Wealth Building Strategies

Inflation is Very Much Alive--Don't be Fooled by the CPI

2011-12-16T15:34:00.000-05:00

According to the Labor Department, the Consumer Price Index (a measure of inflation) was unchanged in November. Additionally, over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

This might seem like a tepid inflation rate, right in line with historical figures. But, dig deeper. Despite the November figure, the index for food costs has risen 5.9 percent over the past year with all six major grocery store food groups up at least 4.4 percent. The gasoline index has increased 19.7 percent, while the household energy index has risen 3.1 percent with the fuel oil index up 25.0 percent.

Most of us live in a universe where food and energy are a staple of our daily survival. I have long complained, to whomever might listen or read my comments, that the CPI index is not an accurate reflection of the true cost of living and anyone planning their financial future should keep that in mind.

When it comes to financial planning, retirement and investing, inflation is a real threat to your security. Under-estimating the true impact of inflation on your purchasing power can mean the difference between achieving your financial objectives or not. So, keep it real.

Puzzling Times for Wealth Managers

2011-11-21T09:59:00.000-05:00

From the dailybusinessreview.com

Even for the comfortably wealthy, it's hard to know which way to turn when investing in a crisis-filled world.

Check out the video.

Balanced Investment Strategies Can Weather Turbulent Markets

2011-11-06T09:24:00.000-05:00

A balanced global investment strategy may help mitigate the longer-term impact of negative events on disciplined investors.

This graph shows performance of a balanced investment strategy following a few historical crises. Each crisis is labeled with the month and year that it occurred or peaked. The subsequent one-, three-, and five-year annualized returns start from the first day of the month following each crisis.

Although a global investment strategy would have suffered losses immediately following most events, the financial markets recovered over time, as indicated by the positive three- and five-year cumulative returns.

Negative events such as these may tempt investors to flee the financial markets. But diversification and a long-term perspective can help investors apply discipline to ride out the storm.

Composition of the Normal Balanced Strategy

* 7.5% S&P 500 Index
* 7.5% Fama/French US Large Cap Value Index
* 7.5% Fama/French US Small Cap Value Index
* 7.5% CRSP 6-10 Index
* 15% Fama/French International Value Index (7/81–12/10)
and MSCI World ex USA Value (1/11–9/11)
* 15% International Small Cap Index
* 40% Merrill Lynch One-Year US Treasury Note Index

Source: Dimensional Fund Advisors

Good news for savers....IRS increases retirement plan limits

2011-10-24T17:25:00.000-04:00

The Internal Revenue Service announced on October 20, 2011, cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

Things to note include:

•The elective deferral (employee contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government's Thrift Savings Plan increased to at $17,000 (up from $16,500).
•The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500. So if you are 50 or older, your max contribution can be $22,500.

The total contribution limit, including employer contributions (ie. Profit Sharing contributions), has increased from $49,000 to $50,000.

IRA contribution annual limits will remain at $5,000 (or $6,000 if age 50 or older).

When it Comes to Estate Planning it Pays to Plan Ahead - Ask Steve Jobs

2011-10-10T20:27:00.002-04:00

As the entire world now knows, Steve Jobs died last week, a sad day indeed. The man was a legend and innovator that truly changed the world and life as we know it. But, apparently his genius transcended the digital world, he was also a great planner (or at least he hired some genius advisors that helped him develop a great plan).

In this blog and on our website (www.cathypareto.com) we have often stressed the importance of financial planning, not just with regard to investments or retirement, but also with regard to estate and end of life planning.

Could this article be true?: Billionaire Steve Jobs Died Tax-Free, Experts Say. I'm sure more will be revealed in time.

Bottom line is, it pays to plan ahead. You don't need to have wealth of Steve Jobs' proportions to ensure your legacy and maximize what you leave to loved ones.

For more on estate planning essentials, check out our Knowledge Center and the tutorial I wrote for Investopedia on estate planning.

Filtering Out the Noise in Investments

2011-08-02T08:00:00.004-04:00

Investors are inundated by an avalanche of daily financial information, whether by mail, email, internet surfing, blogs, RSS feeds, TV....the list goes on. The constant, rapid fire flow of information (particularly the last several weeks) is enough to shake even the most seasoned investor's confidence.

It’s so difficult for the financial consumer to separate the relevant investment or planning information from the financial pornography. My advice is to limit your intake of information to a few credible sources (ie. Wall Street Journal, The Economist, Financial Times, Barron's), and definitely tune out of the incessant financial chatter on channels like CNBC that only exist to create spin and sell ads. When it comes to investment knowledge and strategy, remember—garbage in, garbage out.

The recent S&P downgrade of US sovereign debt, to AAA+ to AA+, sent a shock-wave through the markets yesterday. U.S. stocks tumbled in a rout that sent the Dow Jones Industrial Average down 5.5%, or 634.76 points, to 10809.85 -- plunging below 11000 for the first time since November -- as investors fled from risky assets in the first trading session since Standard & Poor's downgraded the federal government's credit rating. Despite the downgrade by Standard and Poor's, U.S. Treasuries remained a haven for many investors despite the downgrade.

Although many reports may blame this session's precipitous drop on the S&P downgrade, the sell-off really came in response to what the downgrade signified, which is that the US economic outlook isn't as strong as what many had thought (GDP really needs to be higher than current levels). In fact, the Federal Reserve meets today to review potential policy changes (there is buzz about possible QE3). Of course, the threat that the tenuous fiscal and financial conditions of Europe could deteriorate and create contagion have added to concern. The story continues to unfold.

It is our judgment that the biggest impact of the S&P downgrade of U.S. Treasury obligations will be headline risk and its effect on investor and consumer confidence. The downgrade is only a part of the volatility story. Europe's situation is quite serious and it is in our best interest that they can contain their financial problems. But, at the end of the day, it is the fundamental health of the U.S. economy that is adding to this vicious downward cycle (growth, unemployment, fiscal responsibility, etc).

We believe that the markets were way oversold and irrational behaviors have taken center stage. We believe the markets are very reasonably priced at the moment and see buying opportunities for clients willing to accept the current volatility.

Inevitably downward market volatility causes stress, anxiety and in some cases panic. We are, after all, only human (particularly since the challenges of 2008/2009 are still so fresh on our minds). We are telling our clients that now is not a time to lose sight of their long-term goals and time horizon. Short-term volatility is to be expected, and doesn't mean that your portfolio isn't working (especially if you have a well diversified portfolio). While it goes against all of our human instincts, this is the time to remain disciplined and rebalance--it's not the time to panic.

Debt Ceiling Debate - Impact on Your Portfolio?

2011-07-28T11:18:00.000-04:00

The debt ceiling debate rages on in Washington and as we tick closer to the deadline, people are worried. Considering many are still healing from the financial crisis of 2008/2009, and those wounds are still quite fresh, some investors might mistakenly let fear dictate their investment decisions during such an uncomfortable period.

We thought we might address some of the questions we have received regarding this issue.

How do we expect the markets to react to a downgrade -- and how would investors be impacted?

The issues unfolding in Washington are really two separate events: a) raising of the debt limit and b) the downgrade in the credit rating. Truthfully, whether or not the debt limit is raised or not, many advisors fear that the credit rating of the U.S. is already at risk and our standing in the global community has taken a hit. I doubt very much that the credit rating agencies would retain our existing rating, unless they see fundamental changes to our expenditures AND revenue generation.

Frankly, I am surprised that we are this far into the timeline without any clear resolutions from Congress. Unfortunately, while I believe ours is the greatest nation in the world, the political theatrics are being played out on a global stage and this does not bode well for the reputation of the U.S. as a credit safe haven going forward, even if a rating downgrade becomes temporary. No U.S. president in history has ever defaulted on the nation's debt, so we are living in interesting times (to say the least).

What's the worst that could happen? What's more likely to happen?

To some extent, at least as of this writing, the markets seem to be mostly shrugging off the possibility of a default or downgrade. Surprisingly, the S&P 500 is still up 1.37% for the month of July amid the political negotiations and the bond markets have been equally as resilient so far. For government bond investors, a change in credit rating might not mean much since multiple factors really affect bond prices and yields. Furthermore, a rating of AA (which is what the U.S. would likely be downgraded to) is still considered a very strong credit rating. All that said.....

I think the greatest risk is the psychological damage a downgrade would cause. If a default and subsequent downgrade occur, the general impact would be negative for the U.S., which has enjoyed a AAA bond rating from Standard & Poor's for 70 years, nearly as good as cash or gold. We can expect interest rates to up, which raises our cost as a nation to borrow money and finance its national debt. Of course, that would further exacerbate the budget challenges we already face. Further, a downgrade would also increases the cost for consumers and small businesses to borrow money, individuals with adjustable rate loans could quickly face higher interest payments on credit cards or adjustable-rate mortgages and consumer loans (ie. auto, student loans) would also carry higher interest costs.. The value of the dollar would decline and the stock markets would be temporarily disrupted with higher volatility likely. All of these factors will further dampen negative consumer sentiment, which is not good when we are grappling with already high unemployment and a sluggish economic "recovery".

With regard to the stock market, remember that the markets are only as efficient as its participants and investors are often quite irrational in their thinking and their behavior. So, I'd expect, at least in the short term, that nervous investors might abandon or reduce stock holdings out of fear. Any knee jerk reaction would be a mistake on their part. Investors should be positioned for market fluctuations that are appropriate to their personal risk profile and circumstances as part of their long term planning. Assessments like that should be done before market events, not after.

What are you telling your clients to do (or not do)?

We have been systematically re-balancing our client portfolios all year (booking profits from strong equity returns the last two years) and realigning portfolios to ensure we retain the clients target risk profiles. We also have been reaching out to clients to assess their financial plans, running stress tests of their existing as well as alternate portfolio strategies as part of their ongoing retirement planning.

Additionally, part of our communications to clients have served to try and keep them informed and let them know we are closely monitoring the events. Here's a snippet from a recent email client memo:

We have already taken steps to adjust some stock weightings through our rebalancing efforts. In some cases, we have maintained some additional exposure to cash or short term bonds, where appropriate for the client. Our stock portfolio is still very broadly diversified across the world with nearly 20,000 stocks represented in our asset mix. We should be reminded that although the capital markets will always face economic cycles and challenges, the long term prospects for profits remain a viable reason to keep a long term exposure to stocks.

Are any of these issues of particular concern to retirees or pre-retirees? Would your advice for that demographic differ from what you would tell younger folks?

Clearly, retirees are most at risk since most depend, at least in part, on their portfolios for income. In fact, many of the calls of concern we have received have been from that specific demographic. However, most retirees are also quite moderately balanced between risky assets and bonds, so to a large extent much of their risks have been contained. Younger folks are more able to withstand market cycles and volatility and should use short term disruptions in the market or any potential pull backs as a chance to buy into the market at lower prices for the long term.

Any thoughts on the continuing rise of gold?

We've owned gold/ metals and commodities for several years as part of a comprehensive investment strategy, and are comfortable with our existing allocation. However, I would not be piling into more of that as a defensive strategy at this point....gold may certainly have more room to run, but at existing price levels, buying more now may carry risks.

Investing Rules to Live By

2011-06-21T21:33:00.000-04:00

One of my favorite clients sent this with me today. It's simply too good to keep to myself, so I'm sharing it with you. Here is the source link and below are the highlights. Forget the reference to "New Year's resolutions", these are words to live by everyday when it comes to money management.

With the average investor’s dismal track record of investing in the stock market, we thought it would be helpful to adopt a set of 10 New Year’s resolutions that may help you succeed where others fail. These resolutions were originally penned by Brad Steiman of Dimensional Fund Advisors.

1. I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.

2. I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.

3. I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.

4. I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).

5. I will stick to my financial plan because it is time in the market—and not timing the market—that matters.

6. I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn't done well recently) and selling some of what has performed well.

7. I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.

8. I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.

9. I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.

10. I will keep my cost of investing reasonable.

The above article was published in the Kitsap Business Journal on March 3, 2011.

Women are Better Investors -study says.

2011-06-20T17:46:00.000-04:00

A new study affirms what I've already suspected--women make better investors than men! Who can argue with that? On the surface this may appear to look biased, after all, I am a woman. But, the proof is in the pudding. A couple reasons why women are more profitable than men when it comes to investing:

-they take fewer risks as investors
-they tend to buy and hold
-they are more thoughtful and methodical in their investing
-they tend avoid risky, anxiety-producing investments
-they refrain from frequent trading
-they are less emotional when it comes to investing (yes, it's true ironic as that sounds)

Why do women exhibit such profitable self control?

According to the study, women behave this way because they are less confident about taking risks than men. Or perhaps men are too confident. The women also don't want to engage in the anxieties of hasty trading, another factor that contributes to their more conservative, and ultimately more successful, investment strategies.

Sorry fellas, girls rule in this case.

"Inside Job" Documentary a Must See

2011-04-20T06:31:00.000-04:00

This documentary is a must-see! Just when you think you couldn't hate greedy Wall Street bankers more (and greedy politicians/economists), this film will thoroughly disgust you. Makes me feel so powerless and insignificant.....and MAD!!!

The Quiet Force in Personal Finance

2011-03-11T16:08:00.000-05:00

Yesterday, a client was kind enough to bring me an article recently featured in Bloomberg BusinessWeek, titled "The Quiet Force in Personal Finance". It essentially highlights the fact that, little by little, Registered Investment Advisors (like me) are chipping away at market share that was once monopolized by traditional brokerage firms (commissioned based brokers, salespeople, etc.) Today, RIA's manage over $1.7 trillion in client assets.

Why the sea change? The article states "The RIA's appeal stems from the idea that their goals are aligned with those of their customers. Unlike stockbrokers, they are bound by a fiduciary duty, meaning they MUST put their clients' interests ahead of their own. Stockbrokers are under no such obligation." Registered Investment Advisors have no incentive to sell someone's product. We represent one group, and one group alone--our clients. At least for this financial advisor, it sure feels great to be on (what I consider) the right side of the industry. Thanks for sharing Mr. M!

The Current Aftershock

2011-03-10T13:42:00.000-05:00

Using an illustrated timeline, David Booth (co-founder of Dimensional Fund Advisors) chronicles US stock market performance in four periods since World War II. His review suggests prevailing market sentiment is often wrong and that investors must stay disciplined through all market environments to pursue their long-term goals.

More Evidence to Support Passive Investing Strategies

2011-03-05T07:46:00.000-05:00

Released semiannually, the SPIVA Scorecard weighs in on the passive versus active debate by providing performance comparisons of active funds and their associated benchmarks. The 2010 year-end Scorecard indicates that most U.S funds underperformed their benchmarks in nearly every category. Results are more favorable for international equity funds.

Investor Behavior Can Be Detrimental to Your Wealth

2011-03-02T22:54:00.000-05:00

Here's a video worth sharing.

Research indicates that humans are not naturally wired for prudent, long-term investing. Scott Bosworth, Vice President and Regional Director of Dimensional Fund Advisors, describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

Important Tax Updates You Need to Know

2010-12-14T11:48:00.000-05:00

One of my business associates passed this great info along to me....thought it was worth sharing with you. Click on link for a more extensive read.

The tax “compromise” brokered by the White House and Senate Republicans has been reduced to legislative language in a bill entitled “Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010.” The bill extends - for an additional two years, through 2012 - most of the provisions of two major bills that were scheduled to expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (known collectively as the “Bush tax cuts”). It also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act (the Obama “stimulus” bill). The compromise is scheduled for vote in the Senate within the next few days and, if eventually enacted into law, as expected, is estimated to cost approximately $850 billion.

Source: : AALU Washington Report

Your Taxes: Forgiveness or Cancellation of Debt

2010-12-02T10:31:00.001-05:00

As a Certified Financial Planning practitioner, I often get questions from readers about the tax treatment of debt forgiveness, particularly since the economy tanked in 2008. While I can provide some general advice with regard to tax planning, I defer technical subjects like this to tax professionals who specialize in tax compliance and planning. Here's an interesting little blurb from a business associate that's worth sharing.

Author: Marila Hurtado, Ocariz, Gitlin & Zomerfeld, LLP (a respected Coral Gables, FL CPA firm)

The unstable conditions of the economy during the past few years have financially affected most of us. Many individuals have become unemployed; consequently, defaulting on loans and losing their homes.

Lenders have to forgive these debts and are required to issue
Form 1099 C for the cancellation of the debt. The amount reported on these forms may be taxable to the individuals on their tax returns.

Certain situations listed below may allow for the exclusion of cancellation of debt income:

• Qualified principal residence indebtedness
• Bankruptcy: debt canceled in a title 11 bankruptcy case is not taxable
• Insolvency: if insolvent immediately before the cancellation
• Qualified Farm Indebtedness
• Qualified Real Property Business Indebtedness

Although these items may not be taxable, taxpayers are still required to report information regarding the cancellation of debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Form 982 must be attached to the federal tax return.

The exclusion of the qualified principal residence applies to debt used to buy, build, improve, or refinance a principal residence and is limited to $2,000,000 when the filing status is married filing jointly. In cases where the home mortgage loan is simply modified and the individual retains ownership of the residence, the basis in the property may have to be reduced.

The tax implications of forgiveness of debt can be quite complicated and vary depending on the taxpayer's circumstances. More information on canceled debt may be found in Publication 4681 or you may contact Ocariz, Gitlin & Zomerfeld, LLP at 305-444-8288 begin_of_the_skype_highlighting 305-444-8288 end_of_the_skype_highlighting.

Retirement Account Owners Over 70 1/2 Don't Forget Your Minimum Distributions!

2010-11-18T22:55:00.001-05:00

Retirement account owners (ie. Traditional or Rollover IRA's, 401k's, 403b, Profit Sharing, etc.) who are over 70 1/2 years old must remember to take their required minimum distributions (RMD) before year-end. Failure to take the correct withdrawal amount before December 31st will lead to a stiff penalty! This requirement was temporarily lifted in 2009, but is back in force this year.

As a refresher, you must take your first RMD by April 1 of the year after you turn 70 1/2. If you wait until April 1 of the year after you turn 70 1/2 (rather than taking your first RMD that same year), you'll have to take another RMD by December 31 of that same year. After that, you'll be required to take your RMDs by December 31 of each following year. If you don't take your distribution by year-end, you are subject to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount that was actually withdrawn. To calculate your RMD, your total account balance as of the preceding year is divided by your life expectancy (found in IRS Publication 590). Distributions are not required from Roth IRAs, which grow tax free forever.

More Who Render Investment Advice Would be Fiduciaries Under Proposed Regs

2010-10-24T16:56:00.000-04:00

This is a good thing for everyone, except traditional brokers and insurance agents that is. The regulators are finally trying to level the playing field in the financial industry by imposing fiduciary standards across investment professionals, at least i the retirement plan space. Imagine that, all people that call themselves “financial advisors” will have to place their client’s interest ahead of their own….novel idea! Wait....wasn't that already understood?? Any business owner or retirement plan participant should continue reading....

Source: Pension & Benefits Updates on Checkpoint Newsstand tab 10/22/2010

DOL's Employee Benefits Security Administration (EBSA) has proposed changes to the regulatory definition of a fiduciary under ERISA by broadly defining the circumstances under which a person is considered to be a “fiduciary” by reason of giving investment advice to an employee benefit plan or a plan's participants.

