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.