Death and Higher Taxes?

Occasionally I come across something in my industry that can only be the portent of bad things to come.  Consider this excerpt from an email I received from my brokerage house:

As you may know, brokerage firms will be required to report to the IRS detailed cost basis, gain and loss, holding period and other tax information for the disposition of clients’ covered securities – i.e., stocks acquired on or after January 1, 2011. [Emphasis added]

In a moment, I will flesh out what this means and why it is an ominous sign, but first I want to emphasize two points:

1. That the custodians of your investment assets are now REQUIRED to be functionaries of the IRS; and
2. That, at least in the case of my brokerage house, this is being applied to QUALIFIED as well as non-qualified accounts (more on this in a minute).

The practice up to this point in time is that people who bought and sold securities in non-retirement accounts were required to keep track of the purchase price, purchase date, sales price and sales date of the securities in their portfolio.  They also had to declare their capital gains or losses on their tax returns upon the disposition of those securities.  One could argue the reasonableness (or unreasonableness) of capital gains taxes, but those were the rules.

But these rules did not reach to qualified (retirement) accounts, because when people took distributions from those accounts, they were not subject to capital gains taxes, but to income taxes.  Yes, there were built up "gains" in these accounts, but since the securities were always sold before any cash distributions and since income tax rates were higher than cap gains rates, the government happily assessed the distributions at income tax rates.

It appears now that the government may be setting up the system by which they collect both capital gains and income taxes on qualified (retirement) accounts.  Why else would they require custodians to report "detailed cost basis information" on these accounts?  This may be the first stages of the planned changes to retirement account taxation that I wrote about earlier in this blog.

I think Mr. Franklin's quote might more properly have been: "The only thing certain in life are death and HIGHER taxes."  Especially when a government goes about spending its people into a multi-trillion dollar debt notwithstanding the objections of all sane economists and the majority of the people. 

So what is there to do?  Well everyone needs to speak to their financial advisor or CPA to determine the immediate financial moves to consider.  But, in truth, the greater issue is reigning in a government that has clearly stopped trying to "establish justice...and secure the blessings of liberty" for us and has become one that perpetuates the gravest injustices and destroys our liberty.  Sooner rather than later, we better all stand up and say ENOUGH!

The Best Investment In The World...Isn't One

Let me say from the front end that I am not going to fully explain that cryptic title in this article.  For the full explanation of it you will have to agree to two things: First, to read a book that I will provide to you, and second, to sit down with me and allow me to explain what you must do to take advantage of the best investment in the world.  This article is simply meant to demonstrate the findings of my years of research into this issue and to accelerate your arrival at the same conclusion.  

    So what issue am I addressing anyway?  For what problem am I promising you the “best” solution?

    There are two answers to that question.  The first answer is helping you determine the best place to store (invest) your money.  

    The second answer is more complex, but describes the mental processes that I have gone through over my years of examining the financial services arena.  If people were only concerned about the return on their investment, the answer to the above question would be the highest yielding investment.  However, my experience has shown me that people are actually concerned about many more things than just the return on their investments.  Some of these concerns are whether the money is liquid or not, whether or not there is a risk of loss, whether or not there are tax implications to the investments, whether these assets are subject to loss through lawsuits and how much control they have (or don’t have) over the assets.  If these concerns have ever crossed your mind, then you have an idea of what the real issue is.  Perhaps it can be summed up like this:  Is there a place where I can invest my money that alleviates all or most of my concerns as well as the pitfalls of other investments?

Past Results Are No Guarantee of Future Returns

    The “Past Results” disclaimer is on every piece of investment literature you see.  What it is really saying is that despite the rosy picture we have drawn showing the market generally proceeding upward, it is possible that we could be wrong and that the market could go down and you could lose it all.  Not a very comfortable thought is it?  And even if you don’t “lose it all,” what if you are the unlucky soul who is slated to retire the same year that the market has a major correction of say 40-60 percent?  Could you retire then?

    Most people that I advise simply ignore this fear.  It is not that they don’t recognize the potential of the market working against them, they just assume that nothing is guaranteed and that the market is as good a place as any to risk it.  Actually, that is how most “professionals” sell market investments!