Current definition. Under ERISA, plan fiduciaries are personally liable for plan losses resulting from a violation of a number of duties, including a duty of undivided loyalty, a duty to act for the exclusive purposes of providing plan benefits and defraying reasonable expenses of administering the plan, and a “prudent man standard” duty of care. According to ERISA § 3(20)(A)(ii) , a person is a fiduciary to the extent he, among other things, “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.” However, existing DOL regs narrow the statutory definition of “investment advice,” so that for advice to constitute “investment advice,” a person (who does not have discretionary authority or control with respect to the purchase or sale of securities or other property for the plan) must:

(1) render the advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
(2) on a regular basis,
(3) pursuant to a mutual agreement, arrangement, or understanding, with the plan or a plan fiduciary, that–
(4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that–
(5) the advice will be individualized based on the particular needs of the plan. (Labor Reg. 2510.3-21(c))
In addition, in ERISA Op Letter No 76-65A, 1976, EBSA further limited the term “investment advice,” concluding that a valuation of closely held employer securities that an employee stock ownership plan (ESOP) would rely on in purchasing the securities does not constitute investment advice.

Proposed definition. EBSA noted that while the definition of who is a fiduciary has not changed in 35 years, both the retirement plan community (with a shift from defined benefit plans to defined contribution plans) and the financial marketplace (with the types and complexity of investment products and services available to plans increasing) have changed significantly. Therefore, EBSA believes there is a need to re-examine the types of advisory relationships that should give rise to fiduciary duties on the part of those providing advisory services. In particular, EBSA stated that its enforcement efforts are finding a variety of circumstances, outside those described in the regs, under which plan fiduciaries seek out impartial assistance and expertise of persons, and these persons significantly influence the decisions of plan fiduciaries, and have a considerable impact on plan investments.

Accordingly, in order to better protect the interests of plans and their participants and beneficiaries, EBSA has proposed to update the “investment advice” definition. Under the proposed definition, subject to certain conditions, two requirements would have to be met for a person to render “investment advice” for a fee or other compensation, direct or indirect, to an employee benefit plan, and thus be considered a plan fiduciary.

First, a person would have to be doing any of the following on behalf of not just a plan or plan fiduciary, but also a plan participant or beneficiary:

(1) provide advice, or an appraisal or fairness opinion, concerning the value of securities or other property;
(2) make recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property; or
(3) provide advice or makes recommendations as to the management of securities or other property. (Prop Labor Reg 2510.3-21(c)(1)(i))

Second, a person would have to meet at least one of the following conditions, either directly or indirectly (such as through or together with any affiliate):

(a) represent or acknowledge that it is acting as a fiduciary within the meaning of ERISA with respect to providing advice or making recommendations described above;
(b) be a plan fiduciary within the meaning of the other provisions of ERISA § 3(21) (that is, by exercising any discretionary authority or control with respect to plan management, or having any discretionary authority or responsibility in plan administration);
(c) be an investment adviser within the meaning of §202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); or
(d) provide advice or make recommendations as described above under an agreement, arrangement, or understanding, written or otherwise, between such person and the plan, a plan fiduciary, or a plan participant or beneficiary that such advice may be considered in connection with making investment or management decisions with respect to plan assets, and will be individualized to the needs of the plan, a plan fiduciary, or a participant or beneficiary. (Prop Labor Reg 2510.3-21(c)(1)(ii))
The proposed regs would include a series of limitations to prevent certain persons from being considered fiduciaries under this definition. These limitations would exclude persons selling investments to a plan, so that the plan should know that no independent advice is being proffered; persons providing investment education information and materials; and various service providers under participant-directed defined contribution plans. (Prop Labor Reg 2510.3-21(c)(2))

The proposed regs provide that a “fee or other compensation” means any fee or compensation for the advice received by the person from any source and any fee or compensation incident to the transaction in which the investment advice has been rendered or will be rendered. For example, this includes, but is not limited to, brokerage, mutual fund sales, and insurance sales commissions. Also included are fees and commissions based on multiple transactions involving different parties. (Prop Labor Reg 2510.3-21(c)(3))

EBSA noted that its proposed definition does not depart from its existing interpretation that, as a general matter, a recommendation to a plan participant to take an otherwise permissible plan distribution does not constitute investment advice, even when that advice is combined with a recommendation as to how the distribution should be invested. However, EBSA is requesting comments on whether and to what extent the final regs should define the provision of investment advice to encompass recommendations related to taking a plan distribution. In particular, EBSA is interested in information on other laws that apply to the provision of these types of recommendations, whether and how those laws safeguard the interests of plan participants, and the costs and benefits associated with extending the regs to these types of recommendations.

Roth Conversions Now Allowed in Employer Plans

2010-10-03T22:19:00.000-04:00

One of the best wealth building tools of our time is the Roth IRA or Roth 401k/403b. As a refresher, traditional IRAs/401k's are funded with pre-tax dollars and defer taxes on investment gains until the day you withdraw the funds. When funds are withdrawn from the traditional IRA/401k, they are taxed as ordinary income (your highest tax bracket). Conversely, Roth's, are funded with post-tax dollars but all of the investment earnings grow tax free and avoid taxes when they are withdrawn (assuming it’s a qualified distribution).

It used to be that even if your employer retirement plan (401k/403b) allowed Roth contributions, existing plan balances could not be converted to a Roth until you left the company and rolled over your money. That is no longer the case.

As of September 27, 2010, employees with 401k or 403b accounts can do a Roth conversion without taking money out of the plan — but only if the employer takes steps necessary to permit these conversions. Click here to learn more about this.

How Retirement Planning Shortchanges Women

2010-09-16T21:48:00.000-04:00

I've been writing about women and money related issues for several years now. Here's a recent Wall Street Journal article on the subject that's worth sharing. Some highlights:

*Analysts say the industry sometimes shoehorns women into retirement-savings formulas meant for men. But two important variables, income and life expectancy, are very different for women -- generally, they earn less and live longer. Many advisers specializing in women's finances say that means women should invest more aggressively in their younger years. In practice, women tend to be more conservative, keeping a higher percentage of their money in low-risk investments such as cash than men do, according to Cogent Research.

*Financial planners say it's common for married women to assume that their spouse's savings will do the heavy lifting. But in practice, women are more likely than men to spend part of their retirement alone, making it even more important for them to have their own plan.

*Conflicting styles of communication may have a lot to do with why women feel ill-served. Experts generally agree that women prefer advisers who address their needs holistically, educating them about their choices and explaining how they can reach long-term goals.

For more info on financial issues for women, check out this article on my website www.cathypareto.com

Today is National 401(k) Day....what's the state of affairs in your plan or account?

2010-09-10T17:31:00.000-04:00

401(k) Day is an annual celebration spotlighting the importance of employer-sponsored profit sharing and 401(k) plans. A good 401(k) plan can boost your chances of a secure retirement and, perhaps even allow you to retire sooner—if you take advantage of it. Employer contributions and the benefits of tax deferral can be a welcome boost to your bottom line in retirement.

So, when is the last time you took a look at your employer's 401k plan? How often do you re-balance your investments? Do you even know what you are investing in? Are you maxing out your contributions?

Why not make every day 401(k) Day?-- here's how:

* Enroll in your company's 401(k) plan
* Increase your contribution to the 401(k) plan with every pay raise
* Take control of your savings
* Ensure your 401(k) investments are on target to get you where you need to be
* Shift your asset mix as needed to stay on course
* Prepare for detours on your journey toward retirement
* Learn about available investment options from your plan sponsor, if they
aren't helpful then take the initiative to learn on your own
* Check your account balance at least quarterly, reallocate funds as needed
* Work with your 401(k) plan administrator or an independent (fiduciary)
financial advisor
* Retirement is more expensive than you think, so make sure you are prepared
to reach your retirement destination

Finally, if you change jobs, don't forget to rollover your old plan into an IRA Rollover that gives you greater flexibility and fund choices. Read here to learn more.

Are ADR's or Mutual Funds Better for Global Diversification?

2010-08-18T14:24:00.000-04:00

The benefits of international investing cannot be denied. There have been countless articles and papers written on the subject already that are beyond the scope of this article. But what exactly is the best method of gaining international exposure in your portfolio? Should you consider exposure to foreign companies via American Depository Receipts or are mutual funds a more optimal solution?

American depository receipts (or ADR’s) are securities created by a U.S. bank that represent shares in foreign companies that are held at the bank. An ADR may represent a portion of a foreign share, one share or a bundle of shares. ADR’s themselves are not stocks, but certificates held by U.S. banks. Like U.S. common stock, ADR’s trade on U.S. stock exchanges and pay dividends (subject to U.S. taxation).

ADR’s, like most foreign mutual funds, are denominated in dollars, but they do not eliminate the potential currency risk associated with investing in foreign markets. So, when the dollar is weak, investment returns in foreign positions are usually more robust. Inversely, when the dollar rallies against foreign currencies, ADR’s from those countries will fall more than if shares were held by direct investors in the company.

Unfortunately, if your objective is to achieve global diversification in your portfolio, ADR’s are quite limiting. When you buy an ADR, you are gaining representation in one foreign company, a concentrated risk by most prudent standards. Furthermore, most ADR’s are limited to mid to large capitalization companies. So, even if an investor owned every traded ADR on the exchange, he/she would end up owning something similar to an EAFE index, but at a much higher acquisition cost.

We can all agree that the purpose of including foreign stocks in a portfolio is to control risk and maximize return. However, these dual objectives cannot be obtained solely with international large cap exposure (which is all that the ADR would provide). In order to accomplish your goal you should also include foreign value, foreign small, foreign small value and emerging markets. These simply cannot be attained with ADR’s.

So, for access to foreign markets, international mutual funds are a better alternative. They have the ability to provide broad global representation while spreading risk across hundreds of companies, sectors, and countries around the world. The aforementioned asset classes like foreign small, foreign small value et al are all available to investors.

It should be noted that because international stocks are more costly to trade, foreign funds typically carry higher expense ratios than their domestic counterparts. Furthermore, the dividends of international stocks are subject to foreign taxation—even when the recipients are tax-exempt in the US (like a pension plan). Taxable investors, however, can receive credits for foreign taxes paid. Of course, cost conscious investors should consider global index funds or exchange traded funds to keep costs to a minimum.

Yet despite the potential cost and foreign tax implications, international mutual funds (unlike ADR’s) allow investors to capture a broad array foreign exposure. When soundly combined with other domestic asset classes, international exposure is an essential building block in any optimal portfolio, and mutual funds (not ADR’s) provide you with the best tools to achieve that goal.

Keep Tabs on Your Credit Report--for free!

2010-07-22T14:40:00.000-04:00

Everyone knows how important it is to maintain good credit. You need good credit for many things nowadays, ranging from buying a home, renting an apartment, buying/leasing cars and even landing certain jobs.

It used to be that monitoring your credit was not very transparent and obtaining your credit information was a tedious process. But, that's no longer true today. Consumers can now see their credit reports and every detail on them. Knowing what's on their reports, people can dispute errors and see how they can improve their scores. They can even spot identity theft much sooner.

So, why don't more people monitor their credit, especially when you can do it for free?

Did you know....Americans are entitled to a free credit report every 12 months from each of the three credit bureaus (Equifax, Experian and TransUnion). However, there is no law about getting your credit score (which is based on information in your credit report) for free. You can get your credit report from AnnualCreditReport.com. It is a good idea to request a report from each of the companies and check each one.

Word to the wise....be smart about where you sign up to get a credit score. Many companies are only looking to sell you their credit monitoring services and products (think of that annoying T.V. commercial with the catchy songs and the singing dorks). Other sites don't necessarily provide your FICO score, which is the most commonly used credit information.

How the Expiring Bush Tax Cuts Affect You

2010-07-08T08:21:00.000-04:00

Here's one worth sharing from SmartMoney.com. Higher tax rates are coming, make no mistake about it. After all, someone has to pay for the mountain of debt that keeps growing in the U.S., right?

Read on to see how the Bush tax cuts will affect you.

Higher Tax Rates for All

You may have been led to believe that only individuals in the top two brackets will face higher federal income taxes when the Bush cuts go bye-bye. Not true! Unless Congress takes action and President Obama goes along, rates will go up for everyone -- not just a sliver of the wealthiest Americans

You should consult with your financial advisor and/or tax professional now to see what, if any, strategies you should consider in preparation for higher taxes.

Deciding Between Stocks and Bonds

2010-06-04T15:20:00.000-04:00

Choosing a basic stock-bond mix is an important first step in portfolio design. Although the decision may appear simple, it can have a profound impact on your wealth.

Portfolio theory explains the value of making a deliberate, strategic decision about the proportion of stocks versus bonds to hold in a portfolio. The basic premise in structuring a portfolio is that all investors face two important decisions: (1) deciding how much risk to take, and then (2) forming a portfolio of “risky” assets (equities) and “less risky” assets (fixed income) to achieve this risk exposure.

Your stock-bond decision implements this risk position.

The Rationale

All investors who are willing to take stock risk should begin with a diversified market portfolio. Each investor then can dial down total risk in the portfolio by adding fixed income to the mix. The greater the bond allocation relative to stocks, the less risky the portfolio and the lower the total expected return; the greater the stock allocation relative to bonds, the higher the portfolio’s expected return and risk.

Investors who want to take even more risk than the market can increase exposure through borrowing on margin and/or tilting the stock portfolio toward asset groups that offer higher expected returns for higher risk.

So, how does one confidently allocate between stocks and bonds? A common method is to evaluate model portfolios along the risk-return spectrum. A riskier portfolio holds 100% stocks, and the least volatile portfolio holds 100% bonds. Between these extremes lie standard stock-bond allocations, such as 80%-20%, 60%-40%, 40%-60%, and 20%-80%.2 Then you compare the average annualized return and volatility (standard deviation) of each model portfolio for different periods, such as one, three, five, ten, and twenty years. Volatility is one of several risk measures investors may want to consider. With this in mind, the analysis should feature average returns, as well as best- and worst-case returns for the various periods.

While this technique relies on historical performance that may not repeat in the future, and does not consider various investment costs, it may help you think about the risk-return tradeoff and visualize the range of potential outcomes based on the aggressiveness of your strategy.

Refining Your Stock Allocation

After establishing the basic stock-bond mix, investors turn their attention to refining the stock allocation, which is where the best opportunities to refine the risk-return tradeoff are found. Investors who are comfortable with higher doses of equity risk can overweight or “tilt” their allocation toward riskier asset classes that have a history of offering average returns above the market. Research published by Eugene Fama and Kenneth French found that small cap stocks have had higher average returns than large cap stocks, and value stocks have had higher average returns than growth stocks. By holding a larger portion of small cap and value stocks in a portfolio, an investor increases the potential to earn higher returns for the additional risk taken.

The final step in refining the stock component is to diversify globally. By holding an array of equity asset classes across domestic and international markets, investors can reduce the impact of underperformance in a single market or region of the world. Although the markets may experience varying levels of return correlation, this diversification can further reduce volatility in a portfolio, which translates into higher compounded returns over time (but not always in the short run).

Fixed Income Strategies

Research shows that two risk factors—maturity and credit quality—account for most of the average return differences in diversified bond portfolios. Long-term bonds and lower-quality corporate bonds typically offer higher average yields to compensate investors for taking more risk. But keep in mind that these premiums are considerably lower than the market, size, and value premiums documented in the equity world.

Investors generally hold fixed income to either (1) reduce overall portfolio volatility, or (2) generate a reliable income stream. These objectives typically lead to different investment decisions. The first approach, volatility reduction, is an application of separation theorem (i.e., hold equities for higher return and use fixed income to temper portfolio volatility). Rather than increasing risk to maximize yield, these investors want to hold fixed income securities that are lower risk. Certain fixed income asset groups are better suited for this strategy.

With this in mind, some long-term investors may seek to earn higher expected returns by shifting risk to the equity side of their portfolio. With an eye to minimize maturity and credit risk, they hold short-term, high-quality debt instruments that have historically offered lower yields with much lower volatility.

The second purpose for holding bonds is to generate reliable cash flow. Income-oriented investors, including retirees, pension plans, and endowments, may not worry as much about short-term volatility in their bond portfolio. Their priority is to meet a specific funding obligation in the future. Consequently, they design a portfolio around bonds and accept more volatility in hope of earning higher yields, which they pursue by holding bonds with longer maturities and/or lower credit quality.

Whether investing for total long-term return or for income, a portfolio should be diversified across issues and global markets to avoid uncompensated risk from specific issuers and to capture differences in yield curves around the world.

Summary

The stock-bond decision drives a large part of your portfolio’s long-term performance. During portfolio design, evaluating different stock-bond combinations can help you visualize the risk-return tradeoff as you consider the range of potential outcomes over time. Once you determine a mix, it can guide more detailed choices of asset classes to hold in the portfolio. And as your appetite for risk shifts over time, you can revisit the mix to estimate how shifting your portfolio mix may impact your wealth accumulation goals in the future.

Endnotes
1 James Tobin, “Liquidity Preference as Behavior Towards Risk,” The Review of Economic Studies 25, no. 2 (February 1958): 65-86.

2 The basic stock component may be reflected by the S&P 500 Index, or preferably, by a broader market proxy, such as the CRSP 1-10 Index. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca exchanges. The S&P 500 Index offers a proxy of the large cap US equities market. The fixed income component may be represented by an index of short-term US government securities or government and corporate bonds.

Free Business Books!

2010-05-25T22:13:00.000-04:00

Online MBA, a website dedicated to business education and related resources, is giving away a limited number of books on its recommended list. Among the titles offered: Dynamic Asset Allocation, Linchpin, My Start Up Life, The Happiness Project and more. Instructions on how to request a free book copy are posted here.

What's the catch? Supplies are limited...first come, first serve.

Quick background:

OnlineMBA.com is a a blog is dedicated to help guide soon-to-be college graduates and business professionals navigate through the pitfalls of the business world by providing valuable resources and tips from business professionals, as well as advice from some of the leaders in various industries. Check it out!

3 Ways to Spy on Your Financial Planner

2010-05-10T11:26:00.000-04:00

This article from Bankrate.com was worth sharing. Anyone currently working with a financial planner/advisor or shopping for a new financial advisor should read this.

Here's a snipet:
Consumers are accustomed to having their personal information collected but turnabout is fair play. You are entitled to more than mere verbal assurances from the financial planner in your life. After all, this is the professional who's going to guide you as you save for college, retirement and other important milestones.

Want to learn more about your Certified Financial Planner, or CFP? Looking to choose a planner but want more up-to-date information on your candidate? Check these three places to get the skinny on your money pro:.....read more.

Money Saving Tips For You

2010-04-27T15:43:00.000-04:00

From NBC6 in Miami: Finance experts say web companies are pooling resources to help save you money. Check out what Cathy Pareto has to say....

View more news videos at: http://www.nbcmiami.com/video.

21 Best Money Tips Ever

2010-04-15T17:56:00.000-04:00

CNN Money lists what they call the 21 best money tips ever. They asked "some of the nation's leading business owners, investors, and thinkers" to "share their thoughts on rebuilding your wealth." I thought some of my favorites might be worth sharing:

John Schnatter
Founder and CEO of Papa John's Pizza, with more than 3,000 locations worldwide

"Live below your means and be frugal. The economy is going to get worse before it gets better. And folks who have savings have the best chance of getting through this."

Robert Shiller
Yale economist who correctly called the bubbles in real estate and tech stocks

"People are mistaken about the long-run gains they might make in real estate. I put together a home-price series going back to 1980. And it's wrong to think real estate investments as a group will have to go up much in price."

I live in South Florida and have seen this first hand. Everyone had a Donald Trump complex and real estate was thought to be THE investment, until the bottom fell out.

