or it is money at work.” The simplicity of money at work is that it works 24-7 through our investment portfolios. With a well constructed investment portfolio, we can reasonably rely on a long term rate of return (ROR) in the range of nine to ten percent. After inflation and taxes, we need about 9% to 10% just to cover our living needs. Investments work! This is because people who place their capital into investments, do so because they demand a rate of return on their investment. It is in their nature!
It is the business cycle that drives the financial markets and short term rates of return. Also, one must note, that there is a difference between short term returns and long term returns. In the short term, RORs can swing wildly from very high highs to very low lows…sometimes so low, they’re negative. No surprise, after all, it is in the nature of businesses to go through cycles.
The negative part of the business cycle is usually only short enough to let the market fix things that went wrong during the early stages of that business cycle. When the dot-coms went crazy, it was followed by a market correction. Real state recently went through a similar boom. It was followed by a Real estate crash and collaterally with it, a mortgage crash. Frankly, if a bank lends money to someone who can’t pay it back, you (and especially the banks) shouldn’t be surprised when the borrowers walk away from their mortgage. A crash is our collective way of saying “ ‘whoa’…you’ve been making some silly decisions lately…” All corrections are part of the cycle. It is in their nature.
Back to the professor and his snake: After his unbridled enthusiasm, the professor realized the nature of the snake, and after the winter we realize that the weather in spring can have wild temperature swings. So too with the market, it goes through these clumsy parts of the cycle.
While we can certainly commiserate over the negative returns, we cannot be surprised that they’re a part of the cycle. The good news is this: better days are coming. Warm sunny days are ahead and strong market returns are ahead. After all, for the market, strong returns are in its nature!
Good luck and may all your financial endeavors be successful.
April 24th, 2008 04:03pm
Tom Muldowney
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
You probably heard this old adage from your mom. I think that the best financial advice comes from mom and has done so through out the ages. “Don’t put all your eggs in one basket” (diversify), and “buy things when they are on sale” (buy low/sell high) come directly to mind.
Well my mom admonished my frequent impatience…she said, “a watched pot never boils.” She was right. If you put water on the stove, and you stand there waiting for it to boil so you can make your tea, it seems to take forever. So to make it feel like we’ve speeded up the process, you may consider putting the pot of water on the stove, then doing a short task, like throwing in a load of laundry, after you have put in the laundry, the water is ready for the tea. This doesn’t make the water boil any faster, it just seems like it does. (And now you know who does the laundry at my house.)
Whenever and whatever we watch, if we watch with impatience, it never seems to happen. Consider trying to lose weight…If you step on the scale every few hours, you’ll probably be frustrated. If you place a hot fudge sundae in front of you after dinner, you’ll easily rationalize away the 600 calories. You’ll say to yourself “I’ll work it off later on!” You will actually get a moment of joy, but you probably won’t lose any weight either. In combination, watching the scale and eating the hot fudge sundae are hurtful. You’ll already feel bad AND you’ll do the exact opposite of what you are supposed to do…(push that sundae away!). Don’t do the things that make your weight loss seem longer, and by golly, don’t do things that are going to frustrate your long term plans to lose weight.
You have heard the old aphorism that ‘something’ is ‘so boring, it’s like watching paint dry.’ Building a successful portfolio of retirement assets is even more boring, it’s like watching paint fade.
Over the past 82 years the broad market (largest 500 stocks) has grown by 10.4%. You have also probably heard that if, over the past 82 years, you had missed the top ten days OR the top ten months, that you would have significantly under-performed the market by as much as half. What is often not discussed in those ‘big gainer months’ is that the top ten days are usually preceded by the ten worst days (or months). This “worst” followed by the “best” pattern of days is why the market is referred to as volatile. It is also, why you shouldn’t watch!
Recent psychology studies, in behavioral finance, have also shown us that losses feel twice as bad as gains feel good. That means that even though the worst days are followed by better days, we still feel worse for the wear even after we have made up for the losses that we endured.
So, what can we learn from this? If we look at it over the long run, we can have confidence that the market produces returns that are positive and in the range of 10% but only if we have the patience to tolerate the worst days mixed with the best days.Your action steps are contained herein: First, just like losing weight, don’t look every moment of every day…it won’t speed up the returns at all. But it will seem to make the volatility a bit easier to tolerate Secondly, if you don’t look every day, you’ll be less inclined to take impulsive actions, like selling off in a panic or trying to time the sell outs with the buy backs. Over the long run, in spite of the rapid declines followed by the rapid gains, you’ be entitled to receive that long term rate of return. Building that successful portfolio is like losing weight. Don’t watch the scale every day and don’t watch the market every day. Create a strategy, write it down and execute the strategy faithfully. When things do not seem to be going your way, refer to the plan that you wrote down. You’ll be less inclined to make hasty, harmful decisions!