    Try this experiment: Go into your financial advisor or stock broker’s office and say, “Which of my portfolio holdings has a guaranteed return?”  The advisor will quickly put his finger to his lips, give you a loud SHHH and tell you, “We don’t use that word around here!”
    What if you could get an investment with a guaranteed return?  Would you prefer that investment over the riskier one?  Better yet, what if you could guarantee the rate of return too?  Is there such an animal?

Your Silent Partner

    No, your financial advisor can’t guarantee your returns, but he can promise to get the government out of your pocket…for now.  It’s called qualified money, but you probably know it by the more common names: IRAs, Roth IRAs, 401(k)s, Simples, SEPs, and a host of other tax-privileged investment vehicles.  

    Here’s the pitch: Invest your money in one of these programs and the earnings are not taxed as income (some even give you the added benefit of excluding the contributions from your taxable income).  Then after year one, your contributions plus the earnings grow even more (compounding) without tax again etc. etc. etc.  Usually these pitches are accompanied by beautiful graphs showing you the difference between this tax-deferred growth and the growth of a taxable (non-qualified) fund.  

    It’s a no-brainer.  You feel so good about beating the tax-burdened investments and getting one over on the government that you sign right up.  You’ve already forgotten that the return is not guaranteed.  In fact, the beautiful graphs that depict the growth of your investments use what are called “assumptions.”  Maybe you’ve heard the old adage about what happens when you assume…Ah, who cares, those graphs sure were impressive!

    Then you learn the price you pay for tax deferral.  For the wonderful benefit of not being taxed on your earnings, you get a host of federal legislation telling you when and how you can use the money.  First, there are limits to how much you can invest in these programs.  Next, there are taxes and penalties for early withdrawal (i.e. use) of the money.    Also, you may move the money, but it must always remain in a qualified plan and in the care of a qualified custodian.  Finally, the money can’t stay (and grow) in there forever.  You must take a “minimum required distribution” at age 70½ regardless of your need or desire or tax circumstances.  Say hello to your silent partner, the IRS.

    I can hear all the advisors out there right now criticizing me: “Oh, but the government is liberalizing the rules regarding early use of qualified money.”  But they just don’t get it.  What I find repugnant about this whole scheme is not how stingy (or generous) they are in their regulations, but the very idea of anyone telling me how to use my savings.

    Most people that I talk to want to be able to get to their money, even their retirement money, if they need to and they are not interested in paying taxes and penalties to do so.  Now as a financial advisor I should strive to find an investment choice that would provide that option without losing the benefits of tax deferral.  Is that possible?  

Two Taxing Problems

    Why wouldn’t it be possible?  I thought we lived in the land of the free!  If such an investment doesn’t exist, why couldn’t we create it tomorrow?  In fact, why couldn’t we create an investment vehicle that would have every attribute we wanted?  Just saying that sounds revolutionary!

    Therein lies the first taxing problem: getting people, investors and advisors, to think outside the box.  The limited choices being offered to the investing public are not due to a lack of options, but rather to a lack of thinking, a lack of knowledge.  The answers are there if you know what you are looking for.

    So let’s describe the best investment in the world.  We’ll start with the characteristics already discussed.  We want:

·    A guaranteed return
·    At a rate we specify
·    With tax deferral
·    Not susceptible to lawsuits
·    But, without losing our control over the assets
·    And maintaining liquidity

    Bring this list of features to most financial advisors and they will laugh at your outlandishness then tell you that you can’t have it all.  So which ones are you willing to sacrifice?

    My answer is none.  In fact, I would add another feature.  I want tax free income from my investments when I retire.  Can I get that too?  

    This is the second “taxing” problem.  It arises from another assumption made by financial advisors, namely that retirees will be in a lower income tax bracket when they retire so they will not mind paying taxes on their portfolio income.  There are two problems with this reasoning.  First, my experience is that many retirees are not in lower income tax brackets.  And second, everyone I know would prefer NOT to pay taxes or lower them if they can legally do so.  Is this a surprise to anyone?

The Best Investment in the World

    The best investment in the world does exist, but it isn’t one.  Sorry, but I told you I wasn’t going to explain that statement.  What I will tell you is that you can have the best investment in the world.  All that is required is a change of thinking, a change of doing and a commitment to achieve it.