Jane Bryant Quinn
The dean of personal-finance columnists and author of "Making the Most of Your Money Now"

"Pay off your mortgage before you retire if you want financial safety and security. There is bankruptcy among people in their seventies and eighties who had a lot of debt that they couldn't carry when the paychecks stopped."

Liz Ann Sonders
Chief investment strategist at Charles Schwab; chairs the firm's investment strategy council

"One thing I see with our clients and individual investors is an aversion to risk, and a favoring of fixed-income funds and Treasuries. In the past 20 years, we've been in an environment that's been good to bonds relative to stocks. But it's rare for that to happen over an extended period -- and the last two times it happened, the subsequent five-year period favored stocks."

Abigail Johnson
President of the Personal and Workplace Investing division of Fidelity Investments

"Best advice I can give: Every retiree and pre-retiree should have a retirement income plan in place that incorporates a realistic estimate of anticipated expenses. And if possible, your essential expenses, including health insurance, should be covered by reliable sources of lifetime income such as Social Security, pensions, and perhaps certain types of guaranteed income or sustainable withdrawals from savings."

Liz Claman
Fox Business Network anchor and author of "The Best Investment Advice I Ever Received"

"It's not about what you want, it's about what you need. We all must reassess our consumer behavior. It's not good enough to live within our means -- we have to live beneath them."

This is great food for thought from some pretty bright minds. Hopefully Americans are listening....

Recent Market Volatility in Perspective

2010-04-14T23:51:00.000-04:00

The US stock market has taken investors on a bumpy ride in recent years. This volatility has tested investor discipline and prompted some people to question their commitment to equities. While no one knows the future, looking at the past may help you gain a better view of long-term market performance and put the recent market volatility in perspective.

The above chart shows the historical distribution of US market returns since 1926. The performance years are stacked in ascending order by return range. This chart illustrates that:

· Market performance over the past two years has been extreme by historical standards. In 2008, US stocks experienced their second-worst calendar return in eighty-four years. Then, in 2009, stocks rebounded strongly to deliver a return in the top quartile of the historical distribution.

· Over the long term, the market’s positive return years have outnumbered the negative return years. Since 1926, the market has experienced a positive return in almost three-quarters of the calendar years.

· Not only are the positive years more numerous, the chart shows a larger concentration of performance in the higher ranges of returns.

· The sequence of calendar returns appears random, suggesting that accurately predicting future performance is a difficult task for any investor or professional manager.

Over time, the market has rewarded investors who can bear the risk of stocks and stay committed through various periods of performance.

Source: Dimensional Fund Advisors

Investors Get More Involved

2010-04-06T20:31:00.000-04:00

I've been in this business for nearly fifteen years, and it never ceases to amaze me how disengaged some people are when it comes to their finances. Whether it's budgeting, retirement planning, risk management or investment strategy....some people are so disconnected from their own financial planning process it's actually quite scary. So, when I came across this Wall St. Journal article, it was music to my ears.

As a Certified Financial Planning Practioner, I have regularly challenged (or begged) my clients to become more engaged in their own financial planning process (with me as their guide or "coach").

From the WSJ, April 5th, 2010:

Investors are taking a more hands-on approach to their financial lives.

The past 18 months have taught individuals harsh lessons about markets' ups and downs—and made clear that investment pros aren't necessarily any more capable than average Joes of forecasting the future.

Investors continue to look to financial advisers for guidance; some are seeking out advisers for the first time or shopping for new ones. But many want to be more engaged than they'd previously been in decision making. "I think investors are taking more ownership," says Ray Sclafani, president of ClientWise LLC, a Mount Kisco, N.Y., coaching and consulting firm for financial advisers.

Nearly seven in 10 investors want to be actively engaged in the day-to-day management of their investments, according to recent data from Chicago-based research and consulting firm Spectrem Group.

So....I have one thing to say about this......."FINALLY".

Exposing the Fallacy of the "Lost Decade"

2010-03-23T08:34:00.000-04:00

The last ten years have certainly been an economic disappointment for many, with good reason. From the tech burble bursting, to the real estate boom/bust, to the grand finale of a financial meltdown, the 00’s started and ended with a bang. Many of the financial pundits have obsessed over how the decade of the “noughts” will go down in history as a total investment dud. It’s true, the 10 years ended 12/31/09 was the worst on record for the S&P 500, the benchmark for U.S. large caps. But it was the only primary global market segment that was negative over the full decade. While the 2000s were lackluster for U.S. large stocks, other asset classes fared quite nicely, and the “lost decade” argument loses some of its validity. In fact, if the past decade teaches us anything, it offers a ringing endorsement for the benefits of global diversification. Let’s dig deeper.

The investment universe is much broader than many people might think. Contrary to some investors’ propensity to concentrate their holdings in a single market index (ie. the S&P 500 or other domestic large cap stocks), many of the profit centers in the last decade were located in other sectors of the market, especially outside of the U.S. A balanced portfolio consisting of 60 percent stocks (both U.S. and foreign, small cap and large cap) and 40 percent bonds had an average annual return of 6.49 percent in the 2000's. That’s not huge, but it’s far from a lost decade.

Hedging Tools

Along with having global balance of traditional stocks and bonds, by including other hedging tools into your asset mix, like commodities, real estate investment trusts and emerging markets in your portfolio, the likelihood of a lost decade is even more remote. Consider the average annual returns of these diversifiers in the 2000's.

The FTSE NAREIT Real Estate Investment Trust Index averaged 10.2 percent for the decade. The MSCI Emerging Markets Index returned 10.1 percent per year. Treasury inflation-protected securities added 7.7 percent annually. The Dow Jones UBS Commodity Index averaged a 7.1 percent return. No lost decade there!

It’s easy to try and benchmark one’s returns to the S&P 500 or the Dow because they are so prominently mentioned in the media. However, globally diversified portfolios will not, and should not track those market indices. The reality is the U.S. market, while still prominent, only represents 40%of the global economy (less and less every day, incidentally). Many of the investment opportunities lie outside of our own border.

The “lost decade” is nothing more than a fallacy. Rather than obsessing over how a single U.S. market index has done since a meaningless date, you should focus on your long term goals and incorporate a meaningful strategy to help you reach those goals.

Mixing non correlated or low correlated assets together helps investors dampen risk while trying to maximize returns, in the short term and the long term. Just because markets across the globe had significant declines in 2008 (or the S&P was flat the last ten years) doesn’t mean diversification does not work. It has worked extremely well…just ask somebody concentrated in the S&P 500 alone, or held a handful of stocks (AIG) or was concentrated in industry exposure (financials, energy). Those folks certainly experienced a lost decade, but my guess is that they would have preferred spreading their risks and owning tens of thousands of stocks instead.

Bottom line: exposure to other types of equity and non equity assets is essential in portfolio construction. By including exposure to each of these markets in a balanced investment strategy, you might not only increase returns but reduce risk at the same time.

Cathy Pareto on Managing Portfolio Risk

2010-02-20T09:15:00.000-05:00

I’m relieved that we’re starting to see an economic recovery, but there’s a disconnect between what’s gone on in the stock market and what’s happening in the macro economy. People have a bias toward recent events—we have a huge debacle in the markets and everyone gets out, then the market’s on fire and people want to get back in. Along the way, they tend to lose sight of what’s important with their own personal planning—that it’s not just about returns, but also about how much risk they can really handle.

On my intake form for new clients, I ask about their objectives, as well as how much volatility they can deal with. After I do a three-page risk tolerance questionnaire, I say, “Given all of that, what is a realistic expected rate of return for you?” Almost universally, they want low risk, capital preservation, low volatility, high growth—and a 12% rate of return. At that point, I have to have the uncomfortable conversation that I just don’t think that combination is going to work.

I try to simplify the concept of how risk and return are connected. I’ll say, ‘If these are the kind of returns you want, let me show you what kind of risk it’ll take to get there.’ I use historical returns from 1975 through 2008 and draw a sample portfolio out to two or three standard deviations. That way, we get a more realistic picture of how high the upside can be—and, more important, how low the downside can be. Many clients will sit back and say, “I don’t think I can sleep with that scenario.”

When I have a client who’s planning to retire in a year or two, I do a worst-case scenario: Say you’ve just retired. You’re starting to draw down your retirement savings, and we hit a two-year-long bear market. How would it impact your terminal wealth? It’s a dose of reality that clients really need.

After what we’ve been through in the last couple years, I think we owe it to our clients to level with them. I don’t have the inside scoop from Wall Street firms and Washington connections, but arguably we could go through this again in the near future; our country is not on sound fiscal footing.

Individual Investors Continue to Underperform Market Index

2010-02-13T17:27:00.000-05:00

Published results from firms like Dalbar and Vanguard consistently show that, over the past 25 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.

So, for example, in 20 years from Jan. 1, 1989 through Dec. 31, 2008, the S&P 500 showed a 8.35% gain (Dalbar). Over that same period, equity investors showed a 1.87% gain. And if you include the 2.89% inflation rate in those years, investors show a 1.02% loss.

You can shift to a timeframe which excludes the bear market that started in 2007, but it doesn't change the basic story. From January 1984 though December 2002, the Dalbar data shows that equity investors earned an annual average of 2.6%, vs. the S&P 500's 12.2% annual average. The annual inflation rate for period was 3.14%.

What's more, similar studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy.

Want to learn more about investor behavior? Click here.

The Timeless Rules of Investing

2010-01-28T12:03:00.000-05:00

Princeton Economics Professor Burton Malkiel talks with Kelly Evans from the Wall Street Journal about his book "The Elements of Investing," which advocates a "buy and hold" strategy, despite the poor performance of past decade.

These are sound nuggets of advice you may wish to consider.

Watch this informative video here:

2009 A Year of Investment Scams

2009-12-31T09:25:00.000-05:00

As reported by the Associated Press:

"It was a rough year for Ponzi schemes. In 2009, the recession unraveled nearly four times as many of the investment scams as fell apart in 2008, with "Ponzi" becoming a buzzword again thanks to the collapse of Bernard Madoff's $50 billion plot.

Tens of thousands of investors, some of them losing their life's savings, watched more than $16.5 billion disappear like smoke in 2009, according to an Associated Press analysis of scams in all 50 states.

While the dollar figure was lower than in 2008, that's only because Madoff — who pleaded guilty earlier this year and is serving a 150-year prison sentence — was arrested in December 2008 and didn't count toward this year's total.

In all, more than 150 Ponzi schemes collapsed in 2009, compared to about 40 in 2008, according to the AP's examination of criminal cases at all U.S. attorneys' offices and the FBI, as well as criminal and civil actions taken by state prosecutors and regulators at both the federal and state levels."

Surely, 2008 and 2009 will not be the last times we hear of such Ponzi schemes. We are living in a world plagued by corporate corruption, excess and greed. Last year's financial debacle coupled with scandal after scandal has left investors leery and scared. Who can blame them?

Investors beware and don't fall prey to these greedy snake schemes. Here are some tips, as published by the CFA institute on how to avoid investment fraud.

May 2010 bring you wisdom, good health and success!

What is a Conservative Investor

2009-12-18T12:32:00.000-05:00

A conservative investor is someone who doesn't subject themselves to much market risk or market fluctuation. Typically an older person, conservative investors will have more fixed income bonds and fewer stocks. Find out more about conservative investing with information from a financial planner in this free video on investments.

What Is a Conservative Investor? -- powered by eHow.com

Measure Your Portfolio's Performance

2009-12-16T17:20:00.000-05:00

Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.

Recovery in 401k Balances

2009-12-02T15:43:00.000-05:00

It pays to invest in a down market. Don't believe me?

One of the questions posed following the 2008–2009 market decline was: How long will it take for 401k plan participants to recover the wealth they attained at the peak of global stock prices in October 2007? This new "Research Note" from Vanguard Center for Retirement Research provides an answer: For the median plan participant at Vanguard, recovery took about two years. The main reason—ongoing contributions.

Read for yourself by clicking on this link.

Wealth Management Roundtable

2009-11-10T13:13:00.002-05:00

From the Daily Business Review: "Seven financial advisers from across South Florida discussed the challenges of both the past year and the next at the Daily Business Review’s seventh annual Wealth Management Roundtable, and gave their take on how clients should approach the next several months." Cathy Pareto was among the small group of panelists.

Check out the full article here and highlights from the discussion in the video link below.

http://www.dailybusinessreview.com/Web_Video/Wealth_Management2009/video.html

Retirement Crisis?

2009-11-07T21:35:00.001-05:00

The percentage of Americans at risk of having to cope with lower living standards in retirement has risen to 51%, seven percentage points higher than the 44% last measured in 2007, the Center for Retirement Research at Boston College found. And the figures would be even higher if they accounted for healthcare and long-term care, the center said.

Among low-income households, the percentage at risk is 60%, among middle-income it is 47%, and for high-income it is 42%.

And Nationwide Mutual Insurance, which underwrote the research for the National Retirement Risk Index, has found that many investors are becoming disengaged about planning for retirement. Twenty-five percent fewer people say they would seek advice before making investment decisions, and 60% less agree that retirement income is important.

“We are clearly facing a retirement crisis, one that will continue to grow as younger workers age,” said center Director Alicia H. Munnell. Both the center and Nationwide are calling on investors and their advisers to proactively prepare for retirement, particularly for advisers to empathize with their clients’ frustration and cynicism. Specifically, the organizations recommend that people save and invest more, reduce debt and work longer.

Are you on track?

5 Ways to Save for College

2009-11-07T20:52:00.000-05:00

Here's part two of the Miami Herald series on college planning, featuring quotes from Cathy Pareto.

You might feel like you need a degree to figure out the best way to save for your child's college education.
Never mind an extra income.

But there are different options -- for nearly every budget -- that can help amass at least some of the money it will cost to pay for an education years from now.

In addition to prepaid plans that let you lock in current tuition prices, a variety of investments are designed to make your money grow.

Investments, interest rates and fees vary in these plans, so you will need to do some research before you choose one of them.

COLLEGE SAVINGS PLANS

Aside from prepaid tuition plans, many states offer 529 savings plans, named after a portion of the federal tax code. A 529 plan can refer to a prepaid program in which the tuition is guaranteed to be covered, like the kind Florida has, or college savings plans, in which investors manage their own accounts and there is no guarantee of the plan's value at the time a child is ready to go to school. Florida has one of those, too: the Florida Investment Plan.

Many advisors recommend using one of these plans along with a prepaid tuition plan. The money from the savings plan can be used for college expenses beyond tuition, such as textbooks.

And if there's money left in the plan when the student finishes his or her undergraduate education, it can be used toward a graduate degree, said Cathy Pareto, a certified financial planner in Coral Gables.....

Prepaid plans could solve college funding problems

2009-10-24T10:02:00.000-04:00

Here's a recent blurb regarding college planning from The Miami Herald.

Mention that you need to start saving for your child's college tuition and you will hear the same advice from many financial planners: Pay for it in advance.
``Step one is, if you can lock in your costs at today's prices, do it,'' said Cathy Pareto, a certified financial planner in Coral Gables.

That's because the costs of college are rising at a staggering pace -- and far faster than the rate of inflation, Pareto said.

Just this year, the state raised tuition at all public universities by 8 percent and every university then raised tuition another 7 percent -- a one-year increase of 15 percent.

Read more.

http://www.cathypareto.com

To Roth or Not to Roth, That is the Question

2009-09-29T14:46:00.000-04:00

The majority (83%) of individual investors are clueless about the removal of income limits on Roth IRAs next year, according to research by Fidelity Investments released today.

Fidelity’s findings are much worse than an earlier study by Bank Investment Consultant, Financial Planning and On Wall Street, which found that only 42% of those clients knew about the changes affecting Roth IRAs next year.

Are you informed? There may never be a better time for a Roth conversion. Find out why and if this makes sense for you. Read on....

Are You Financially and Emotionally Prepared for Retirement?

2009-09-23T10:11:00.000-04:00

The third Real Life Retirement quarterly pulse survey by Charles Schwab shows the recent economic downturn has not spurred Americans to change behaviors regarding retirement preparation. Almost four in 10 Americans (39 percent) are not currently saving for retirement and, despite market losses, six in 10 Americans (62 percent) have not adjusted their thinking about what age they will retire – nearly unchanged from the first pulse survey in September 2008, months before the recession was officially declared.

"Americans may be feeling a lack of control over their retirement which has led to inaction, when in fact this is an ideal time to act," said Mark Jamison, vice president at Charles Schwab. "Now is the time to reevaluate your financial circumstances. Whether that means delaying retirement or adjusting how much you save for retirement, making changes now can lead to a significant difference in the future."

Survey respondents estimate they will need just over $1.2 million to comfortably retire, yet those currently saving for retirement have put away an average of $194,000. Despite this awareness, 41 percent of Americans feel positively about their retirement preparedness and another 22 percent feel indifferent.

For More Information

Do you know if you are on track for retirement? Are you aware of how expensive funding your retirement can actually be? To learn more, click on this recent article on our website.

2009-08-26T13:31:00.000-04:00

How to Pick a Mutual Fund -- powered by eHow.com

To pick a mutual fund, consider the cost of investing, the load on the front and back end, the internal expense, how it fits into current investments and the asset class of the mutual fund. Understand the tax implications of purchasing a particular mutual fund with help from a financial planner in this free video on investments.

Expert: Cathy Pareto Contact: www.cathypareto.com
Bio: Cathy Pareto has an MBA, and is the founder and president of Cathy Pareto & Associates, Inc., based in Miami, FL.

Congress aims to change credit card rules for people under 21

2009-08-04T17:42:00.000-04:00

BY NIRVI SHAH
nshah@MiamiHerald.com

Laptops ready? Take notes: Congress wants it to be harder for the under-21 set to accrue a mountain of credit card debt.

A new federal law affects credit card holders -- and those who want cards -- of all ages. But because several provisions don't take effect until February, this could be the last semester of truly easy credit for many college students.

``I don't want to say credit cards are evil,'' said Cathy Pareto, a certified financial planner in Coral Gables. ``But targeting that demographic has long been an abusive practice. [Credit card companies] take advantage of the naïvete of teenagers.''

Read the whole article here.

Inside The Great American Bubble Machine

2009-07-19T10:10:00.000-04:00

Here's a great story published by Rolling Stone (of all magazines), on how Goldman Sachs has engineered every major market manipulation since the Great Depression.

In Rolling Stone Issue 1082-83, Matt Taibbi takes on "the Wall Street Bubble Mafia" — investment bank Goldman Sachs (click here to read the whole story). The piece has generated controversy, with Goldman Sachs firing back that Taibbi's piece is "an hysterical compilation of conspiracy theories" and a spokesman adding, "We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good." Taibbi shot back: "Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it." Here, now, are excerpts from Matt Taibbi's piece and video of Taibbi exploring the key issues.

Here's the author, Matt Taibi, in his own words, summarizing his piece. Check out the video here.

Unbelievable! AIG strikes again

2009-07-10T11:23:00.000-04:00

Report: AIG asking corporate pay czar Kenneth Feinberg to approve next week's bonus payments

By The Associated Press

After its bonus payments ignited a firestorm of criticism earlier this year, American International Group Inc. is asking the federal government to weigh in on the insurer's plan to resume paying millions in promised retention incentives next week, according to media reports.

AIG, once the world's largest insurer, has asked the Obama administration's compensation czar, Kenneth R. Feinberg, to approve the payments in order to head off any public outrage, The Washington Post reported Thursday evening.

While the company isn't required to get the government's blessing because the payments are actually for 2008 employment contracts, the newspaper said executives are reluctant to move forward with installments coming due next week without official approval.