May all your financial endeavors be successful.
April 21st, 2008 01:21pm
Tom Muldowney
Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF®
For certain things, one is not only enough, one is all that you should have….my wife of 36 years reminds me of this regularly!
On the other hand, you have probably heard the old yarn about the mountain hiker who lost his balance and fell off of a cliff only to land in a small tree on the side of the mountain. He prayed “Dear God, please save me.” He was surprised when he heard a booming voice come out of the sky. He was most curious when the voice said, “Trust me. Let go. I’ll bring you down to safety.” It was at that time that the climber looked up toward heaven and asked aloud; “Is there anyone else up there?” It is easy to see that our climber would have at least felt a little bit more secure if he had heard another voice or saw a rope coming down from heaven.
For much of the rest of our experiences, we can find that there’s safety in numbers.
Consider a chain. A single link, as strong as it may be, cannot tether an elephant. Nor could you hoist an engine, or ride a bicycle with a single link.
The joy of a youngster swinging on a swing could not be arranged with a single strand of cord. A basketball game cannot be played with only a single player and a good poker game needs 52 cards with five or six players.
Even the insurance that we buy to protect our families could not be sustained if there were only one insured person. The insurance company needs thousands and thousands of lives on which to calculate the risks and to spread the costs. It is with the arrangement of these large numbers of individual units, that we find safety.
The same is true for wise portfolio construction.
You cannot build a safe portfolio with all of your investment money wrapped up in a single stock. Recent history brings to memory the stories of people who lost their retirement security, seemingly overnight, because they invested in just “Enron,” or just “Worldcom”, and more recently just “Bear Stearns.”
So where does this safety come from? In the domestic investment world, you can invest in a
US mutual fund that has hundreds of US stocks. For a bit more safety, you can invest in an index fund which has thousands of US stocks. For a handful of you readers, you might be a bit skeptical about investments in our
US economy. It has not behaved very well lately! This gives you the chance to invest in the companies of other nations…after all, you use Nestle Chocolate (Switzerland) in your milk, BP Amoco Oil (United Kingdom), Bayer aspirin (
Germany). You drive in your Volvo (Sweden) after talking on your Nokia cell phone (
Finland). You are already an international customer, so why not apply this lesson to your portfolio?
For investing, consider the incremental safety if you invest in more funds, including an international flavor. Now you can add Europe to the mix, then the Pacific Rim, then emerging markets like China, India, Korea, and many, many others. Pretty soon, your investments will include thousands of companies in hundreds of cities in hundreds of nations.
There is clearly safety in numbers…at the first level within an investment fund and secondly with the ability to invest internationally.
The lesson contained herein is easy enough… While you have the ability to concentrate your investments in a single company, or a single fund, or a single country, you give up a bit because of the potential for risk…that is, something to go wrong. A diversified collection of investment funds in a vast array of companies spread out over every free market nation in the world can be woven to provide your own financial safety net.
Your mom was right. Don’t put all of your eggs in one basket! There’s safety in those numbers.
April 18th, 2008 08:31am
Scott K. Laue
Scott K. Laue, J.D., CRPS
It’s not going to happen to me.
Medicare or my health insurance will take care of it.
My children will look after me.
America as a nation is aging rapidly and many people avoid thinking about the day when they or a loved one will need long-term care services and therefore fail to plan. Long-term care refers to the many services beyond medical care and nursing care used by people who have disabilities or long-lasting illnesses. Long-term care insurance helps pay for these services, which can be very expensive, thus protecting the assets you’ve accumulated during your lifetime.
The U.S. Department of Health and Human Services estimates that about 40% of people ages 65 and older have at least a 50% lifetime risk of entering a nursing home. At a time when the average cost of a private room at a nursing home tops $74,000 a year, long-term care insurance can be a solid investment for individuals who have assets they want to protect or who want to avoid becoming a financial burden to their family. Unlike other types of insurance, long-term care policies are complex and vary widely. Virtually every company’s policy differs on such matters as who qualifies for coverage, when the policyholder can begin receiving benefits, the amount of coverage, the term of the policy, and premium costs.
Long-term care insurance typically covers the cost of:
- Help in your home with daily activities like bathing, dressing, eating, and cleaning.
- Community programs such as adult day care.
- Assisted living services that are provided in a special residential setting other than your own home. These services may include meals, health monitoring, and help with daily activities.
- Visiting nurses.
- Care in a nursing home.