When It Pays To Hire A Financial Advisor...And The Good They Do

Recently in a piece written for Morningstar.com, Christine Benz had this to say about "When It Pays to Hire A Financial Professional":

Paying a financial planner an ongoing fee to handle every aspect of your financial plan can make sense if you're extremely time-pressed or if your finances are particularly complicated. Ditto if you're very rich. Paying for ongoing financial advice (and hand-holding) may also be worth it if you've had trouble sticking with your investment plan through the market's ups and downs. The best advisors earn their keep many times over by saving investors from their own worst tendencies to buy high and sell low.

For most other investors, however, I'd argue that it's not that difficult to create a sensible investment plan on your own...


Now how she can list those four conditions when it is appropriate to hire an advisor and then conclude that "most...investors" can do it "on [their] own" is just mind-boggling to me. So ask yourself:

1. Are you time-pressed?
2. Are your finances particularly complicated? (Before you answer, consider the state of the economy too.)
3. Are you very rich? (She seems to think that already having acquired lots of riches is a sign that you need an advisor. I would argue that one's inability to continually increase their wealth would be an indicator that they need an advisor.)
4. Have you had trouble sticking with your investment plan?

Again, does anybody not fall into one of these four categories? And when you consider the loads of BAD information that parades around as sound investment advice, it's a wonder that we haven't all been reduced to abject poverty...but stay tuned for that!

So what is the answer? Should you hire an investment professional? And what should you expect to receive for the money you pay?

In an earlier post, I recounted for you some things to expect from your financial advisor. These are the "goods" that an advisor offers and it is derived primarily from education, experience, expertise and sound reasoning. Intangible? Yes. Valuable? Without a doubt.

But is there anything tangible, more akin to a product, that you get from working with an advisor. Well, I don't know about every other advisor in the world, but here are some of the "products" that I provide to my clients:

• A proprietary system (called the Financial Report Card) that grades one's financial health and monitors economic growth.
• Professional money management with monthly monitoring and quarterly evaluation and reporting.
• Monthly reviews of all funds that hold clients' money and a determination whether or not those funds should be retained.
• Quarterly emailed report of your account holdings, asset allocation and fund changes.
• Partnership with a full-service custodial firm that provides my clients access to over 14,000 funds and alternative investments.
• True diversification through my proprietary "Personal Wealth Analysis"
• Help establishing the "The Best Investment In the World..."

But if we boil all of this down into what is most beneficial about having an advisor, I think it would be two things: First, the encouragement (if not outright demand) that you prudently save and second, the giving of objective advice about personal, and many times emotional, financial decisions.

In fact, I prefer when clients call me to discuss financial moves BEFORE they make them. As one of my colleagues says: It is much easier to create a plan than to clean up a mess. But in the final analysis, an advisor is only as good as the advice you TAKE. So if this post convinces you of the value of hiring an advisor, GREAT. But I will have done you a much greater service if this blog convinces you of the value of making a good plan and assiduously FOLLOWING it.

Good luck with yours!

The Pension Pinch or The War of the Ages?

Some years ago I read a pamphlet entitled The Pension Idea (Amazon says it is out of print, but you can find it by searching elsewhere) wherein the author pointed out the dubious origins, purposes and sustainability of pensions. I acknowledged the wisdom of his assessment, but didn't think it had much practical applicability to our time since most companies were not offering pensions anymore, but 401(k)s. Foolishly I forgot about governments at all levels which are both the largest employers and the largest PENSIONERS in our country.

So flash forward to October, 2010, and reports such as these:

11 State Pension Funds that May Run Out of Money

or

Growing Wave of Pension Shortfalls Threatens Local Governments

and The Pension Idea comes back with a vengeance.

In a nutshell, the pension idea is that you can NOT rely on anyone or anything else (especially the government) to support you in your old age. Not the government, not the new workers, not the market, not dividends or profits and, sadly, not the company that you worked for all those 30+ years.

Why? The simple answer is that we are talking about the future and who can predict the future with any certainty. The more sublime answer lies in the faultiness of the economics underlying "the pension idea," namely that the pensioners are going to have a large (and ultimately unattainable) claim (both legal and moral) on the profits of private companies and the tax revenues of public entities. And when the pensioners demand their money and the workers won't supply it and when the government can not "fix" it...well, take a look at what is happening in France right now!

However, the author of The Pension Idea was too right, too soon. He wrote in the 1950s and thought that any recession would show the weakness of private company pensions. What he failed to realize (at least by my recollection of the book) is that Uncle Sam would step in and "save" the pensions. This they did, but did it "save" anything?