Feinberg has the power to reject pay plans he deems excessive at companies which benefited from large infusions from the government's $700 billion bank bailout fund. Feinberg also has authority to review compensation for the top 100 salaried employees at those firms. AIG is among the companies whose pay practices the government now oversees.

New York-based AIG remains the focus of intense scrutiny, after becoming one in a string of corporate calamities and a touchstone for public fury. The huge volume of credit default swaps -- a form of insurance against bond defaults -- sold by AIG, coupled with rising levels of defaulted mortgage and other debt, threatened the company's existence and prompted the government to step in.

Government aid to AIG totals about $180 billion.

The $450 million in bonuses that AIG allocated in 2008 for employees, including to traders in the financial products unit that brought it to the brink of collapse, fueled public and congressional outrage. The first installment of those payments earlier this year sparked legislation in Congress to slap punishing taxes on big bonuses at AIG and other companies bailed out by taxpayers, though the Senate didn't act on that plan.

---------

Now that's just plain wrong. No more bonuses for bailouts or rewards for bad behavior! The American people deserve better than this.

How to Buy Stocks on a Budget

2009-07-09T21:19:00.001-04:00

How to Buy Stocks on a Budget -- powered by eHow.com

What's the Difference: Stockbrokers, Fee-Only Advisors, Fee Based Advisors?

2009-07-01T22:14:00.000-04:00

The financial services industry is a very crowded space. With so many “advisors” to choose from, how do you distinguish what type of financial advisor you are working with? How do you know who you can trust with your money? Many financial advisors are nothing more than glorified salespeople with a clever title. The investments they sell have a direct correlation with the compensation they receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t be fooled. The following guide will help you make more informed decisions on how advisors are compensated.

Stockbrokers

Commission based advice is great---if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. This type of advice is plagued with high costs and opaque disclosure—high costs that chip away at your profits. The registered representative (stockbroker) - unlike a registered investment adviser - has no fiduciary duty to place the client’s interests first. Inadequate disclosure coupled with conflicts of interest guarantees that a fair number of people are going to be victimized by bad advice.

Because broker-dealers are not necessarily acting in your best interest, the SEC requires them to add the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to dictate
your financial security:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest, running for the exits might be a good option here.

Fee-Based Advisors

“Fee based” advisors (also referred to as fee-offset) can be just as bad, if not worse. Commission based compensation includes “fee-based” compensation which is a particularly evil label referring to both fees and commissions. Fee based advisors have the ability to charge a percentage “based” on the assets they manage, but they also have the ability to sell you a commission based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal is certainly immoral. The broker makes money from both the client and the commission. What a guy! Don’t be fooled. Stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.

Fee-Only Advisors

Fee-only compensation (not to be confused with fee-based) is non commission driven and eliminates the exploitation of investors, where quality objective financial advice is the only product, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you. Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes finding the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors must adopt a Code of Ethics and fully disclose how they are compensated.

High net worth, high income households are often easy targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:

• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you provide an Investment Policy Statement?(Don’t know what that is—find out!)
• How much authority will you exert over my accounts?
• Do you have a clean regulatory record?
• What are your credentials?
• What is your educational background?
• How much experience do you have?
• What are your continuing education requirements?

Finally, you should also request and review the advisor’s written disclosure statement, ADV part I and II.

Other Considerations

Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers the most robust, well rounded financial education available to financial practitioners and it carries the most clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, CFP® designation is held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/Trust companies that may charge commissions or peddle proprietary funds and 2) the more consumer friendly independent fee-only (or fee-based) side of the industry.

In summary, a consumer should demand that their advisor sign on as a fiduciary in writing. Stock brokers and Registered Representatives (RR) cannot do this. Conversely, an independent Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where an RIA is also an RR, the investor must clearly understand that most likely that advisor is not operating as a fiduciary. Remember that credentials do not always translate into your success.

Bottom line—do your homework before you hire!

The Changing Landscape of Taxes

2009-06-18T09:59:00.000-04:00

Get ready for higher taxes! The Obama administration is pushing for changes to tax law, along with more regulatory oversight of the financial sector by the end of this year. Here's a quick intro regarding what policy and tax law changes we might expect, and how these new rulings could impact investors.

Prepare for Tax Increases

With President Bush’s tax cuts expiring at the end of 2010,the timing for tax reform is even more critical. As the deadline approaches,and with President Obama calling for tax hikes on the top two tax brackets, lawmakers are expected to take action before the cuts expire. Indeed, many experts see those top two tax brackets moving from 33% and 35%, to potentially 36% and 39.6% for those earning about $250,000 or more a year.

Without a doubt, the economic stimulus package, the bailouts, plus the cost of proposed new social programs such as health care, will contribute to a significantly higher deficit. So, the current administration wants to try and offset some of these new federal expenses with the revenues collected from higher taxes for "the rich".

Look for Estate Tax Reform

With estate taxes set to temporarily disappear in 2010, we should expect changes to estate tax law before changes to income tax law. The disappearance of estate taxes would eliminate revenue that Capitol Hill clearly needs as it looks to decrease its deficit. It is highly unlikely that Congress will let the estate tax drop to zero in 2010, particularly at a time when our fiscal policy is in the red.

Another reason Capitol Hill is likely to address estate tax law quickly, is that rules set to take effect at the start of 2010 will make it exceedingly complicated for heirs to figure out exactly what they owe to the government when they get their inheritance.

Heirs lose the stepped-up basis in determining the beneficiary capital gains tax starting in 2010, which means they would pay taxes based on the original cost of assets held in the estate, not their worth at a parent’s death. So the savings in estate tax is tempered by increased income taxes imposed on the heirs. Of course, that means tracking down cost basis will be more nightmarish then ever before. This change, if it passes, will be interesting from an administrative perspective.

It is widely expected that Capitol Hill will approve new legislation that would grant a $3.5 million exemption per person, with a 45% rate on anything above that.

Watch for Changes to Dividend Taxes

Another area to keep an eye on is dividend taxes. Taxes on qualified dividends have been at a maximum 15% since 2003—previously the average dividend tax rates were at roughly 28%. But the current rate is scheduled to sunset at the end of 2010 if lawmakers do not authorize changes.

President Obama’s administration has supported increasing these rates for individuals in the top two tax brackets to 20%, beginning in 2011.

According to the current proposal, taxpayers in the lower tax brackets would see their rate stay at 15%, and the lowest tax bracket would see the rate remain at zero. Of course, the outcome may be entirely different in the end.

But unlike the rush to address estate taxes, modifying dividend taxes is not likely to happen until 2010 and is not expected to be effective until 2011. Still, investors and their advisers should be aware of possible changes as they build and adjust their clients’ portfolios.

Consider Municipal Bonds

With income tax rates expected to rise for those in higher-income brackets, certain investors would do well to look to municipal bonds. Municipal bonds, now thought to be undervalued, is expected to increase in value as the public starts to feel more confidence about the financial stability of states.

Some investors have been worried that states will not be able to pay their bonds, devaluing the bonds’ worth. However, the stimulus package is now trickling much needed cash flow down to the states which need it most, alleviating that concern to some extent, which should help the bonds to increase in value.

Expect More Regulation

Investors may also find the increased oversight projected for the financial sector attractive, as regulation is expected to make the way investments are run clearer. In the wake of the meltdown that has affected financial markets, especially the derivatives area, hedge funds and big banks, investors now want more lucidity in their investments. It's about time!

This trend is already apparent in recent legal changes imposed on the credit card industry with the government cracking down on credit card terms that have grown increasingly confusing to consumers.

We'll see how all of this unfolds. Stay tuned for more details as they become available.

Call for Action to Investors!!

2009-06-03T15:51:00.000-04:00

The market news from Wall Street has been positive for a change. But like me, are you wondering if Congress is ever going to change the way Wall Street takes risks with your money?

Right now Congress is looking at the big problems associated with the AIG and credit default problems, but sometime in the near future they will be looking at how to reform the way Wall Street brokers give you financial advice.

To those listeners out there who are still upset with Wall Street misconduct, in a minute I’m going to explain how you can do something about it.

By way of background, the whole advisor area needs serious reform. Years ago your parents clearly knew who was a stockbroker and insurance agent, because that’s what they called themselves. Pretty simple.

The problem is they no longer call themselves brokers or insurance agents. Today the preferred titles are financial advisor, financial consultant, wealth adviser, retirement specialist – the list goes on and on. In reality, brokers and insurance agents are still regulated as sales people and the bottom line is they still need to meet sales quotas to stay in business. This is hugely different from licensed professionals like doctors and lawyers, who are required to act in your best interest. Many in the listening audience may be aware that I am a registered investment adviser, which is different from the brokerage side of the business. Investment advisers, like doctors and attorneys, are required to legally act in your best interest, not meet production numbers.

I believe that if someone talks the talk, they should walk the walk. In other words, if someone markets themselves as a trusted advisor, they should be required to act in your best interest and to disclose conflicts of interest. Some of the conflicts that need to be pro-actively disclosed but are either posted somewhere on a regulatory website or not at all are sales bonuses or payment incentives that might lead a salesperson to recommend a product that benefits them or their firm more than you. Even worse, if they’ve been in trouble with the law before or sued for bad investment advice, current law doesn’t require them to disclose it to you upfront. Investment advisers are required to disclose all of these things.

So here’s what you can do. Grab a pen and write this down. If you know of the name of your members of Congress – including your two senators, there are two easy way to contact them. Call the Capitol Hill Switchboard in Washington, D.C. at 202-224-3121, that’s 202-224-3121, and they will be happy to connect you to either your house or senate member. Just be prepared to leave a short message, since odds are your senator or representative is busy.

If you don’t know your congressperson’s name, or you want to contact them by email, just go to www.congress.org, enter your home address and zip code in the appropriate box and you will find a list and links to your congressperson and senators where you can contact them directly with your own message.

The message is pretty simple. Tell them that a) you are an investor and voter, b) that you are upset with Wall Street greed, and c) the public needs congress to come up with common-sense regulation of all financial advisors. Tell them that no matter if the adviser is regulated under insurance, banking, or brokerage laws, if they are giving investment and retirement advice to the public, they should be subject to a fiduciary standard that requires them to put your interest first. You deserve no less than that.

For more info on the differences between advisors, click on my article here.

Proudly Announcing The 40 Under 40 Class of 2009! (Okay, a little self promotion)

2009-05-20T07:40:00.000-04:00

South Florida Business Journal is proud to announce its 40 Under 40 honorees! This program recognizes 40 individuals, all under the age of 40, who are proven performers in their respective industries and communities.

Proudly Announcing The 2009 Class of 40 Under 40!

Cindy Baldwin, ACAI Associates
Ashley Bosch, Blok Urban Development
Christopher Burgio, Seitlin
David Chaney, Avisena
Jaret Davis, Greenberg Traurig, P.A.
Diana & Michael Dobin, Valley Forge Fabrics
Jon Erickson, Sheraton Suites Plantation
Mike FitzGibbon, 3Cinteractive
Carlos Garcia, Goldstein Schechter Koch
Jennifer Geckler, Bank of Florida
Matthew Greer, Carlisle Development
Group Valerie Holstein, CableOrganizer.com
Rita Johnson, Button Worldwide
Carlos Junco, Bilzin Sumberg Baena Price & Axelrod LLP
Joe Laratro, Tandem Interactive
Tiffani Lee, Holland & Knight
Eric Levin, Gold Coast Beverage Distributors
Kevin Levy, Gunster Attorneys at Law
Nick Loeb, Carbon Solutions America
Jeffrey Lynne, Akerman Senterfitt
Sonny Maken, The Maken Group
Ted Martin, KPMG LLP
Fred Menachem, Johnson & Wales University
Peter Moore, Chen & Associates
Chad Oppenheim, Oppenheim Architecture + Design
Cathy Pareto, Cathy Pareto & Associates
Eliot Pedrosa, Greenberg Traurig, P.A.
Shana Peterson Sheptak, RBC Bank
Jorge Plasencia, Republica
Kevin Ross, Lynn University
Jose Segrera, Terremark Worldwide
Marc Shuster, Berger Singerman
Jared Shusterman, SproutLoud Media Networks
Kricket Snow, Zyscovich Architects
Christina Staalstrom, BAWLS Guarana
Jamie Telchin, LXR Luxury Resorts
Vince Virga, SGIS
Stefan Weiss, Weiss Skin Institute
John Zamora, Deloitte
Alex Zylberglait, Marcus & Millichap

Young professionals are among our community's most vital assets, and it is important to recognize and acknowledge those who are making South Florida a better place to live and do business.

We will honor our dynamic group of 40 Under 40 honorees with a cocktail reception:

Thursday, June 18

Design Center of the Americas

1855 Griffin Road, Dania Beach, FL 33004

Social Security and Medicare Face Insolvency Sooner--One More Thing to Worry About?

2009-05-14T07:52:00.000-04:00

Just in case you needed another incentive to save for retirement, here it is. The government has just revised the estimates for the long-term solvency of the Social Security and Medicare Systems. 2008 marked the first year that Medicare actually ran a deficit, paying out more than was paid in. Government actuaries estimate that the Medicare fund for hospital care will be depleted by 2017, 2 years earlier than previously predicted. Meanwhile, Social Security will start burning cash in 2017 and will have wiped out its funds by 2037, four years earlier than prior projections.

So, what's on the table as far as possible solutions are concerned? We can be pretty certain that taxes will increase. There is one proposal gaining traction on the Hill to tax employee health care benefits in order to raise more capital for the soon-to-be involvement programs. Right now, employers and their employees do not pay taxes on such benefits. Another high probability outcome will be to raise the retirement age and/ or reduce benefits.

My advice for Americans, particularly those under 50--don't plan on these government programs to subsidize any part of your lifestyle in retirement. Unfortunately, the onus will be on us, and only us, to save for our future. Stand in line if you'd like to reclaim your hard earned money back from a system than, in effect, has stolen it from you!

Financial Planning for Women

2009-05-12T14:42:00.000-04:00

When it boils down to fundamentals, planning for women is not much different than planning for men. After all we share common goals: wealth maximization, risk minimization and cost containment. Both ought to strive for an optimal investment mix and both should start investing for retirement at an early age to take advantage of compounding. So, with regard to investing, there is no difference between genders and there is no special need that women have. Yet, unlike men, women face many unique issues that most men don’t. Here are the challenges (and solutions) that we need to consider:

Longevity

One of the challenges that women face in terms of retirement planning is our extended lifespan. On average, women outlive men by 7 years (mortality for women is 79 years vs. 72 for men). Many women are faced with caring for their husbands later in life, but after his death they may be left with no one to care for them. Because of this, women’s health care needs will likely be substantially higher than men, making it much more expensive for us to live longer. What does this mean? It means we may not only need to consider products like Long Term Care insurance, but we also need to have much more money in the retirement pot than men in order to not outlive our funds. Unfortunately, the challenges that follow are even greater…

Earnings Disparity

As little as I’d like to admit it, it’s no secret that men out earn women. Of course, this is true in general terms, and may not be true in all cases. But most statistics will tell us that the "gender income gap" is persistent and well-documented. In fact, he Labor Department claims that women earn only 76 cents for every dollar earned by a male counterpart in the same occupation. And although the gap is shrinking, women are forced to play catch up with their retirement nest egg, as compared to men.

So assume that each gender saves the recommended 10%-15% of earnings over their working years. Dollar for dollar the male will accumulate a larger nest egg and at a quicker pace than the female. The differences in earnings rates between men and women are difficult to explain, but I suspect that as long as women are responsible for child birth and primarily responsible child-care, this differential will likely continue.

Women have to make a conscious effort to take charge of their own retirement planning early on in their careers. And while we can’t change the facts (men earn more than women), women can try to (partially) overcome their retirement challenge by saving a higher percentage (aim for 15% to 25%) of their gross income as compared to men. My advice to all women is to max out their contributions to qualified retirement plans and IRA’s in addition to using some portion of disposable income toward after-tax investments.

Maternity and Benefits

Being a woman is a blessing, no doubt. As women, we get to experience biological miracles that men will never be able to imagine. But our biological blessing can be a double edged sword when it comes to money. Here’s why:

Most women leave paid employment for at least a short time after having children, and many leave for a substantial period of years. Some women may never return to the work force and others that re-enter the workforce may be forced to start their careers all over again. These gaps in a woman’s earnings history may result in lower Social Security and/or pension benefits. Unlike men who receive higher pension benefits because they’ve worked steadily throughout their career.

In fact, the vast majority of men have 35(+) years of substantial earnings by the time they reach 62. Conversely, only a minority of women today has such consistent earnings. Here is how the benefit calculations work. If a worker has fewer than 35 years of cumulated earnings, Social Security requires that zero years be included for those years that the individual did not work. So, let’s say a woman has only 25 years of lifetime earnings, her retirement benefit is computed using those 25 years plus 10 zero years. This number is then divided by 420 to determine the AIME (averaged indexed monthly earnings), which reduces the average benefit. This problem affects very few men.

Here are some frightening statistics to consider:

•For every year a woman stays home caring for a child, she must work five extra years to replace lost income, pension coverage and career promotion.(The National Center for Women and Retirement Research, 1997)

•A woman who takes seven years off over a 40-year career can expect to receive one-half the pension benefits of someone with 40 years of uninterrupted service.(Money Magazine , July 1997)

Investment Responsibility

Unfortunately, most women still defer the investment responsibilities to their husbands. Dreyfus and the National Center for Women and Retirement Research conducted a study in 1997 which found that 33 percent of female investors avoided making decisions out of “fear of making a mistake’” versus 22 percent of male
investors. As a consequence of this fear, women often defer financial decisions and money management to the men in their lives. (Journal for Financial Planning, 2000)

I can attest to that. In my financial planning practice, I’ve encountered far too many women that have never taken the time to learn about investing because they’ve:

1) been too intimated by the process
2) lacked the interest or
3) suffered from the “Prince Charming” effect—expecting to be “taken care of” by their current (or future)husband.

Yet, in the face of a crisis (death/incapacitation of a husband or divorce), too many women are forced to abruptly take the financial reins, leaving them ill prepared to handle their own economic affairs.

The National Center for Women and Retirement Research claims that the average age for a woman to be widowed is 56. And the U.S. Census Bureau claims that at some point their lives, 9 out of 10 women will be solely responsible for their financial affairs. With statistics like that, I can’t understand why any woman would relinquish participation in her financial future. There are no excuses, women need to become informed and get involved. I don’t care if you are single, engaged, married, widowed or already working with an advisor—it’s your future—shouldn’t you be an active participant in the financial decisions?

The Good News

Despite all of these negative statistics I’ve just discussed, there is one positive regarding women and finances. Once women begin to invest, they actually tend to fair better than men!

A behavioral finance study conducted by Terrance Odean (professor at University of California) concludes that men’s overconfidence and hyper active trading actually results in lower investment returns as compared to women. Women tend to be more conservative (investing for preservation AND growth) while men invest for
growth.

As a result, women turn over their portfolios an average of 53% a year; while men’s portfolios turnover at a rate of 77% a year. This excessive trading leads to lower performance. Here’s what Odean found: married women actually get better returns than men -- 1.4 percentage points better, and single women did even better -- 2.3 percentage points a year over single men.

Conclusion

So, what can we learn from this and how should women plan any differently for retirement? From an investment design perspective, we’ve established that women are no different than men. Every one of us ought to own a globally diversified portfolio designed to capture global market returns and minimize portfolio risk. But when building a nest egg, ladies need to make some slight adjustments.