The best time to buy long-term care insurance may be middle-age (age 50-62). It’s the time when you have the highest likelihood of being eligible for a policy and just as important, when premium costs are lower.
Long-term care insurance is probably not for everyone, but with soaring health care costs, insurers increasingly restricting coverage and eligibility, and people’s need to stretch retirement savings through more years, it’s a good idea to consider it seriously. Your goals should be to protect your assets, minimize your dependence on other family members, and control where and how you receive long-term care services.
April 16th, 2008 08:42am
Scott K. Laue
Scott K. Laue, J.D., CRPS
I’m sure way back in my Economics and Finance 101 classes (pre Euro implementation) my professors espoused with great vigor the academia perspective of what currency fluctuations would mean to the United States and world economies. My response to this lecture was to thank them for the short nap. Fast forward to today’s nightly news and the constant comments regarding the weakening dollar and I wish I would have paid a little more attention.
So what does all this potentially mean for the U.S. Economy and specifically you? The quick answer is that since there are two sides to every coin (no pun intended) a weak currency has both its advantages and disadvantages.
The terms strong and weak, rising and falling, strengthening and weakening are relative terms in the world of foreign exchanges indicating a change in position from a previous level. When the dollar is weakening, its value is dropping in relation to one or more currencies, and will thus buy less units of a foreign currency than previously.
Benefits of a Weaker Dollar
- Increased Exports – U.S. companies find it easier to compete with foreign- made goods and have the ability to raise their prices accordingly. This translates into higher margins, more domestic jobs, and increased consumer spending.
- Foreign Investment - Foreigners flush with cash find relative bargains in the U.S. equity, bond, and real estate markets. These inflows help support the financial and housing markets.
- Increased Tourism –Tourism represents a big part of the U.S. economy and a weaker dollar means that more foreign tourists can afford to visit Midway
Village. More tourism is always good for the economy.
Disadvantages of a Weaker Dollar
- Foreign Goods Cost More – It takes more dollars to purchase the same amount of foreign currency so the Canadian drugs or the Toyota Camry is now more expensive.
- Typically Higher Inflation – As the prices of goods rise (think imported oil) these higher costs eventually translate into inflation.
- Foreign Travel More Expensive – That long awaited trip to Europe or Australia will now cost you more, not because you have a nicer room, but simply due to the currency exchange rate.
The above examples indicate why the currency fluctuation of the dollar is important to all of us, whether it’s our employer who is exporting goods overseas, our weekly trip to Target, or the all important jaunt to our travel agent. Happy travels.
April 14th, 2008 02:02pm
Scott K. Laue
Scott K. Laue, J.D., CRPS
Starting in May, the Treasury will begin sending “economic stimulus payments,” also known as checks, to more than 130 million households ($53,300,000 in postage? – ouch). The good news is that the money is not taxable and will not reduce your 2007 or 2008 refund or increase the amount you owe when you file your 2008 return. So yes, the tax man in this case is truly only going to giveth!! So what’s the catch? Before you succumb to the numerous business marketing plans being developed, make sure you are eligible before starting your individual stimulus program.
Eligibility – The vast majority of people who file a 2007 income tax return qualify. You need a valid social security number, can’t be claimed as a dependent on another’s tax return, and have “qualifying income” of at least $3,000. Qualifying income includes any combination of earned income and certain benefits from Social Security. Dividends, interest, and capital gains income is not included when determining qualifying income.
Income Limitations – The stimulus payment, both the basic component and the additional funds for qualifying children, begins to phase out for individuals with adjusted gross income (AGI) over $75,000 and married couples filing a joint return with AGI over $150,000. The combined payment is reduced by 5% of the income over the AGI thresholds.
How Much – The actual amount depends on information provided on your tax return, thus the requirement to file. Eligible individuals will receive between $300 and $600 and eligible joint filers between $600 and $1,200. Those with children under age 17 as of December 31, 2007 may receive an additional $300 for each qualifying child.
When – If you filed your tax return and elected the direct deposit option, payments will be electronically deposited to your bank account starting May 2nd. Paper checks will be mailed starting May 16th. The exact timing will be determined by the last two-digits of your social security number.
The IRS.gov website is the best source for additional information and answers to questions regarding the stimulus payments.
Be aware that identity thieves are already pushing scams involving the stimulus payments. As always, do not give out your social security number, bank account, or financial information to anyone you don’t know.
Good luck developing your spending plan in accordance with the spirit of our government’s generosity …but remember, it’s not a bad idea to save a portion for that proverbial rainy day.
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Amy L. Barrett, MBA, CFA, CFP®, CDFA™