In fact, no. Now we have all of the pension shortfalls settling on the Pension Benefit Guarantee Corporation (which itself is broke), which is nothing more than the taxpayer. And the coming war will be between the pensioner, who has a valid legal and moral claim to payments, demanding money from current, working taxpayers who are having difficulty meeting their own bills, much less their tax burdens for current government programs and now the livelihood of every worker who went before them.

I am afraid the day of reckoning is going to be sooner rather than later and all because of a false "pension idea" that originated less than 3 generations ago. So what can you do?

• If you are currently receiving a pension (or about to elect one) and can take a "lump sum" payment, I would do so notwithstanding the extremely adverse tax consequences. Of course, seek out competent, professional advice to help you mitigate the damage if possible.
• If you are working for a company or governmental body that offers a pension which you are enrolled in, see if you have a vesting schedule. If you are currently vested with benefits, cease contributions to the pension plan and direct that money to other investments.
• Finally, these "other investments" ought to include family businesses or some other personally-controlled PRODUCTIVE enterprise.

After all, it was families and family businesses who were the ones who took care of their elders before the "pension idea" destroyed that ethic. Let's be the ones who resurrect it!

Finally, those who plan on retiring on the market via their 401(k)s and IRAs ought to seriously reconsider that program as well. Just what do you think is going to happen to the value of stocks and bonds when the Fortune 500 and all governmental bodies admit they are broke? True diversification is the key, which I have outlined here before.

So What's Your HATE Of Return?

I know this may sound strange coming from an investment professional, but I have come to HATE rate of return discussions.  The way that most companies present investment "rate of return" to their prospective clients is generally so over-simplified and remote in time as to border on the ridiculous, if not in fact fraudulent.

These are bold claims, but allow me just one example to demonstrate its veracity.  I will set out the advice that you might receive from a fictional financial planner, Ed Jones, then you decide if the “rate of return” that he projects for you has any basis in reality. 

To start, we have to imagine where Ed’s advice is going to lead you.  In other words, what would your portfolio look like following Ed’s advice?  I have a pretty good sense of this because I see these portfolios every day.  More than likely your portfolio would consist of mutual funds (or stocks & bonds) in a qualified account (IRA, Roth IRA, 401(k), SEP, SIMPLE, etc).  If Ed is a good guy, he will also have you set up a cash emergency fund in some sort of bank account (savings, money market, CD, etc).  If you have any money left, Ed will make sure that all of your risks are managed through insurance.  And that usually covers it. 

Is there a benefit to this arrangement?  Yes, of course.  You get tax-deferral in your investments and, most often, tax deductibility.  You have cash for any bumps in the road and your insurance will kick in if any major calamity (health or property) happens to you.  So where’s the rub? 

First, the client buys off on the proposal based upon very speculative projections of their investments growing at 6, 8 or 10% rates.  Second, the client is never shown the COST of the decision to arrange their finances this way, which is akin to claiming that gross profit is the same as net profit.  It is this second problem that I will focus on for the remainder of this article. 

What Ed has failed to account for is where you will get the money to make your regular, major purchases (cars, home repairs, vacations, educational expenses for children, etc).  In other words, since he has your cash flow allocated into locked boxes (especially the qualified accounts where you get penalties and taxes for early withdrawal), you have no capital for making major purchases.  So that leaves you with one choice—borrowing—and that is exactly what Ed recommends. 

In other words, when Ed was convincing you to invest in the market for better returns and locking your money into qualified accounts to avoid taxes, he never considered the COST OF FINANCING in his overall economic plan. And therein lies the mistake: Ed takes a micro-economic approach, looking strictly at rates of return and ignoring costs.  But surely these costs are going to be a DRAG on your overall return. 

Ed does this because he knows of no other way and assumes debt to be part of life.  And truly debt is a part of life, which is precisely why he should try to MITIGATE its effects on your financial plan.  He just doesn’t know how. 

But to be fair and to make an accurate assessment of the REAL value of his plan, he ought to DEDUCT the amount of interest that you paid as a result of his advice.  That would be the true NET return and a fairer estimate of the future value of your account.  This would then allow a client to make apple-to-apple comparisons with other investment strategies. 