First, we have to get informed and get involved. It’s nice to believe that our prince charming will forever take care of us, but the fact is, at some point in our lives, we’re on our own. So, it’s better to be actively aware of your finances and investments long before you might be forced into crisis mode. Second, we’re not going to stop having babies--why should we?! Yet this means we spend a lot less time in the workforce as a result of our biological gifts and to add insult to injury we’re paid a lot less. How do you counter that? You save more…lots more! Finally, believe in yourself. Investing does not have to be a mystery and we’ve already established that women make better investors than men. So, as the Nike ad proclaims…”just do it”. Your future depends on it.

What Are the Basics of Investing?

2009-05-05T01:04:00.000-04:00

Please ignore the pop-up ads, this was filmed by eHow.com and their sponsors ads show up on the videos.

What Are the Basics of Investing? -- powered by eHow.com

What it Means to Work With a Fiduciary Advisor

2009-05-04T18:41:00.000-04:00

Here I am, in my own words about why working with a fiduciary advisor is so important. Listen here! Make no mistake, there is a difference.

What Should Investors Do Now?

2009-04-29T14:47:00.000-04:00

One of our favorite mutual fund providers, Dimensional Fund Advisors (DFA), has developed a great presentation on the markets and investing. Check out their multi-part series on what investors should consider as they move forward. The videos include an examination of capital markets, the effects of recession and government policy on stock prices, how the current market stacks up to previous downturns.

Roubini: Same Crisis, Different Advice

2009-04-28T04:34:00.000-04:00

Stop Bailing Out Wall St.

2009-04-28T03:49:00.000-04:00

From The Business Insider, April 27, 2009:

Paul Krugman highlights yet another problem with bailing out Wall Street: As soon as the bad news ends, Wall Street goes right back to minting money--for shareholders and executives.

But that's good, right? We taxpayers are shareholders of Wall Street firms. So we should be happy about that?

Well, no, we're not really shareholders, because we just own preferred stock, which doesn't participate much in the upside. And now, of course, we get to watch while Wall Street firms and folks who survived on our dime go right back to paying themselves fortunes again.

But get used to it...because there's no way it would happen any other way.

The only thing that will stop Wall Street from paying itself astronomically relative to every other industry on the planet is a major reduction in the profitability of Wall Street firms. And when you lend Wall Street firms money for nothing, guarantee their debt, and demand that they start lending again for the good of the economy, of course they're going to be wildly profitable. (When they aren't writing down terrible gambling bets, that is).

We can't have it both ways. We can't save Wall Street and then micromanage how much Wall Street firms pay themselves, and we shouldn't want to--because that really is screwing up the basis of the economy. So the answer is...

STOP BAILING OUT WALL STREET.

Got that, Tim?

For more coverage, see The Business Insider.

A Broken Financial System

2009-04-17T08:39:00.000-04:00

Here's a compelling Barron's interview with William Black, "The Lessons of the Savings & Loan Crisis," that leads us to wonder if the symbiotic relationship between Washington and Wall Street has not only failed us, but opened the door to our cataclysmic demise.

---------- (from Barron's)---------

AN INTERVIEW WITH WILLIAM BLACK: The current bank scandal dwarfs the 1980s savings-and-loan crisis -- and could destroy the Obama presidency.

WILLIAM BLACK CALLS THEM AS HE SEES THEM, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City. At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud.

For Black's provocative thoughts on the current financial crisis, read on.

Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama's administration, both economically and in terms of integrity.

So you are saying Democrats as well as Republicans share the blame? No one can claim the high ground?

We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

So you aren't a fan of the recently announced plan for the government to back private purchases of the toxic assets?

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Geithner is mistaken when he talks about making deeply unpopular moves. Such stiff resolve to put the major banks in receivership would be appreciated in every state but Connecticut and New York. His use of language like "legacy assets" -- and channeling the worst aspects of Milton Friedman -- is positively Orwellian. Extreme conservatives wrongly assume that the government can't do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.

His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.

I keep asking myself, what would we do in other avenues of life? What if every time we had a plane crash we said: 'It might be divisive to investigate. We want to be forward-looking.' Nobody would fly. It would be a disaster.

We know that with planes, every time there is an accident, we look intensively, without the interference of politics. That is why we have such a safe industry.

Summarize the problem as best you can for Barron's readers.

With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.

There need to be major task forces set up, like there were in the thrift crisis. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS -- and even our own Goldman Sachs. To me, the single most obscene act of this scandal has been providing billions in taxpayer money via AIG to secretly bail out UBS in Switzerland, while we were simultaneously prosecuting the bank for tax fraud. The second most obscene: Goldman receiving almost $13 billion in AIG counterparty payments after advising Geithner, president of the New York Fed, and then-Treasury Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government takeover -- and also receiving government bailout loans.

What, then, is staying the federal government's hand? Have the banks become too difficult or complex to regulate?

The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.
The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

Can you explain your idea of control fraud, and how it applies to the current banking and the earlier thrift crisis?

Control fraud is when a seemingly legitimate corporation uses its power as a weapon to defraud or take something of value through deceit.
In the savings-and-loan crisis, thrifts engaged in control frauds in order to survive. Accounting trickery proved to be the weapon of choice. It is at work today with the banks, and it is their Achilles heel. You report that you are highly profitable when you engage in accounting-control fraud, not only meeting but exceeding capital requirements. These accounting frauds create huge bubbles, which in turn create large bonuses, which in turn lead to huge losses.

Why then is there so much smoke and so little action?

First, they are inundated by the problem. They are trying to investigate the major problems with severely depleted staffs. Honestly. We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.

Are there any parallels between the current crisis and the savings-and-loan crisis that give you hope?

Of course. Objectively, our case was even more hopeless in the S&L debacle than in the current crisis. If we were able to do it in such an impossible circumstance back then, we have reason for hope in the current crisis. I know how easily things can get off course and how quickly things can turn back again. The thrift crisis went through several lengthy courses and distortions before it finally was resolved under the leadership of Edwin Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.

We went through almost a decade of cover-ups by a Washington establishment intent on helping thrift owners. Back then, we had the Justice Department threatening to indict Gray, the head of a federal agency, for closing too many thrifts. Next, there were those so-called resolutions, where the regulators worked day and night -- to create even bigger problems for the FSLIC. Years later, these so-called resolution deals had to be unwound at great expense by closing down even larger failures. Or how about the bill to replenish the depleted thrift-insurance fund that was blocked and delayed by then-Speaker of the House, Texas congressman Jim Wright?

You say the evidence of a breakdown in the regulatory structure comes from the fact that America avoided an earlier subprime crisis in the 1990s.

Exactly. Why had no one heard of the subprime crisis back in 1991? Because America's regulators also faced down the crisis early. The same thing happened with bad credits being securitized in the secondary market. Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem didn't spread -- because regulators intervened.

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America's pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket -- one-stop shopping for all customers -- that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

What needs to be done?

Well, these international behemoths need to be broken down into smaller units that can be managed effectively. Maybe they can be broken up the way that the Standard Oil split up back in the early 1900s, through a simple share spinoff.

The big problem for the last decade is that we have had too much capacity in the finance sector -- too many banks have represented a drain on our talent and resources. All these mergers haven't taken capacity out of the system. They have created even bigger banks that concentrate risk to the taxpayer, and put off dealing with problems.

And a new seriousness must be put into regulation. We don't necessarily need new rules. We just need folks who can enforce the ones already on the books.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don't directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That's big bonuses for the folks who make the best numbers. It sends the message -- making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing -- the most common way that frauds are found in America -- because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.

Thanks, Bill.

Obama: Feeling Our Financial Pain?

2009-03-24T22:14:00.000-04:00

Check out Cathy Pareto's quotes in the latest Ben Steverman article in BusinessWeek.

Should You Fire Your Financial Adviser?

2009-03-20T11:59:00.000-04:00

I take no credit for the following, but it's worth sharing. This is an article by Brett Arends from last week's Wall Street Journal.

Just about everyone has lost money, no matter who manages their investments. But there's a right way – and a very wrong way – to lose.

When it comes to rogue money managers, crooks like Bernie Madoff get all the publicity. But cowboys, charlatans and clowns are far more common, and do most of the real damage.

There are about 270,000 portfolio managers and investment advisers working in America these days. Tens of millions of Americans have a "finance guy" (or "finance gal") of various types to handle their money. Many are wondering these days if they made a bad mistake. I presume most financial advisers are ethical and competent. But I hear from a lot of readers and I must say I am shocked at the way so many have been advised.

It's not simply that they've lost money. Everbody lost money last year, even Warren Buffett.

How can you tell if you should fire your finance guy? Based on emails I've received from reader, here are 10 things that should tip you off.

He didn't just lose money, he lost money stupidly. Everyone had a bad year. But only a fool was still treating Fannie Mae preferred stock as a "conservative investment" when it was 40 cents on the dollar.

He won't return your calls. No, he can't sit on the phone with each client for an hour a day. But this is your money. If he's totally inaccessible during a crisis, he does not take you seriously.

He's rude. Granted, email has given rise to a global rudeness epidemic. But if your money manager isn't polite to you, it suggests he has poor character and can't handle stress. Both are disqualifications for the job.

He hides behind jargon. Don't be fooled. The best money managers speak, and write, in plain English. Like Warren Buffett, Jeremy Grantham, and John Hussman. Jargon is just an attempt to snow you. What's he hiding? Insecurity.

He has blind faith in an automatic "system" for investing. Bah. No such "system" can ever work. If it did, everyone would adopt it, and who would be left to underperform? Successful investing is an art as well as a science. It's pragmatic. It involves judgment.

He wouldn't change course last year. Prices have rarely changed so much in a year. How can the right things to own now be the same as the right things twelve months ago? They can't.

He passes the buck. It's true the government, and those running the big financial institutions, have made a lot of mistakes that have really damaged the markets. But they didn't invest your money. So how can your losses be all their fault? They can't.

He had your money in an inappropriate portfolio for your age and position. There's a reason a 70-year-old shouldn't have all her money in stocks. Any competent money manager knew those reasons a year ago - not just now. Wisdom after the fact doesn't count.

He whines that "this has never happened before." But that's always true of the future. Tomorrow is always unknown. A wise investment strategy takes that into account.

He tries to bully you. I am constantly amazed at the number of people who give in to bullies, thinking they are confident or strong. They are stupid, nasty, insecure and weak. Your money deserves better.

Write to Brett Arends at brett.arends@wsj.com

Enough is enough already! It's time for outrage and populist action!

2009-03-16T16:52:00.000-04:00

I'm waiting for the revolution to start. The day that we, as Americans, get disgusted enough to act and tell our government that we've had enough! Once upon a time in the not-so-distant sixties, people voiced their opinions, vocalized their discontent, their frustrations, they marched, protested, organized....until eventually those people were heard and government had no other choice but to act.

Where is that passion today? Where are our voices?

It is incomprehensible to me, that after the endless supply of stories revealing corporate and/or government mismanagement, corruption, greed, and flat out abuse, the stories have failed to mobilize the public into action.

The latest revelation in a series of financial corruption fiascos is AIG, who (by the way) has received over $170 billion of government funds (er....our money!), had been slated to pay out over $100 billion (of that money) to high level employees and the employees of some of their counterparties.

As reported on Yahoo Finance "Along with Merrill Lynch, Bank of America and Citigroup, the prime beneficiaries of the AIG bailout bonanza include European banking giants Societe Generale, Deustche Bank and Barclays. But at $12.9 billion to date, Goldman Sachs is at the top of the list AIG bailout beneficiaries. This only reinforces the perception the AIG bailout was really a bailout of Hank Paulson's former firm." Hank Paulsen and and his cronies (that includes Tim Geithner) strike again--saving their wealthy banker friends at our expense. When does this end?

Are you sick and outraged yet? I am!!

Are our current leaders brave enough to do something about this? Somehow, I doubt it. Are many of these guys in bed with the perpetrators? I tend to believe so.

"Ben Bernanke, Tim Geithner, Larry Summers, NY Fed President (and ex-Goldman economist) William Dudley, Rep. Barney Frank, Sen. Bob Corker and others have each expressed anger and outrage over the AIG bonuses and payments to counterparties.The real question is what they, and President Barack Obama, are going to do about it?"

As usual, lots of talk--no corrective action. Who the hell is watching our money? Where is the oversight in these giant bail out packages?

Same old story, the fat cats get fatter, and the common folk get leaner. Let's mobilize people.

What's Driving Gold?

2009-03-11T21:38:00.000-04:00

Much attention has been given to the rise in the price of gold in recent weeks, leading investors to wonder, what are the current factors driving gold? The easy answer to that question is --fear. We have already witnessed an eight year bull run in gold, but many believe that it’s bull run is far from over. What is gold’s role in the credit crisis? Is buying the metal a better investment than investing in gold mining companies? Is it too late to cash in on the growth?

Before we can answer these questions, let us first review what role a gold investment might play in your portfolio. Investors buy gold for a number of reasons, including:

• To hedge against inflation.
• To hedge against a declining dollar.
• As a safe haven in times of geopolitical and financial market instability.
• As a store of value.
• As a portfolio diversifier.

Falling under the precious metals asset class, gold is a monetary metal whose price is determined by various factors. Among these factors are: inflation, fluctuations in the dollar and U.S. stocks, currency-related crises, interest rate volatility, global geopolitical tensions and increases or decreases in the prices of other commodities.

In the credit crunch of deflation, gold and currencies are hoarded and the purchasing power of both rises. But, gold also thrives in inflationary environments. That is because of gold's unique property with a dual role as both money and a commodity. Think of gold as money, and money is hoarded in deflation so gold naturally tends to go up. The point here is that gold does well during extreme economic environments. Let's dissect some of the benefits of owning gold in the paragraphs that follow.

Inflation

As inflation goes up, the price of gold goes up. Since the end of World War II, the five years in which U.S. Inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. The environment in the 1970’s was not unlike the environment today. The common denominators in both periods are huge budget deficits, loose monetary policy, soaring oil prices (2008) and the open-ended costs of war (Vietnam vs. Iraq/Afghanistan).

Store of Value
According to the World Gold Council, gold has maintained its value in terms of real purchasing power in the very long run in the US, Britain, France, Germany and Japan. Despite price fluctuations gold has consistently reverted to its historic purchasing power parity with other commodities and intermediate products. Gold is tangible, it’s a physical asset that brings a sense of comfort when intangible assets, like stocks, are evaporating. But, while they do maintain a store of value, it is worth noting that gold, like stocks and other investments, is also subject to price fluctuations.

Safe Haven

Many investors are diversifying away from traditional equities and into gold because of the continued uncertainty surrounding the financial markets. Gold has long been considered a safe haven, or “crisis commodity”. Of course, as investors flock to safety investors the price of gold is pushed even higher. Historically, as people begin to distrust their paper assets (ie. Currency), this positively influences the price of gold too, as we’ll discuss in the next paragraph.

Currency Hedge

Not all citizens have full faith in their local currency, at times, this might even include the U.S. Dollar. So, what do they do? They buy hard assets like gold (a tangible and physical item or object of worth). Although it’s no secret that U.S. Dollar is world’s reserve currency and the main medium for global trade, the U.S. Dollar, like the Euro, Yen or other global currency, is really nothing more than paper, or fiat money. Fiat money is money that is intrinsically useless and is used only as a medium of exchange. There is no physical asset that backs the U.S. Dollar today (or other global currencies for that matter) since its gold backing was stripped in 1971. But since gold is purchased using your local currency, in this case the dollar, then any decline in the value of the dollar causes the price of gold to rise.

Diversification

While all the other rationales for owning gold are viable, perhaps the most important reason to consider gold in your portfolio is for its diversification benefits. Gold, like many other commodities, typically has an inverse relationship to the market. Assets with perfect negative correlation to other assets in a portfolio help investors hedge away their risks, in effect they reduce volatility while enhancing performance. Gold and other tangible assets have historically had a very low correlation to stocks and bonds. Because the price of gold increases in response to events that erode the value of traditional paper investments like stocks and bonds, it’s worth considering a fair allocation to this asset as part of a diversified plan. The "right" allocation will depend upon your specific circumstances and risk tolerance, but a good gauge might be between 3% to 8%.

Owning Gold

The gold market is highly liquid and there are many ways that investors can own gold. The most traditional way of owning gold is via gold bullion like gold bars and coins. When buying the physical asset, many people buy gold coins, considering the potentially higher storage costs or risks associated with owning gold bars. Gold coins can be easily purchased directly from the U.S. Mint or from authorized dealers and precious metals firms. Depending on where you purchase the coins and the current demand levels, you may have to pay a premium (above the current spot price of gold) to acquire the coins.

Another way to access gold is through futures contracts or products like gold ETF’s (ie. Ticker: GLD) which offer investors a relatively cost efficient and secure way to access the gold market. A Gold ETF is an exchange traded fund with gold being the principle and only commodity being traded. Gold ETFs are listed and traded on the stock exchange and investors get units for their holding in the gold ETF. The returns on gold ETFs are more or less same as that of the spot price of physical gold. It’s worth noting that the IRS treats gold as a collectible for long-term capital gains tax purposes, therefore, gains recognized by individuals from the sale of gold ETF’s are subject to a capital gains rate of 28% if held for more than a year.

Finally, investors can also consider having gold exposure through gold mining stocks and funds. Some argue that this is more tax and cost effective, in that, there are no storage fees, theft concerns and gold mining stocks also benefit from lower capital gains rates. On the flip side, owning stocks in a mining company is really not the same as owning the actual gold.

In closing, gold’s recent rise is really no surprise given the recent financial uncertainty in the global markets. As fear and investor trepidation permeate the markets, investors look to physical assets to help them preserve their wealth. Times of crisis help fuel the demand for gold and, arguably, the easy access allotted by gold funds or ETF’s has further pushed up gold’s price in recent years. To a certain extent, the demand for gold, mostly by investment funds, is feeding on itself.

While some analysts suggest that the price of gold is being inflated by a flood of new investment money (implying it might be overvalued), others predict even further price growth down the road. Either way, the argument can be made that gold offers sufficient benefits (inflation protection, currency hedge, portfolio diversifier) to warrant at least some representation in your collection of assets.

Lots of Blame to Go Around

2009-02-25T09:05:00.000-05:00

From today's Wall Street Journal:

"In a rare public rebuke of the financial-services industry, Fidelity Investments Chairman Edward C. Johnson III called 2008 a "period laced with toxic investment waste and the casual use of other people's money by a number of institutions."

In a letter to shareholders issued Tuesday, Mr. Johnson blamed the economic climate on "well-intentioned policies...which made money ridiculously easy to obtain."

Amen to that brother!

10 Tips on Avoiding Investment Fraud

2009-02-12T14:00:00.000-05:00

We are living in a world currently in the grip of the aftermath of corporate corruption, excess and greed. Last year's financial debacle coupled with the Madoff scandal has left investors leery and scared. Who can blame them? Here are some tips that may increase your chances of avoiding investment fraud in the future.

Courtesy of the CFA Institute:

1. Understand clearly the investment strategy – “Some investment opportunities appear alluring simply because they are described in impressive, complicated terms,” said Stephen Horan, CFA, head of private wealth management content at CFA Institute. “Investment strategies and financial products should be clear and understandable. The nature of the risks involved can vary widely and should be well understood. Even the venerable Peter Lynch advised people to invest only in what they understood – advice he abided by in his successful career. If you don’t understand it, stay away."