And truly the STRATEGY is more important than the rate of return.  When a prospective client comes to me and professes to be able to earn 10-12% long-term in the market, I know that I will have the near impossible task of convincing him to consider earning less but COSTING less and doing so on a GUARANTEED basis rather than in the very risky manner he proposes…and have people just forgotten the old adage that “what goes up, must come down?"

What I suggest will just be dismissed as “kooky” talk.  I mean, who wants a 4% return, when they can get “12% long-term with stocks.”  The demonstrable FACT that my real return will be significantly higher (and certain) and their market return significantly less (and at terrible risk) never crosses these people’s mind. 

And that is just ONE reason (there are more) I hate the rates of return being bandied about these days.  But perhaps now you can see why I HATE rate of return discussions.  

How To Choose A Financial Advisor

What does financial planning mean to you? For most it is a periodic visit from a pushy life insurance salesman who never knows when to leave or an occasional visit from a relative, friend or classmate who seems to get out of the business as quickly as he got in. How has that worked out for you?

Well here are three things you should expect from a good financial advisor. And if you don't get these things, you could be making the most expensive mistakes of your life!

1. System of Financial Planning

Your advisor should have a system of financial planning, a philosophy that he uses to direct his actions and guide yours. How else are you going to gauge your success or his?Now this system should be explicit, researched, supportable by data and make sense to you. It is NOT the sales training that a financial representative gets from his company. If that is all your advisor knows, then you will certainly be sold a lot of products, but will rarely know why.

Some ways to find out if your advisor has a financial planning system are:

A. Ask: "What system or process do you use to assess my financial health?" Or more to the point: "What is your financial planning philosophy?" If it sounds like he's making it up as he goes along, he probably is!

B. Ask what books he's read in the past year related to economics or financial planning. Or what books he recommends that comport with his vision. If he stammers, look out.

C. Look for a systematic evaluation process. We call ours a "Financial Report Card".

2. Macro-economic Outlook

What impact does one financial decision have on another? How does each financial choice you make effect your entire plan?These are macro-economic questions and they are critical to your success. Each time you make a money decision, the BIG PICTURE should be discussed and addressed. While it is not possible to avoid every negative potentiality in every decision, you need to be aware of the competing interests to make the best decision for you.

If your advisor fails at #1 above, it is very unlikely that he will succeed here. In truth, if you have a sound system of financial planning, most financial decisions will become pretty clear. On the other hand, trying to solve your financial problems by buying products is akin to trying to shoot a lower golf score by getting a new set of clubs. It's possible, but highly unlikely.

3. Paying Yourself First

A rule for financial success that appears repeatedly in the good literature is: Pay Yourself First. Another way to say the same thing is SAVE, SAVE, SAVE.

Saving (and spending less than you make) is the surest way to economic freedom. If you want to do away with advisors altogether then follow this rule assiduously and you will do fine. However, my experience has been that most people need an advisor to constantly remind them of this rule, encourage them to follow it and insist on saving for savings sake.

Following the rules set out above, the best advisors seek out a system that will account for the macro-economic issues while forcing you to save, save, save. The rest is really up to you. After all, you earn the money so how do you want to use it?

The Best Place To Store Money

Blogger's Note: This article was originally written in September 2009 as an email to clients.

Here are a few excerpts from an article in this month's Financial Planning magazine entitled: Better Than Nothing:

• Clients are piling up cash for both anticipated spending needs and future opportunities. But where do you put it? In the country of the 0% money fund, the 1% payer is king.
• Financial planners are scrambling to find safe places for cash holdings, along with yields that actually enter single-digit territory.
• "I've been using an account that pays 1.05%," says Rich Chambers...."That may not be great but, as I tell clients, that's 105 times better than a money market fund paying 0.01%."
• ....FDIC-insured bank accounts are increasingly appealing. Even so, bank deposits are not fool-proof. Through August, 83 banks failed in the U.S. this year.
• For cash equivalents today, yields above 3% are truly king size. However, investors who don this type of crown may have real reason to feel uneasy. [My note: This last statement refers to the level of risk people are taking with their cash in non-FDIC insured investments.]

Throughout the article, the author quotes "experts" who are heralding 1, 2 and 3% taxable returns, many with market, interest rate and other risks. One more quote:

"An ultra-short fund can lose principal, so these funds are suitable only for clients willing to take a loss."