2. Match investment strategy to reported performance – One of the red flags in the Madoff affair is that reported performance was too consistently good. Other investment scams, popular on the internet, purport to use ultra-safe “prime bank” financial instruments from the world’s largest banks. E-mails that promise double-digit returns are incongruent with the safe investment strategies they purport to offer. Also, find out if the firm has its reported performance numbers independently audited, who audits them, and whether these figures comply with Global Investment Performance Standards, a set of ethical principles for calculating and reporting investment results.

3. Watch for e-mail solicitations and Internet fraud – The internet is a low-cost way for scammers to reach millions of people. Horan says that “unsolicited e-mail messages offering you investment opportunities that sound too good to be true probably are. Online bulletin boards and electronic investment newsletters are also fertile ground to disseminate false information on thinly traded stocks for a pump-and-dump scheme. Treat information from unknown sources on the internet with great suspicion.”

4. Be wary of “sure things," quick returns, and special access – Legitimate investment professionals do not promise sure bets. Legitimate get-rich-quick schemes simply do not exist. Scammers often make the implausible combination of safety and high returns seem plausible by granting you “special access” based on your relationship with a mutual acquaintance or affiliation with a specific religion or ethnic group. Also, understand clearly the terms by which you can redeem shares or exit the investment. When can it be done and what are the fees? Ponzi schemes become unsustainable when investors pull out their money.

5. Understand what, if any, regulatory oversight exists – Fraud may be less prevalent in regulated settings, like mutual funds. Hedge funds are less regulated than mutual funds (learn more) (PDF). Horan said that investors should also “be careful of offshore investments, as well. Many are legitimate, but many others have different regulation, and it is far more difficult to locate and recover your money overseas should something go wrong.”

6. Assess the operational risk and infrastructure – Any investment management operation should have a physical infrastructure for trading and administration. Ask to see them and inquire about the firm’s processes and controls. It is important that a firm have separate, independent operations for asset management, trading, and custody to provide checks and balances against fraud. Many investment firms adopt the CFA Institute Centre’s Asset Manager Code of Conduct, which outlines their ethical and professional responsibilities.

7. Ask about independent audits and who performs them – “Investors should ask for audited financial statements of the organization,” said Horan. “An auditor should be independent, reputable, and congruent with the size and scope of the investment operation.”

8. Assess the personnel – Ultimately, the reliability of any operation is predicated on the integrity and competence of its people. So find out who makes investment decisions and who implements the investment strategy. They should be separate people with relevant experience, education, and training. Look for recognized professional credentials, like the Chartered Financial Analyst (CFA) designation. CFA charterholders agree to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct (PDF), which requires professionals to place the interests of their clients ahead of their own. Credible investment professionals speak knowledgably and comfortably about their professional standards.

9. Perform a background check – Horan believes that investors can easily become their own private investigators. “The Financial Industry Regulatory Authority (FINRA) allows investors to check the background of securities firms and registered securities representatives it oversees in the U.S. If a brokerage firm or broker is not listed, find out why. If they are, make sure their record is clear. Most registered investment advisors (RIAs) must file registrations with the U.S. SEC or their respective state. Again, make sure they are not subjects of investigation, and be wary if you are pressured to make an investment decision before you have time to investigate.”

10. Limit your exposure – “One of the surest ways to avoid the catastrophe associated with investment fraud is to limit the amount you invest,” said Horan. “Diversification is one of the most fundamental and enduring investment principles. Investors often expose themselves to unnecessary risks by concentrating their funds in one or two securities. By limiting your exposure to five to 10 percent of your assets, the principle of diversification can protect you if an investment turns out to be fraudulent.

Asleep at the Wheel

2008-12-17T21:07:00.000-05:00

from The Wall Street Journal
Dec. 18, 2008

"Harry Markopolos, who once worked in a trading firm that competed with Bernard Madoff's, for nine years has been trying to persuade staffer after staffer at the Securities and Exchange Commission that Mr. Madoff's operation was a fraud. The agency never brought charges."

"A week after Mr. Madoff was arrested in an alleged $50 billion Ponzi scheme, Mr. Markopolos was vindicated. Internal SEC documents show how the agency, prompted in 2006 to investigate by Mr. Markopolos's complaints, found serious violations at Mr. Madoff's firm, but took no public action. These documents show the SEC found some violations at Mr. Madoff's firm in 2006-07, but didn't take action on allegations that it was a Ponzi scheme."

How about some true oversight of our financial markets?! How can any investor have any semblance of confidence when the nation's financial watchdogs screwed things up so badly?!The SEC has been completely asleep at the wheel on this and other matters. This is, in one word....disgusting.

If it sounds too good to be true, it probably is!

2008-12-14T16:25:00.000-05:00

On Wall Street, there's no such thing as easy money or risk less investments. If something sounds too good to be true, it probably is.

Case in point, take the dramatic fall of one of Wall Street's alleged top brokers Bernard Madoff who, as we have recently learned, bilked billions from countless ultra net worth (and supposedly highly sophisticated) investors through an intricate, multi billion dollar Ponzi scheme--one of the biggest cases of securities fraud in modern history!

(From the Wall Street Journal on December 12, 2008)

"Mr. Madoff's asset-management business appealed to investors for its remarkably steady returns for investing in the stock market. His investors consistently enjoyed small monthly gains, usually between zero and 2%. Mr. Madoff told investors his strategy was to trade in and out of large-cap stocks and buy options on those shares to help smooth the ups and downs. When he failed to see opportunities in the market, he would shift to U.S. Treasuries, according to fund marketing documents and people familiar with his strategy."

"Mr. Madoff's Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor's 500-stock index was down 37.65%. In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%. Since its inception in December 1990, the fund averaged a 10.5% annual return, according to fund documents."

"Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC," Mr. Markopolos wrote to the SEC in November 2005.The SEC declined to comment on the matter."

As a financial advisor, please heed my suggestion--never do business with a financial professional who does not separate the custody function from the advice function. More importantly, if you do not know what the advisor is buying on your behalf, find out. This lack of transparency, or "black box model" of investing is one my biggest reservations about investing in hedge funds. I suspect that many investors are going to start asking many more questions of their managers and might be much less tolerant of black box managers in the future.

The WSJ article continued to say:

"Mr. Madoff's investors described their shock and panic on Thursday. Susan Leavitt of Tampa Bay, Fla., said she had several million dollars of inherited money invested in the firm and added $500,000 earlier this year. A stay-at-home mother with two children, the 46-year-old Ms. Leavitt says she is considering going back to work. "That was my nest egg for the children, and my future. I'll never see much back, I'm sure," she said. Ms. Leavitt said she recently discussed her investment with a friend who told her he was suspicious about the firm's ability to generate such profits amid the economic crisis. "I thought, 'He's probably just jealous,' " said Ms. Leavitt. "We've been with [Mr. Madoff] for 15 years, and it's grown every year at 10%."

I'll close this entry just as I started it:

If it sounds too good to be true, it probably is!

To Bail or Not to Bail...That is the Question

2008-11-20T07:21:00.000-05:00

Another week another big bailout plan hangs in the balance. This is starting to feel like a really bad, melodramatic soap opera already.

This week it's the Big 3 auto makers from Detroit who have extended their hands, trying to make a grab into big brother's pocket: Ford, GM and Chrysler. Deciding whether or not to bail out the biggest three auto makers in the U.S. has been a daunting challenge for lawmakers in the lame duck Congress, where the rescue plan is stuck in the Senate after days of deliberations. Even the lame duck President does not want to make any commitments.

(From Yahoo Finance)
"Senate Majority Leader Harry Reid, D-Nev., canceled plans Wednesday for a vote on a bill to carve $25 billion in new auto industry loans out of the $700 billion Wall Street rescue fund. The Bush administration and congressional Republicans have rejected Democrats' plan to dip into that pot of money. Warning of economic disaster, a bipartisan group of senators from auto industry states are trying to reach a deal on an alternative package. If an agreement can be reached, Reid said, the Senate still could vote on it as part of a measure to extend jobless benefits."

All three CEO's from the respective companies painted a grim picture of their financial position, despite having flown in to the two day hearings on their private corporate jets and expensive suits. Their claim, "Detroit's automakers, hurt by a sharp drop in sales and a nearly frozen credit market, burned through nearly $18 billion in cash reserves during the last quarter, and GM and Chrysler both said they could collapse in weeks."

The proposed legislation, now on life support, calls for the U.S. government to extend a 10 year, $25 billion loan to the companies. But, it is unclear where the government would lie in the pecking order of creditors the companies already have (ie. in case of default).

Frankly, the capitalist in me thinks they deserve to fail, as heartless as that sounds. Any MBA student from a reasonably reputable college understands the importance of maintaining a nimble corporate strategy and competitive advantage. Where have these smart guys been the last ten years as the Japanese automakers little by little encroached on their market? They lagged in innovation, technology and pricing. The albatross around their neck, the union known as the UAW (united auto workers), has systematically made their costs of production, labor, etc. unreasonably high in an increasingly competitive global marketplace. Something had to give. Either you make better cars, invest in fuel efficiency or cut your prices....otherwise, you are toast! Fast forward to today, when Americans have cut back on spending, banks have stopped lending as vigorously and consumer demand just dropped off a cliff. America cannot keep subsidizing companies whose leaders are blatantly incompetent, stupid or just plain greedy (or some combination thereof).

Now, I'm very sorry about the prospects of 1 to 3 million innocent people losing their jobs and potentially experiencing pension defaults. The impact could spell considerable discomfort in the short term to the economy and the financial markets. But, a bailout of these companies is not justified. Who's next....the airlines, the farmers, the mid sized manufacturer in the industrial parks of Hialeah Florida, the corner flower shop? Give me a break!! As far as I'm concerned....farewell big 3...pigs get slaughtered and now it's your turn to go. Good luck in Bankruptcy court.

A Silver Lining in the Global Recession?

2008-10-28T07:12:00.001-04:00

Sometimes it's hard to stay positive during tumultuous financial times. So, I thought I'd highlight at least a few good things that have resulted from the economic downturn to keep things in perspective:

* Lower gas prices

In a time where already cash strapped consumers are witnessing the evaporation of their retirement accounts and house values, a little relief at the pump will be a welcome change. Gas prices have tumbled from their July highs of $4.11 a gallon down to just under $3 in many U.S. cities, due in large part to shrinking global demand. A happy by-product of this is the negative financial impact it will have on psycho oil-rich dictators like Chavez (Venezuela) and Ahmadinejad (Iran) who are now scrambling to restructure national budget obligations. Sorry boys....looks like the energy orgy is over and it's time to sober up. I guess this might put a damper on their record of "checkbook diplomacy", in their efforts to sway leftist or anti-West support in cash poor, vulnerable nations.

*Global warming will slow down

Okay, so I don't have any scientific evidence to support this claim. But, I figure, if there's less global demand for oil (and that includes oil guzzling China), then there's less driving/flying/manufacturing, which means less carbon emissions, which means some slight relief for the ozone layer. Well....at least we can hope, right?

* Responsible bank lending

The days of easy credit are officially over. And while this is bad for some consumers, it's the responsible thing for banks to do (not only for their balance sheets but for the economy as a whole). If there's anything that we've learned from the sub-prime debacle, is that responsible lending is a critical component for a sound economy. Banks are reverting to their old ways...that is, prudent lending practices that were prevalent before the housing frenzy spiraled out of control. Borrowers will actually have to be credit worthy (gasp!) and will be forced to save for down payments in order to buy a home (gasp, gasp).

*Americans will FINALLY recognize the value in SAVING

It's no secret, Americans are among the worst savers on the planet and that will come back to bite many of them in the tush right now (and of course in the future). A joint survey conducted by Princeton Survey Research Associates International for the National Foundation for Credit Counseling and MSN Money, found that Americans are largely unprepared for economic hard times--many don't even have an emergency fund! I suspect that after we all survive this bitter dose of economic reality, many folks will learn their lessons and give serious consideration to saving for unforseen circumstances (like now) and also for their future. Sometimes it's the negative experiences that teach us the best lessons and serve as a source of discipline and inspiration in later years.

What Should You Do With Your 401k?

2008-10-16T11:12:00.000-04:00

This video was produced by Chuck Fadely for the Miami Herald

Click here to start the video "What Should You Do With Your 401K?"

7 Good Reasons to Fire Your Adviser

2008-10-14T21:51:00.000-04:00

1. You Feel Like a Little Fish in a Big Pond

Ever gotten that feeling that your Adviser could care less whether you stay with him or her? The reason may be simple; your account is too small for them now. They may have treated you like royalty when you first became a client, but now they barely return your phone calls. This is a very common phenomenon and it's happening more and more as firms continue to get consolidated.

Currently there are many investment companies, banks, and wealth management firms that are trying to divest themselves of small brokerage accounts (less than $3 million) by either centralizing many of the relationship management responsibilities or simply relinquishing the relationships. At $3 million, this is the point at which you as a client are perceived to be profitable to a large firm.

So what should you do? For starters look for a company that not only provides the services you are looking for, but is also happy to provide these services to clients with your portfolio size. Go to NAPFA (National Associations of Personal Financial Advisers)and do a search for local and national Advisers. Ask the different companies what their average, largest and smallest account size is. This will give you an indication of where you would stand as a client. Don't tell them how much you have, as they may want to skew the numbers.

2. Your Adviser Has Limited or No Credentials

Credentials and degrees are not always a guarantee of professional competence, but they are a start. Just like you would be hesitant to go to a Doctor that does not have a Medical Degree you should be hesitant of a Financial Adviser that does not have the right credentials and experience.

What Should You Look For? The highest credential in the industry for a Financial Advisers is the CFP accreditation. What this credential says is that your Adviser has studied and passed comprehensive exams on issues such as investing, insurance, estate planning, retirement planning, taxes, and other pertinent issues relating to managing wealth. This is not an easy exam to pass. It can take as long as a full year to complete all modules and become accredited. A great thing about this credential is that the Adviser is not allowed to use the CFP mark even after they have passed the comprehensive exam if they do not have at least 3 years of experience.

In addition to this they also have to adhere to high ethical standards and meet continuing education requirement to keep the designation.

Click here to see the full range of requirements.

So a CFP should be your minimum requirement. There are other designations out there such as CFA and ChFC. There is certainly no shortage of acronyms in this industry. What you have to remember is not to be intimidated by the arrangement of letters behind your Adviser's name. Find out how easy or how hard it is to obtain these designations and what these mean to you. A rule of thumb is, If you can obtain the designation by passing an exam that only takes a week to study for it, you should discount it immediately. Otherwise you may end up with a salesperson, rather than a true Financial Adviser.

Aside from a CFP or other credential you should still do more due diligence.Ask any new potential Adviser hard questions about the economy, their investment style, investment philosophy, IRA rules, tax rules, etc. If they can't answer these types of questions, then it is likely that you are dealing with a salesperson that relies on the company brand. Don't be a victim of financial malpractice. Make sure your Adviser is knowledgeable by doing your homework and becoming knowledgeable yourself, preferably before you hire someone.

3. You Simply Can't Stand Your Adviser

This reason may be trivial to many, but it is more important than you think. Human interaction and personal chemistry is important. If you don't feel comfortable communicating with your Adviser you are putting your money at risk. Your Adviser is supposed to serve as your guide through this ever changing financial maze, and they need to be able to understand your overall financial picture. Equally as important, you need to be able to understand them. If you can't stand your Adviser you may be reluctant to share the details of your current financial situation which may put your money in jeopardy. Likewise, if they don't like you, they may be less likely to provide you with the level of service and attention that you deserve.

This is a bad situation to be in and should not be taken lightly. It's your money, find a competent Adviser with whom you can comfortably communicate with.

Top reasons you may dislike your Adviser:

a) You can't understand what your Adviser is saying (@#$!^*&^%!) and they don't make the effort to help you understand.

b) Your Adviser speaks over your head (it's on purpose so you don't ask too many questions they can't answer).

c) When you ask a question, your Adviser dismisses it as if it were a stupid question.

d) If you don't call him or her you never hear from them.

e) Your Adviser forgets that it's your money not theirs.

4. Your Portfolio is Made up of All Proprietary Products

Want to see a completely biased portfolio? Just look at one with all proprietary funds. It always amazes me that out of thousands of available mutual funds and exchange traded funds with low expenses, investors are still buying the idea that proprietary funds are better. If you have your brokerage account at Mickey Mouse and Company and all of your investments are Mickey Mouse Large Cap, Mickey Mouse Small Cap etc., I can assure you that you are paying more than you should. Your Adviser may not tell you this but he or she is probably getting a commission by selling you these funds.

Your overall portfolio could be costing you up to 2-3% per year, but they will tell you that there is no charge for the advice. We should all know by now that nothing in life is free and no one works for free. This is 2-3% that is coming right out of your returns. If your Adviser never bothered to tell you how much your overall portfolio would cost you, it's simply dishonest. You cannot build trust on dishonesty and hidden agendas.

5. Your Portfolio Consistently Under Performs Its Appropriate Benchmark

Any investor knows that returns will vary from year to year and that this year is one of the worst years as far as performance is concerned. So when it comes to performance, you have to remember that your Adviser is not a magician. Having said this, you should expect to meet certain benchmarks. If you are invested in all US Large Cap Stocks the appropriate benchmark is the S&P500. Now let's say the S&P 500 has returned -32% year-to-date, and your portfolio is well below this benchmark at say -40% year-to-date, then you are under performing the benchmark. If your Adviser consistently under performs the appropriate benchmark, year after year, you may want to reconsider the advice you are getting.

6. You Never Know Who Your Adviser is Because There is Considerable Turnover at the Company

If there was ever a time to consider firing your Adviser this would be the time. High employee turnover means the following for you:

1. Bad service - The level of service if there was ever a level, will become nonexistent. You have to retain your employees to create a culture of service. If you have high turnover who is going to do the training? Beware of the revolving door.

2. There is something seriously wrong with the company. Make no mistake, the employees that left the company may know something you don't. All businesses go through changes but constant employee turnover is a red flag that there is something clearly wrong with the company or the management team.

3. Errors that will cost you money - Critical tasks related to your financial plan may be missed to your detriment. You have to build a history with your Adviser so that he or she can make informed recommendations. You will be basically starting from scratch with every new Adviser. Can you say missed or late distributions, account trading or reporting errors...the list can go on.

7. You Don't Trust Your Adviser - The final reason for firing your Adviser is that you simply don't trust them. The relationship you have with your Adviser should be one of mutual trust. Your Adviser should trust that you are providing him or her with all the details necessary to help you make better financial decisions, and you should trust that your Adviser has your best interest at heart. Once the trust is broken for any reason mentioned above, it's extremely difficult if not impossible to rebuild that trust again. It may just be time to say goodbye and start again.

Hopefully you will take the lessons that you learned from your experience with you and avoid them with your next Adviser.

This is NOT the Depression...

2008-10-11T13:23:00.000-04:00

Part of the hysteria that we are experiencing can, in part, be blamed on the overused comparison to the Great Depression. My goodness, pundits and financial media are using the "D" word like it's going out of style. We are NOT in a Depression people!

Here are some great blurbs from today's Wall Street Journal to give us some perspective:

(Source: Wall Street Journal, Jason Zweig "What History Tells us About the Market")

"In fact, the market is probably wrong again in its obsession over whether this decline will turn into a cataclysmic collapse. Eugene White, an economics professor at Rutgers University who is an expert on the crash of 1929 and its aftermath, thinks that the only real similarity between today's climate and the Great Depression is that, once again, "the market is moving on fear, not facts." As bumbling as its response so far may seem, the government's actions in 2008 are "way different" from the hands-off mentality of the Hoover administration and the rigid detachment of the Federal Reserve in 1929 through 1932. "Policymakers are making much wiser decisions," says Prof. White, "and we are moving in the right direction...."

" A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb....This collective stupor may very likely be the last stage before many investors finally let go -- the phase of market psychology that veteran traders call "capitulation." Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it."

I confess...the markets suck right now. But for goodness sake, let's stop this Depression mindset and get on with life.

What Should You Be Asking Your Adviser Right Now?

2008-10-10T15:08:00.000-04:00

For many investors the current markets feel like a high speed roller coaster without a stop in sight. While we may have enjoyed the thrill and fear we felt going through loops and drops as children, as adults we simply can no longer stomach the ride. To make matters worse, this experience can be even more painful by going on the ride alone, or even excruciating by going on the ride with the wrong person. What does this have to do with you and your Adviser? Plenty.

The job of your Adviser is to ensure that at the end of the ride (retirement) you have a positive experience. This is after all the reason you pay for their advice.

I would hope that your Adviser is being proactive in keeping you up to date with the current economic environment and the status of your portfolio. But if this is not the case, you should know what to ask him or her.

Visit Ben Steverman's Article The Fed, the Crisis, and Your Portfolio on BusinessWeek Online to read the list of questions along with my thoughts.

Madness in the Markets!!!

2008-10-10T08:55:00.000-04:00

This bear market is none like I've ever experienced. It is painful to live through this, that's true. But it's more painful to watch the absolute stupidity of our leaders and their lemmings (us...as citizens of this great country and investors in our markets).

My friend Jay Patel said it rather succinctly on his blog:
http://investorsoul.blogspot.com/

There are over 3 trillion (that's trillion with a capital "T") dollars waiting around on the sidelines--precious capital sitting idly by as the grease of the global money machine dries up. The sad irony, is that we need that capital flowing in the markets to keep this machine well lubricated. Stop the insanity--please! Let us all get back to rationale fundamentals...there are great buys out there for the taking, but the masses need to get a grip first.

This market is beyond oversold, and its time for people to rationalize their thoughts and quiet their unsettled feelings. There is no room for emotion in investing. The world is not in collapse, it just feels that way. And the longer we are paralyzed with panic, the longer this pain will last.

What the FDIC Changes Mean to You

2008-10-08T11:55:00.000-04:00

It’s official. FDIC insurance has increased.

On October 3, 2008, FDIC deposit insurance temporarily increased coverage from $100,000 to $250,000 per depositor through December 31, 2009.

Basic FDIC Deposit Insurance Coverage Limits

Single Accounts (owned by one person)-- $250,000 per owner

Joint Accounts (two or more persons)-- $250,000 per co-owner

IRAs and certain other retirement accounts-- $250,000 per owner

Trust Accounts -- $250,000 per owner per beneficiary subject to specific limitations and requirements

After December 31, 2009, account ownership categories for which the deposit insurance limit was $100,000 prior to October 3, 2008 will revert to the $100,000 limit.

Important Note on CDs

CDs with a maturity date after December 31, 2009 held in an account ownership category for which the insurance limit was up to $100,000 prior to October 3, 2008 will temporarily have an insurance limit of $250,000 and will revert to the $100,000 limit after December 31, 2009.

You should, therefore, take this into consideration when purchasing CDs.

Calculate Your FDIC Coverage

Calculating deposit insurance can be complex, especially when you have multiple accounts or multiple ownerships. To find out how much coverage you are getting use the FDIC calculator.

No Boom and No Crisis Last Forever

2008-10-06T10:11:00.000-04:00

We have received so many comments regarding our paper "No Boom and No Crisis Last Forever" published on Friday, October 3rd that we have decided to post it on our Blog.

So what is this paper about? This paper discusses previous US financial crises, current events, and what these may mean to you as an investor. Here's the intro:

If history is any indication, we can deduce that no boom and no crisis last forever. It is no doubt difficult as an investor to realize this, especially now as we see the stock market declining right before our very eyes. This year will go down in history as one of the worst ever, and it’s a jagged pill to swallow if you are an investor (in particular an investor approaching or in retirement). It’s even more difficult to endure this rough period, as we are constantly bombarded by messages of fear and doom in the media.But, for just a moment, let us step out of this terrible situation to reflect on our reality and our history.After all, we are long term investors and must remain focused on our long term goals (as hard as that may be in these tumultuous times).

Let us begin this discussion with a brief review of some prior periods of financial distress, and/or crisis,specifically as they relate to market performance and time.

To continue reading our paper click here. You will need Adober reader.

Are You Still Investing in Your Company's Stock?

2008-10-02T18:03:00.000-04:00

For many investors investing in their company’s stock makes sense. After all, you are an insider and it makes you feel like you know what is going on in the company. If anything were to go wrong you would be the first to know right?

Or, you may think that you are doing great and your division is doing great, so it is safe to assume that the company is doing great right?

Or, you have had meetings with your Human Resources Department and Manager and they have assured you that your company is not like “those” other badly managed companies. These may be some of the thoughts that may go through your head as you pour more money into your company’s stock. But are these thoughts rational or are you getting blindsided?

As investors, we know or should know that we need to be as rational as we can be when it comes to investing. After all, investing is about taking measured risks and looking at the numbers. Unfortunately for many of us it is quite difficult, if not impossible, to remove emotions from our decision making. And when it comes to investing, our emotions can sometimes have a detrimental effect in our portfolios.

Read full article here

Is my account safe at Merrill Lynch, Morgan Stanley or Goldman Sachs?

2008-09-22T15:17:00.000-04:00

There are two parts to this answer:

1) Technically the answer to this question is Yes. Your accounts are safe at these investment banks (the latter two now called bank holding companies). Even if they go through a merger, acquisition or they fail altogether, your account will still exist. SIPC insurance will cover any loss of securities in the event they are not properly accounted for once the transition takes place. Some limits apply.

Another reason your account will be safe is that your account(s) at these investment firms are not part of their balance sheet, thereby not subject to their creditors. This does not mean that the value of your account is safe. For this you have to look at the holdings inside your account. Any losses you may incur as a result of market downturns are not covered by SIPC insurance. So this is the time to review your asset allocation, diversification and your own risk tolerance if you haven’t already done so.

This leads to the more interesting part of the answer…

2) It is not necessarily the safety of your account that you should be concerned with, but rather the type of advice that you will receive. In normal circumstances, and we can agree that these are not normal circumstances, following a merger, bankruptcy or acquisition you begin to see layoffs. What does this mean to you? Your advisor may not be around to advice you, and if they are, perhaps they will be more concerned with their job security. After all, who can blame them? If you had trouble getting in touch with your advisor before you may have an even harder time now.

So is your account safe. You’ll have to make that decision on your own.

Is the Financial Crisis Over?

2008-09-19T17:45:00.000-04:00

While many unprecedented actions are being taken by the Fed, Treasury and SEC to ward off a disastrous global financial meltdown, it is unlikely that investors are completely out of the woods just yet. The intricate and highly complex web of the financial and banking systems is just beginning to get unraveled. And in the next few weeks we will see how deeply connected all these firms really were.

This is the time to really look at your investments and ensure that you are appropriately diversified. Global diversification is still the best defense for investors.

Has the market hit bottom? No one knows. This is why timing the market does not work. As investors we must have a long term view and remain focused. History has demonstrated that those investors with a well diversified portfolio that stay invested in the market fair much better than those who sell their positions out of fear and re-enter the market when it's already rallying.

Read Are You Investing or Speculating by Karla Arguello to learn more.

Visit our Knowledge Center for more articles of interest.

What to do in this market meltdown?

2008-09-17T21:47:00.000-04:00

Wall Street had a very busy weekend trying to salvage the flailing financial giant Lehman Brothers, while Bank of America was busy acquiring Merrill Lynch. Monday and today were days of reckoning for the financial markets, and you can bet that this week will be one in which we see the financial implosion in U.S. banking and brokerage that many have been expecting for some time. What we are experiencing is unprecendented, possibly a once-in-a-lifetime series of unfortunate events I certainly doubt that this is the end of it.

What should you do? For one thing....do not panic. The short term pain will no doubt be felt and your resilience as an investor will be tested. But, this painful process should be a sort of “clean up” after the storm and crud left by the credit crisis.

Lehman’s demise, like Bear Stearns and Merrill Lynch, were fueled by greed and high stakes borrowing during the real estate boom and it's time for our government to clean house with the weak and feable...not to mention the really, really greedy.

While the turmoil in U.S. financial markets could turn frightening this week, the good news (if you can call it that) is that Wall Street’s players will now be smaller in number, less leveraged, and more transparent (or so we hope).

Broader efforts to tackle problems plaguing the entire industry are underway, including the FED's expansion of short-term lending to banks. Additionally, a group of 10 commercial and investment banks including, Goldman Sachs, Citigroup, Barclays and Morgan Stanley, agreed to put up $7 billion each to create a $70 billion lending facility that institutions facing liquidity issues could tap.

We are NOT planning to divest any of our client portfolios of any positions right now and remain confident that, while the rest of the year and possibly next will certainly continue to be challenging, the capital markets will continue their long term upward trends once this mess is cleaned up, if history is any indication.

Retirement Account Rules Catch Many by Surprise

2008-09-02T21:43:00.000-04:00

When it comes to retirement accounts we can't forget RMD's (Required Minimum Distributions). Forgetting can cause you a great deal in penalties. Thankfully, you don't have to think about this until you have reached the age of 70 1/2. Still, for those who have to calculate the amount every year it can be quite annoying but it's really not an option. When I show people on paper what the penalty would be if they conveniently forget, or if their advisor doesn't help them they realize how important it is to comply with all the rules.

Read the full article on CNN Money here

A Deeper Look At Alpha

2008-08-20T16:32:00.000-04:00

So what is Alpha and how does it relate to your portfolio’s performance? As an investor these are very important questions to ask so let’s explore the concept together. In " A Deeper Look At Alpha" written for Investopedia.com I discuss what it is, what it measures, and what you should know about it.

Link:

http://www.investopedia.com/articles/financial-theory/08/deeper-look-at-alpha.asp

The Ultimate Gift

2008-08-17T21:11:00.000-04:00

Money—it’s such a simple, yet potent word that can invoke many different emotions, thoughts, fears and dreams in so many people. We all seem to want it, but most of us for different reasons. For some it’s the means to a better life or survival, for others it’s about power, control, vanity….or simply having things.

I’ve never given much thought to the meaning behind it all—the meaning of money, until I stumbled upon “The Ultimate Gift”. This inspiring movie, based on the book with the same name (by Jim Stovall), reminded me of how easily money can corrupt our perspectives about what’s important, and what is real.

Why do we work as hard as we do? What does all this money do for us? What is it all for?

Ironically, my entire professional life is centered on money, taking care of it for others, making sure that it’s saved, it grows, that it lasts, and that it protects the people that have entrusted me with it, people that have worked so hard for it and others who maybe didn’t. I live and breathe money every day—in my client planning, their investments, savings, budgeting…..money…..it’s everywhere…. in its tangible form. But, what exactly does money mean?

What exactly does money mean to you?

Money is blind, and money blinds. It is a ticket to freedom, for others a sentence in darkness. Some obsess about it, a few loathe it, and yet others cannot ever seem to attract it. I’ve seen money corrupt the most decent of people, rip families apart and poison minds and hearts. But, I’ve also seen money enable dreams, save lives and nourish the existence of those who need it most. Money is meant to be shared, not hoarded, help not hurt.

Every day, we should remind ourselves of our purpose in life, revisit our dreams and face our deepest fears. Life is a journey, it’s our shared existence and every experience, good or bad, painful or happy teaches us something. Every moment is really, an ultimate gift….and money, no matter how much or how little we may have, is merely the means to end--nothing more.

Pigs Get Slaughtered....and Investors Pay the Price

2008-08-13T09:55:00.000-04:00

Just when you think Wall Street couldn't get any greedier....last Friday UBS became the third major firm in a week to agree to buy back auction rate securities, in an effort to save its skin from allegations of wrongdoing over its sales of the product. Merrill Lynch and Citigroup were already in the hot seat. Collectively, the three firms have committed to taking back a total of more than $36 BILLION of the instruments.

Auction rate securities were a popular form of debt in recent years, often linked to municipalities and student loan organizations that borrowed for the long term but at much lower short term rates, rates which were often reset at periodic auctions.

So, what's the problem and where are the pigs? Regulators and prosecutors investigating the auction rate debacle have uncovered several types of abuses in the auction rate market, including the allegation that the brokers that sold the instruments secretly propped up failed autions. To quote the Wall Street Journal article from August 9th:

"Interest rates were supposed to be reset by weekly or monthly auctions, at which investors could cash out if they wanted to. Until the market collapsed in February, investors got the impression there was heavy demand for the securities because the auctions went off without a hitch. They weren't told how often Wall Street dealers stepped in to support the auctions with their own bids".

Wait...it gets better....

(quoting the same article) "Another allegation by regulators is that some brokers misled investors on the safety of the securities.Customers often were told that the securities, which had higher interest rates than rock-solid certificates of deposit, were just as safe and easily sold. They weren't told that the auctions could fail and leave them without the ability to sell."

To add insult to injury, when the market started to unravel earlier this year, Citigroup and other brokers pumped up the commission splits so they could get rid of the securiteis and dumped them on unsuspecting investors instead. Regulators say brokers were paid unusually rich commissions to sell the securities. In some cases, they say, brokers received high commissions for a product that appeared to offer high returns but held hidden risks.

What a pig fest!! Now it's their turn to pay.

Understanding Mutual Funds Share Classes and Their Costs

2008-08-02T23:55:00.000-04:00

by Karla Arguello, MBA

To the unsuspecting investor, all mutual funds might look the same. In fact they are not. With over 25,000 mutual funds now available in the marketplace, it’s important to understand how one fund might vary from its peers. Mutual funds come in all shapes and sizes and often represent distinct categories of the market. This article will focus on the differences in cost structure from fund to fund, and their impact on you, the investor.

Before we jump into this discussion, it’s important to note how many financial advisors get paid. Brokers are often paid by commissions (front end, back end or some blend of both) plus trailing commissions. Brokers can also claim future commissions on any new dollars deposited to the funds, whether or not the broker actually had a direct hand in the process. Certain mutual fund companies either pay the brokers a direct commission, or they recoup these “marketing” expenses from the shareholders by inflating their annual expense ratio.

By way of background, every mutual fund has annual operating expenses. Fund operating expenses vary widely depending on the type of fund. The largest component of operating expense is the fee paid to a fund's investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting/ auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. Monitoring the costs of the underlying investments within the portfolio is critical to your financial success. The higher the expense of the fund, the less profit you keep, and so these fees should be controlled by the investor.

Investors can buy mutual funds with distinct “share classes”, many of which contain sales loads. Savvy investors should only consider funds without sales loads, by buying “no-load” funds, often available by buying them directly from the fund company or at a discount broker (ie. Schwab, e-Trade, etc.). Let’s find out what these share classes mean:

A- A class shares typically require upfront commissions, usually between 1% and 5%, commonly referred to as a “sales-load.” These shares generally have the smallest annual expense ratio, but tend to have temporary 12b-1 fees (or marketing expenses) embedded in the cost.

B- B class shares commonly carry contingent deferred sales charges (CDSC), also called “back-end loads,” payable on the sale of the shares. B class shares generally have higher expense ratios than A shares. On top of paying higher yearly expenses, 12b-1 fees are also present. After an initial investment period, usually between 5 to 8 years, B shares customarily convert to A shares.

C-C class shares, like B shares, generally charge a 1% 12b-1 marketing fee and have higher expense ratios. While there are no up-front and back-end fees, C shares ultimately may be the most expensive for many investors because 12b-1 fees are subtracted each year,for as long as the investor owns the shares.

F-F shares are similar to A shares, but with an asset-based fee, usually 1% to 1.5%, directly billed to investors by financial advisors.

I-I shares, often called “institutional shares,” are usually sold to a broker’s largest customers and are sold without upfront loads, CDSC or 12b-1 fees. They carry expense ratios similar to A shares. These are often your best bet, but require big deposits or access through advisors.

R-R shares, often called “retirement shares,” are similar to I shares, but add additional payments to financial advisors and record-keepers into the expense ratio. These are typically found in corporate retirement plans.

When it comes to investing in funds, costs matter. If you're buying a mutual fund using a full-service broker's advice, there's high probability that you've just bought a fund with high costs and commissions. So, before your take the plunge either as it “do-it-yourself” investor or as the client of an “advisor”, do your homework. You can find the expense ratios and loads of mutual funds at websites such as Morningstar's. For more in depth information on the various types of advisor compensation, read here.

If My Bank Fails Will I Lose My Money?

2008-07-16T20:20:00.000-04:00

The answer to this question really depends on how much you have at your bank. Thankfully, the Federal Deposit Insurance Corporation (FDIC) established by the Banking ACT of 1933, protects you against some losses should your bank fail. How much protection do you get? The FDIC protects you up $100,000 and up to $250,000 for IRA accounts.

If you have more than $100,000 you may still be fully insured if you meet some requirements. To find out how much you will be covered, use the FDIC calculator

Some FDIC History

The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. The main purpose of the FDIC was to restore consumer confidence in the banking system, and reduce the threat of bank runs (also known as run on the banks) which devastated the banking system during the depression.

Since the formation of this institution people are less likely to panic and withdraw all of their funds from their bank which would ultimately make the bank insolvent.

Thinking About Borrowing from Your 401K?

2008-07-16T16:57:00.000-04:00

Thinking of tapping into your 401k plan to pay debts, buy a car, or to refinance your mortgage? Think again! Given the current real estate, stock market, credit crunch, and unemployment rate, it is tempting to want to borrow from your 401K but borrowing from your 401k can have disastrous consequences on your finances. If you are currently unemployed and have absolutely no other option to survive then you may have to do it, but if you have options you should not.

So what is the impact of borrowing from yourself as most call it?

Opportunity Cost

If you borrow from your retirement plan, the money is no longer "working for you”. Over the period of the loan, you may be giving up growth in your account in the form of interest, dividends and capital gains. Moreover, you will reduce the benefit of tax-free compounding.

Your opportunity cost grows further if during your repayment period, you decide to stop your regular contributions. Human nature may tempt you to stop your plan contributions, since your disposable income diminishes with your loan payment. But don’t shoot yourself in the foot, stay disciplined and keep on saving.

The Rules

If your 401k allows for loans, you can borrow up to 50% of your vested account balance or $50,000 (whichever is less). And unless you are borrowing for a first home purchase, which gives you a 30-year payback period, you get five years to pay back the loan.

It’s a whole other story, however, if during the repayment period you terminate employment. Before you leave the employer, your loan must be paid in full usually within 60 days.

If you still have an outstanding loan balance and cannot pay it off, the penalties if you are under 59 ½ years old are not pretty. You will pay a 10% penalty for the early withdrawal on top of the ordinary income taxes on the distribution, which is the unpaid balance.

Pro’s and Con’s

Most participants are tempted to borrow from their plan because it’s easy and requires no credit check. A click of a button, phone call or form will usually get the ball rolling. Also, while interest rates vary from plan to plan, most rates hover between a reasonable 1 to 2 percent above the prime rate. Paying yourself the loan interest is also tempting if you’re investments are under performing the loan rate. Finally, the loan interest you pay yourself is tax deferred.

Heck, with those types of benefits, are there really any downsides? Plenty.

The biggest drawback to borrowing from your plan is that the money is no longer tax deferred. The payments you make to repay the loan, whether paid directly from a salary reduction or paid from your bank, are after-tax dollars.