Now who wants to LOSE money on their cash savings? Imagine if your traditional savings account went down one month and your bank said, "Well yes, but you did earn 1% on the balance."

Incredibly, the safest (at least, historically) and higher yielding option of cash value life insurance was NEVER mentioned in the article. While these experts are willing to put your cash at various risks to squeeze out an extra 2% of TAXABLE yield, there is a very low-risk option that contractually guarantees you a TAX-DEFERRED yield of 3-4% (and it can go higher!). In essence, you could follow their advice OR you could store your cash in a lower-risk "investment" with a return 1.8 times better (and that's 1.8 times better in the lowest tax bracket). Which one do you want?

In bad times you discover good investments. Why? Because you can see what really works versus what was promised in the "good times". Everyone that I know that has adopted the "insurance bank" concept, especially those that apply the "be your own banker principles", has now discovered why I consider this to be the "best place to store money."

If you haven't shared this concept with everyone in your family, now is the time to do so. Let's save them from the advice of planners and magazine reporters who still just don't get it!

Uncommon (But Good) Advice

 Blogger's note: Amended version of an email sent to clients in March, 2009.

I came across this interesting statement in one of the most successful investment newsletters of the past 25 years:

"Prudent investors keep a minimum of the next couple of year's worth of living expenses out of the market."

Really!?! Other than from The Fiscal Fitness Company, have you ever received that advice from a financial advisor?  I have never heard it, seen it written or found it established in a client's account since I have been in the business.

The most I have ever heard a planner advise his clients to have in cash is 6 months emergency fund.  And then they rarely, if ever, actually insisted upon that by having it built into their plans.

The reason for this is simple.  In 2007, the median household income was slightly over $50,000.  Therefore, based on a 6 month reserve, most people should have $25,000 in CASH before ever getting into the market.  If you use the 2-year rule, then the figure is $100,000 in CASH.  How many people have that?

So in order to make a living, investment "professionals" can't wait for you to save up $25,000 (or $100,000) before selling you anything.  So instead of devising a plan that would keep you at a PRUDENT level of cash, they "advise" you to have an emergency fund, then quickly spend the very money you should be saving on products they sell.

It is not completely their fault.  They do have to make a living and the advisors are not the ones who created the flawed system of distribution that we have.

Still, the wise advisor realizes that common sense rules, like the one to have a substantial pile of cash for emergencies, are time-tested and TRUE.  If you violate those rules, you do so at your own peril...and the peril of your clients.  That is why I have striven to do two things in my practice:

1. Create a system of distribution that is mutually beneficial to me and the client; one which allows me to make a living NOT at the expense of my client's needs and goals; and, MORE IMPORTANTLY
2. Create a plan that incorporates as many SOUND MONEY and SOUND ECONOMIC principles as can be accomplished at one time.

I think I have done just that...and looking for ways to improve it still.

So here is the acid test:  Do you have 6 months or 2 years of "living expenses out of the market"?  If not, have you established a plan to get there SOON? In all cases, the answer should be "yes".  And if you have not been shown a way to do so, then you are NOT getting very good advice.

URGENT: 401(K) or Not O(K)?

I hate to be alarmist.  And no, I am not trying to manipulate you through fear.  In fact, my only concern is to protect you and your wealth from the vagaries of the financial markets and the appetite of the ever-expanding government.


Recently some news reports have come out stating that the government is considering changing the rules and status of your retirement accounts.  The reports have varied from an absolute takeover of those accounts by the government (and the issuing of a new government annuity plan) to a simple change in the tax treatment whereby you will no longer get tax-deductions or deferral on those accounts. 

Here is a sampling of those reports:

• Congress Mulls Major 401(k) Changes
• Retirement Alert
• Proposed Rules (Excerpt from Federal Register)

Now if you followed all the "expert's" advice and signed up for a 401(k) or IRA for the "tax benefits", then what's at stake here is your life savings!  What accounts will be affected:

• 401(K)s
• 403(B)s
• All other IRS Section 400 plans
• IRAs (Traditional and Roth)
• SIMPLEs
• SEPs

Every type of government-favored, retirement savings vehicle that the financial services industry has been pushing for years.

Now I suppose it is possible that all this talk about annuitizing your retirement money is really an attempt by the government to do what's best for the people and is not sinister at all.

Perhaps, but I subscribe to the view offered to me some years ago by an older and wiser financial professional: 

"When the government creates a problem, like onerous taxation, and then offers you a solution to the problem, like tax-favored accounts (IRAs, 401(k)s etc), aren't you just the slightest bit suspicious that you are being manipulated?"

He went on to predict that there would come a day when the government would call in that "favor" they were giving you and make you pay up NOW.  How prescient!


That is why I have always advocated limiting your exposure to the market AND reducing your affiliation with government, sponsored retirement plans.  If you haven't done so already, you better take action soon.
So what can you do?  Here are a few suggestions:

1. Consider trimming back or eliminating your contributions to your 401(k), IRA or other government-sponsored plan and investing that money elsewhere;
2. If you have an old 401(k) from previous employment or an inactive IRA, you should consider liquidating the account or doing a planned withdrawal (this will incur taxes and penalties and must be analyzed carefully for the best approach);
3. Establish a truly diversified portfolio as mentioned in an earlier post.

I believe something is coming in regard to your retirement accounts.  In typical fashion the government has floated an outrageous idea like a complete takeover of all 401(k)s so that you won't be so hostile when they offer you the lesser evil of paying immediately all income and capital gains taxes from your accounts.  Don't let it happen to you!  Take action to preserve your own assets, then fight publicly these scoundrels who are supposed to be our servants.

Time To Take Stock...Just Not Wallstreet's

Blogger's note: This message was originally sent out in July, 2008, at the height of that year's market meltdown.

During times of economic and market turmoil like we are seeing today, I invariably get asked: "Is it time to cash out and head for the hills?"  What they are really asking is what does the future hold and my answer is: I don't know...it's the future.

What I do know is how to weather-proof a financial house based upon historical and common-sense evidence.  That is what I have built my Financial Report Card around and to the degree that my clients follow it, they will fare well in all economic times.  However, I am a financial ADVISOR not a financial DICTATOR so I can not make you do the things I suggest. But if these trying times have got you thinking about whether or not you have a good financial plan, maybe it is time to review your score on the financial report card and to enact the items that you've neglected or put off.

To that end, I offer this brief review of the four categories of the Financial Report Card and the underlying areas that I score.  These are:

1. Money Management
2. Emergency Preparation
3. Financial Stability
4. Future Planning

Under money management, I look for things like whether the client has a budget or not, whether they have a regular savings program and whether they have a debt reduction program.  Ideally, you would have a working budget, be out of debt (excepting your mortgage) and have a savings program that incorporates the infinite banking concept.  For all of these things I have resources that I can recommend to you.

Under emergency preparation, I look for things like whether the clients have emergency provisions, emergency cash savings and proper insurance on life, health, disability and property and casualty.  Let’s face it, if the economy COLLAPSES the only thing that we will consider valuable are things that we can use to stay alive.  You should also have enough cash on hand (either in your home or at a local bank) to pay your expenses for 3 to 6 months.  The problem with emergency provisions is usually two-fold: how much should I have and how do I rotate it to make sure it is good when I need it.  For this I have some recommendations and welcome the advice of others, but it is truly an issue that will vary for each individual and family.

Under financial stability, I look for things like whether the client has intrinsic worth items, an alternative earnings method and passive income generators.  An intrinsic worth item is anything that has value in itself: food, firearms/ammo, gold/silver, jewelry, tools/equipment, collectibles, livestock, etc.  I generally recommend that a person have approximately 10% of their net worth in this category (which can and should include your emergency provisions).  Additionally learning a trade that can earn you a living (other than your current job) or having resources that produce income for you without your direct efforts (a passive income generator like oil well royalties or rental income) would greatly reduce your anxiety about your future sustainability.

Finally, there is the future planning category.  Here I look for retirement funding planning, education funding planning and tax reduction strategies.  For most people these assets are in the stock market (though it need not be exclusively so).  This area is a cause of much anxiety to people for two reasons.  First,  too many people have TOO MUCH of their net worth in the market.  Second, because the financial news is dominated by THE MARKET, most people are concerned when the market declines...because of reason one!

However, if you are fiscally disciplined (a budget), have a savings program and adequate cash reserves, are properly insured, out of debt, holding intrinsic worth items and emergency provisions, and have the other things set forth above, then will you be overly concerned by the bulls and bears that invariably come to the market?  I doubt it.