So let’s say that your monthly loan payment is $400 and your marginal tax bracket is 30%, you will have to make $571.43 in gross salary to cover that payment. Worse yet, when you withdraw the money at retirement, you get to pay taxes again!

If you are younger than 59 ½ and default on your loan (which was YOUR money to begin with), you get to advance your taxes on the balance and pay Uncle Sam a 10% slap on the wrist penalty, as we discussed above.

Also, the interest you pay on your loan is not tax deductible as, say, a home equity loan would have been. Finally, dipping into your plan will warp your psychology toward retirement planning. Rather than saving for things you want or need, you may get in the habit of using your retirement as a spending fund.

Example

So let’s see what happens in a real life scenario. Janie, age 30, has been a diligent saver and has accumulated $50,000 in her 401k. Between personal and employer contributions, she socks away $8,000 a year into her plan at an assumed rate of 7% per year. All other things equal, Janie will have accumulated $1,639,724 by age 65.

One day Janie decides to borrow $25,000 from her 401k. The loan will be paid over five years at a rate of 4%, making her payments $460.41. During the term of her loan, she decides she can only afford 401k contributions of $206.26. After the loan is paid off, she begins her full $8,000/year contribution again. Janie should expect her nest egg to be $1,367,370 at retirement.

This loan will result in an opportunity cost of $272,354!

To view a quick an easy calculator on what it would cost you to borrow from your retirement plan go to Bankrate.com. Click here to go

Closing

Unless you plan to extend your working years or take up a part-time job during retirement, your 401k plan and all other retirement accounts should be off limits until you retire. Think of these funds as sacred. Using these accounts as a safety net is a great way to jeopardize your financial security in the future.

A better alternative is to build up a cash reserve outside of your retirement accounts. A true safety net consists of liquid savings, money market or CD accounts, not your retirement plan. Most brokerage firms or banks will allow you to establish a regular deposit schedule from your checking to your savings.

If a recurring savings program is not part of your reality, consider borrowing the money from somewhere else. If you have no other choice but to borrow from your 401k account, do yourself a favor and 1) pay back the loan as soon as possible and 2) continue to make your regular contributions in addition to your loan payments. After all, it’s only your future at stake.

Are Markets Still Efficient?

2008-06-22T16:42:00.000-04:00

In recent years, many financial economists have come to question the efficient market hypothesis. I wonder what some of the brightest minds in finance might say about that?

According to the most successful modern-day investor, Warren Buffett, "most investors, both institutional and individual, will find that the best way to own common stocks ... is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals."

In the words of Burton Malkiel, famous economist and author of "A Random Walk Down Wall Street:

"Even if markets are less than fully efficient, indexing is likely to produce higher rates of return than active portfolio management. Both individual and institutional investors will be well served to employ indexing for, at the very least, the core of their equity portfolio."

...words to live by.........

It sure feels like a recession, but...

2008-06-16T22:57:00.000-04:00

Though popular definitions vary, the term "recession" generally refers to a period of more than a few months of declining gross domestic product. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP). A national recession can't be confirmed until the economic data show that the overall economy is in decline. The truth is, economists are at odds in deciding if we are really in a recession or not, given that growth is still positive, as measured by GDP. That’s not to say that current economic conditions don’t feel like a recession to many people.

While experts debate the nuances of recession . . . the Federal Reserve now suggests it’s more worried about inflation, due to a rising consumer price index.
Just in case you were in doubt, inflation is no doubt here. We feel it every day at the pump and at the grocery store. Headline CPI is now at a whopping 4.1%. What's that sound you say? Yeah, that's the suction in your wallet, and the purchaing power of your dollar disappear faster than a room full of hairballs near a Dyson vacuum.

Stay tuned for some financial tips on countering the effects of inflation AND recessions...

Women and Money

2008-06-11T22:06:00.000-04:00

Are You Investing or Speculating? – Your Answer Could be Detrimental to Your Future Wealth

2008-05-28T12:51:00.000-04:00

by Karla Arguello, MBA

Oil prices are high, real estate is down, the dollar is flat, unemployment is high, your investments are down, and no one really knows what’s going to happen with the elections in November. The future is uncertain to say the least, and for many the fear of uncertainty can lead them to make poor investment decisions that will have a rippling effect into their future. It is times like these that separate the well prepared investor from the panic stricken speculator. Let’s explore the difference between the two and the consequences.

An investor is some who invests using a consistent, long-term strategy to secure their financial future using well diversified investments. Generally the focus is on minimizing risk while maximizing return.

A speculator or market timer is someone who is less concerned about consistency and who switches investments on an emotional whim.

During a bull market most people would say that they are investors, but when the stock markets are jittery investors get tested, revealing many closeted speculators. This may include you, if you liquidated your investments and are waiting for the markets to recover to get back in.

Why This Strategy Does Not Work

You simply cannot predict when the markets will rally and when the markets will hit rock bottom. And missing the upswings of the market can be very damaging to your long term returns as seen in the following graph.

Understanding Risk

Investing in the stock market is not risk free. You should understand and feel comfortable with the level of risk in your portfolio so that when the market goes through its cycles you are well prepared. Let’s explore this further. Let’s use a
hypothetical portfolio ABC with the following risk and return criteria:

Standard deviation = 10% (Standard deviation is a statistical measurement that sheds light on historical volatility. This is a good measure of the portfolio’s risk. The higher the standard deviation, the riskier the portfolio.)

Expected return = 12%

If you own portfolio ABC what can you expect going forward? To answer this question we must go back to statistics. If you are a long term investor you expect that the average return will be 12%. This does not mean that you will earn 12% every year. After all, there is market risk to consider. For example, one year you may earn 6% another year 25% or anywhere in between, and so forth.

At any given period you can be 68% confident that your portfolio’s return will fall within a range of 2% to 22%. And you can be almost certain that your portfolio’s return may fall anywhere from -18% to 42%. Can you deal with this? Most investors enjoy the up side of risk, but seldom enjoy the downside. Case in point, an investor that earns 32% on a portfolio whose long term expected return is 12% is a happy camper. But, is that same investor happy when the same portfolio (whose expected return is 12%) earns a crummy -8%?

The point of this example is to understand that returns will vary from year to year. Depending on the standard deviation of your portfolio, those figures will fluctuate within a given range and you must be willing to live with that volatility. Just like you will not get 12% returns every year, you will also not get negative returns every year. Long term investors must understand and accept this risk if they want to be appropriately compensated.

Remember you are a long term investor. It’s the long term strategy that matters. Over the long run when you average the positive and negative returns your portfolio’s total return will approximate 12%. All the bumps in between are just part of the investment process.

Quoting Warren Buffet “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

The Importance of Diversification

As investors, we must understand that markets are cyclical and that there is risk involved in investing in the stock market. While that risk never completely goes away, we can do a lot to minimize the portfolio risk to the best extent possible. The best way to do this is to diversify our investments across different asset classes (or categories of the stock market) The key here is to identify investments in segments that perform opposite to one another under different market conditions (known as negative correlation), or at least have low correlations to each other. The result is higher returns and lower risk over time.

One common example that simplifies this concept is that of suntan lotion and umbrellas:

If you own a store that sells suntan lotion in Florida, more than likely you will do very well when it’s sunny out and people are going to the beach or outdoors. However, we all know that it rains in Florida, so on rainy days your store may not do so well. To diversify the risk of not selling any suntan lotion on rainy days you could consider also stocking up on umbrellas. That way you will make money whether it rains or it’s sunny out. This is the concept of diversification. Market conditions that cause one asset category to perform well, often cause another asset category to have average or poor returns. If properly executed, diversification will smooth out the unsystematic (market) risk events in your portfolio.

What About Asset Allocation?

Asset allocation describes how you choose to distribute your investments among investment vehicles such as stocks, fixed income, alternative assets, cash etc. According to Roger G. Ibbotson’s The True Impact of Asset Allocation on returns “for the long-term individual investor who maintains a consistent asset allocation and leans toward index funds, asset allocation determines about 100 percent of performance—regardless of whether one is measuring return variability across time, return variation between funds, or return amount.”

How you decide to distribute your assets among investments is a personal choice that needs to be looked at very carefully. In making this decision you should take the following into consideration:

Time horizon: how long will it be before you need to start withdrawing money from your portfolio? You don’t want to find yourself in a position where you need the money and you have to sell part, or your entire portfolio at a loss. The longer your time horizon the more risk you may be able to accept. The closer you get to your investment goal i.e. retirement; you can reduce the level of risk by reducing your equity exposure and increasing your fixed income levels.

Risk tolerance: You may want higher returns, but when your ABC portfolio is negative you feel like you’re going to be sick. You may be taking on more risk than you can stomach. You have to be realistic with yourself and face the
fact that you need a portfolio that will not deliver huge returns but will help you outpace inflation.

Conclusion

When it comes to investing and life in general, it always pays to do your homework and have a plan. As a long term investor your goal is to diversify your investments to reduce risk and maximize your long term results. This involves the careful selection and distribution of assets among investment vehicles that support your risk tolerance, time horizon and individual needs, as well as the appropriate mix of negatively correlated asset categories.

There is no denying the sexy allure of timing the market, or the fact that speculators can make money, and do get lucky investing in what’s “hot”. However, the reality is that they can’t consistently beat the market. More times than not, especulators end up buying high and selling low in a panic. You will always hear how much money a speculator made on one or two investments, but you will rarely hear how much money they have lost on their other not-so-“hot” investments.

It is wiser to develop a long term strategy and remain consistent even when the market misbehaves. After all, if we do our homework we would know what to expect in the long run and this includes expecting, that at some point or another, our portfolios will experience a few bad periods. What matters is the long term performance of our investments and most of all our peace of mind.

Inflation Numbers from a Parallel Universe?

2008-05-18T11:37:00.000-04:00

What planet does our government live on?

According to the government's most recent Consumer Price Index, a key inflation reading, consumer prices rose 3.9% in the 12 months ending in April, down slightly from the 4% annual inflation rate in March despite record gasoline prices. I would argue the REAL numbers are much, much, much higher.

The feds conveniently eliminate food and energy costs from their core inflation estimates....I mean, that just might look bad in the eyes of the consumer (the consumer paying almost 4 bucks for a gallon of milk and almost 4 bucks for a gallon of gas) so let's just bury our heads in the sand and pretend it doesn't exist.....maybe nobody will notice?

Food and energy costs are a very important part of household budgets. We all know those prices have been skyrocketing. How about this for inflation....Gas prices were up about 21% over the 12 months ending in April. The numbers will vary by region. South Floridians, like me, are exposed to:
Food prices up 5.4 percent, housing up 4.5 percent, and gasoline up 22 percent compared to April 2007. So much for living in paradise....

So how do they get away with those figures that might otherwise seem to hail from a parallel universe? Seasonal adjustments in the CPI and tricky formulas. The Bureau of Labor Statistics uses a system that weights prices according to an estimate of what the average American spends. Under that method, food only accounts for about 15 percent of the market-basket of products the typical family buys in a given month. Other sectors that account for bigger parts of the family budget showed only modest price increases or in some cases outright declines. That is what made overall inflation look tame last month.

Whatever....

Q&A Forum.....from a reader

2008-05-07T09:41:00.000-04:00

My wife has stopped working to raise our children. Can I make retirement contributions for her if she does not work outside the home?

Being a stay at home mom should not preclude anyone from saving for retirement. I encourage all couples to maximize their savings as much as possible. If a married person does not work, he/she may in fact contribute to a spousal IRA as long as the couple has compensation that equals or exceeds the contributions to the IRA of both persons. A nonworking spouse can make an IRA contribution of up to $5,000 for 2008 ($6,000 if age 50 or older as of 12/31/08) as long as the couple files a joint return.

Compensation Limits/Deductibility

For a traditional IRA, there is no limit on the amount you earn in order to contribute to a spousal IRA. If neither spouse is an active participant of a company retirement plan, then the entire IRA contribution is tax deductible. In this case, both spouses can make deductible IRA contributions of up to $5,000 in 2008 — for a total of $10,000 — regardless of the couple's adjusted gross income. However, if the working spouse is an active participant of their company retirement plan (but the other is not), then the spousal IRA may be deductible as long as the couples combined adjusted gross income is less than $159,000 and phased out at $169,000.
With Roth IRAs, deductibility is not an issue, but compensation is. Contributions are made with after-tax dollars. The payoff is that all Roth account earnings (plus contributions) can be withdrawn tax-free after age 59 1/2, provided the account has been open at least five years. However, in order to qualify for a full $5,000 contribution to a Roth IRA, (for you or your spouse), your income must be less than $159,000, and contributions are phased out from $159,000 to $169,000 of AGI.

Looking for real estate abroad?

2008-04-30T14:18:00.000-04:00

The U.S. credit crunch and financial meltdown is pushing a growing number of American real estate companies and investors to look outside the United States for opportunities. My recent article on Investopedia.com addresses these opportunities. Check it out here.

Are the Joneses Keeping You From Building Your Wealth? What You Can Do To Change It

2008-04-08T18:49:00.000-04:00

by Karla Arguello, MBA

It's hard to pin down when it happened but it happened. At some point, society subtly taught us that we are what we have or what we own. And thus the race to keep up with the Joneses began, making you go on shopping sprees that you couldn't afford, and racking up debt you will have a hard time paying off. That ever present feeling that you had to keep up with the Joneses has kept you from building the wealth you deserve, and for what? For the short lived thrill of having the sexy car, the latest cell phone, the hip lap top, the coolest clothes and the biggest house? While it can be exhilarating to buy the latest "it" item, the products themselves or the feeling you'll get from buying those items will not last very long. And unfortunately the damage to your wallet will. So what can you begin doing today to start building your wealth?

Change How You Think

When you get the urge to buy an expensive or inexpensive reoccurring item (Starbucks coffee) ask yourself the following questions:

---Do I really need it or is it just an immediate desire? Think before you buy. Whatever you want to buy is not going anywhere. Give yourself some time to think about your purchase decision and the impact it can have on your ability to build wealth. You might be surprised at how your mind forgets what you "really" need to buy.

---How many hours do I have to work to pay for this item? Calculate your hourly rate and figure out how long you have to work to pay for the item? If you love your job you may not mind putting in extra hours (fun retirement hours), but if you don't or prefer spending time with family you may want to think twice. If you buy the item on a credit card you have to also calculate the interest rate you will be paying. Those $4 lattes a day do add up.

---Why do I want this item? Sometimes we want things for the wrong reasons so consider your motive. Are you trying to impress someone? You want what your neighbor has? Think about this: Are you going to work until 80 just to say you impressed Tommy, or that you had what Jane had? Do you really think they'll care? The more you understand your motives the less likely you'll be to destroy your future wealth. Yes, we could all die tomorrow so why not live now? The fact is that most people will not die tomorrow, but they will get older and will need money to live on. So the question is will Tommy or Jane support you during your old age? You know the answer to this question.

---Is the Item Within My Budget? Who doesn't want to live like the rich and famous? Everyone does but we have to be realistic. Before you buy a house, a car or any major item you have to be realistic and see if your budget allows it. Having enough credit to buy it does not mean you can afford it. Your monthly income and monthly expenses will determine if you can afford xyz.

Budget Yourself

Most people think of a budget as punishment for bad behavior, but it doesn't have to be that way. A budget is merely a plan you create for planned income and expenses and your guide to helping you make decisions and analyze where you are spending your money. You can create a plan using an excel sheet or with readily available software such as Quicken or Quickbooks.

Creating a Budget That Works

Most people go wrong with budgets because they either make them too restrictive making them feel like they can't have any fun, they include too much making it impossible to track, or they do not include everything they need to include. Here are some tips on how to make a budget that works for you.

Add the following line items to your budget:

1. List All Sources of Income: Payroll, Rental Income etc.

2. List All Monthly Household Reoccurring Expenses: Utilities, car payment, rent, mortgage, loans, insurance, credit cards, food, cleaning supplies, clothing, gas, etc. (do not include things like fun or entertainment yet)

Now that you have these item listed use the following formula:

Income - Expenses = Disposable Income

Let's say your monthly income is $5,000 and your monthly expenses are $3,850. This means that you have $1,150 of disposable income per month. So here's what we are going to do with this money.
You are going to split it like so: 20% Fun 20% Emergency Savings and 60% Retirement Savings.

$1,150 x .20 = $230 and $1,150 x .60 = $690

1. Fun Allowance: Open a second free checking account and deposit your $230 (20% of your disposable income) a month into your fun allowance checking account. You can spend it without worrying about tracking it in your budget. But remember once you run out of allowance money that is it. You'll have to wait until next month for extra fun money. (if you want more allowance money see where you can cut back on expenses and not on emergency savings or retirement savings).

2. Emergency Savings: To avoid being one paycheck away from disaster you'll need to save some money for emergencies. Deposit $230 (20% of your disposable income) into a savings account. Open a high interest savings account with ING, HSBC or other provider and fund this account on a monthly basis until you have saved at least 3 months worth of expenses. Your IRA, 401K or Retirement Plan should never serve as your emergency fund. If you are younger than 59 ½ and you take money out of these plans you will not only have to pay a penalty but also taxes. It's not a good idea.

By the end of the year you'll have $2,760 in emergency money. You need $11,590 ($3,850 in monthly expenses x 3) but don't get discouraged. You'll get there.

3. Retirement Savings: Contribute $690 (60% of your disposable income) a month into a retirement account ie. 401K ($15,500 2008 contribution limit if you have earned income and are younger than 50 or $20,500 if you are older than 50 years of age and have earned income).

By the end of the year you would have contributed $8,280 into your retirement account not including your employer contribution match or account growth.

Your goal should be to contribute at least 10% -20% (you'll need more if you are closer to retirement age) of your salary into your retirement account. If you would have followed this budget you would have contributed 13.8% of your salary. Nice Job!

If your budget is tighter, review your monthly expenses and see where you can cut back. If you follow these simply tips you will avoid the trap of trying to keep up with the Joneses and you will have built the wealth you deserve. We are all going to grow old. The question is how comfortable are we going to be? It's up to you decide, so before you spend more than you can afford think about your future and what you want it to look like.

Send your questions or comments to karla@cathypareto.com

Is It Time To Abandon Stocks?

2008-03-28T22:01:00.000-04:00

It’s not unusual to hear prognostications of doom and gloom when the markets are in disarray, as they have been for several months now. A front page article on the Wall Street Journal this past week would indicate that stocks might be in store for a ten year lull, in other words, dead flat performance. If you read the headline alone (“Stocks Tarnished by Lost Decade: U.S. Shares in Longest Funk Since 1970’s), you might just consider running for the exits in a fit of panic. But, should investors worry and should they consider abandoning equities for safer bets? Not quite, here’s why.

Economic Stimulus Plan - Are You Getting a Check?

2008-03-27T12:18:00.001-04:00

So you think you're getting an IRS check in May? You may not qualify depending on how much you made last year.

The media has been talking about payments being mailed starting in May, and yes these payments will range from $300 to $600 for individuals and $600 to $1,200 for joint filers, but will you get a check?

Phase Out of the Stimulus Payment

Both the basic component and the additional funds for qualifying children begins to phase out for individuals with adjusted gross incomes (AGI) over $75,000 and married couples who file a joint return with AGI over $150,000. The combined payment is reduced by 5 percent of the income above the AGI thresholds.

You can find out if you qualify and how much you will receive by using the IRS calculator http://www.irs.gov/app/espc/

If you do receive a check use it to pay down your debt.