Finally, I consider the order of these categories to be the correct prioritization. In other words, #1 is more important than #4.   Most often, we do all of these things simultaneously.  However, if you find yourself  having financial worries or troubles, go back to basics and make sure that #1 is being handled well.  Usually when we do this, #2, 3 and 4 will follow.

How Risky Are You?

Blogger's Note: Most of these early posts were actually emails that I sent to my clients years ago and slightly edited for this blog.  I hope that the information presented is relevant to the general public despite being addressed to a smaller audience. 

Are you a bull or a bear?  Gosh, in today's market I think most of us would prefer to be a mouse and hide in the back of the cupboard with our little piece of cheese!

Frankly I hate the propaganda mill that is known as the financial markets press that continually tell us not to worry (or to worry a lot...depending on the day) and have always sought to develop a strategy that will protect my clients' wealth ALL of the time.  What I have come up with is a bit contrarian, off the beaten path and requires those who work with me to take responsibility and to take action.  To the extent that one follows this plan, it works.  But, it is not perfect and we all are prone to sloth and taking the path of least resistance.

One component of my plan is managing your market assets.  Too many of us have too much of our wealth in the market, but I recognize that changing this takes time.  In handling your market assets, I follow a proprietary model, establish well diversified, risk-adjusted portfolios and seek to minimize losses, choosing some level of active managment over "buy and hold."

Some people ask me if I "market time" and the answer is an emphatic "no".  But, I am also simply not going to stand by and watch my clients' accounts suffer huge percentage decreases while all the while saying such things as, "Don't worry, the market always rebounds and over the long term...blah, blah, blah." You've heard it all before.

But when to make defensive moves or enter the market is no easy task.  In fact, in most cases the time to make moves is exactly OPPOSITE what one would FEEL is right.  Which is why I don't go on feelings, but use certain market indicators to assist me.  Now, I don't have a perfect system and no one can account for the market manipulation of the Federal Reserve or other international events.  But on the whole, I believe that making these strategic moves is beneficial to my clients' accounts.

Now it is my job to read items such as these:

A Long-Time Bull Turns Bearish

or this one:

 Is A Market Crash In The Offing?


 and to worry about your money.  That is why you hired me.

But I wanted to give you a sense about how difficult it is to know when to stand pat, take defensive moves or go against the tide and invest.  In the end, though, if my calls make you lose sleep at night, it is time to adjust down the risk in your portfolio.

Rule of 100—Getting Closer To Real Diversification

Diversification, don’t put your eggs in one basket, and spread your risks.  What do all these expressions mean?  I can tell you it does NOT mean what most brokers and financial advisors say it does .

Real diversification is what percentage of your money is in “risky” investments versus what is in “guaranteed” accounts.  Risky investments could be stocks, mutual funds, or variable annuities.  Safer guaranteed accounts could be savings accounts, money markets, CD’s, fixed annuities, or life insurance.  In my practice, I have four areas of diversification, but at a minimum, everyone should divide their money into risk capital versus safe accounts.

Most brokers or financial advisors say diversification is how you spread your money in risky investments.  For example, 30% in large cap growth and value funds, 30% in small and mid-cap growth and value funds, 20% in international funds and 20% in bond funds.  The problem with this is that you can LOSE money in all of these accounts.  They all have RISKS associated with them.  This is not real diversification.

The rule of 100 is a simple, yet powerful rule that has worked for generations.  Subtract your age from 100, and that is the figure that should be in “risky investments.”  For example, a 70 year old should have 30% or less of their money in risky investments.  A 30 year old should have 70% or less in risky investments.

Let’s look at real figures to illustrate how the rule of 100 protects you in the ups and downs of the market:

John & Betty have $200,000 invested, and are 50 years old.  If they had the entire $200,000 in risky investments, and they dropped 20%, they would have $160,000.  If they would follow the rule of 100, they would have $100,000 in risky investments, and $100,000 in safe guaranteed accounts.  Let’s still assume they lost 20% in their risky accounts, leaving them with $80,000.  But their $100,000 gained 5% in their safe guaranteed accounts, leaving them with $105,000.  Following the rule of 100, they would have $185,000 instead of $160,000 not following the rule of 100.

At a minimum, you should follow this guideline.  If you do, you will sleep better at night. Still, if you are a more conservative investor, you can always have more money in the “guaranteed” column.