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Are You Single?

Bob Rall — Mon, 30 Jan 2012 20:41:50 GMT

Before my wife reads that headline and thinks that I’m up to something that I shouldn’t be, I need to explain. If you are single, you have a different set of financial planning issues to deal with.

And you are not alone (pun intended!). All of us are familiar with the game-changing demographics of the Baby Boomers. But, a subgroup of that demographic, what some have called the “Singles Surge,” is starting to attract a lot of attention. The latest numbers from the Census Bureau show that both the divorce rate and the number of people who have never been married have increased dramatically. Singles in the 55 to 64 year old age group increased from 30% to 33% over the last decade. And those in the 50-54 age group have increased from 29% to 35%.

So, what does that mean? From a financial planning perspective, it can mean a lot. While singles and married couples have many of the same financial needs, there are some noticeable differences.

First, let’s look at saving and investing. Since there is only one paycheck, singles have to save and invest more. And that can be quite a challenge. But, in order to prepare for short-term emergencies and longer-term goals, like retirement, it has to be done.

And speaking of retirement, there are unique issues to deal with here too. A single person will only have one Social Security check at retirement age instead of two, so building a retirement nest egg is a key. Deciding when to start taking Social Security is actually a little easier for a single person. If you need the cash flow, you can start it whenever you need to after age 62. If you are still working and don’t need the income, you can wait to start taking Social Security, which will increase the size of the check you ultimately receive.

Do you have a pension? It’s actually a little easier for a single person here too. Married couples with a pension will often take a reduced payout from the pension in order to make sure that the surviving spouse receives a benefit after one passes away. A single person can just choose the highest possible payout.

Disability insurance is especially important for singles. I believe it is important for married couples too, but even more so for singles. If a single person is injured or has a disabling illness, there isn’t another paycheck to rely on.

What about long-term care insurance? It might not be as important for a single as for a married couple. Why? If one spouse develops a need for long-term care, the couple will face the increased expense of the care. But with the healthy spouse still living at home, they are not reducing other expenses. For a single, the house could be sold to help fund the long-term care expenses.

This doesn’t mean that long-term care insurance isn’t an important consideration for singles. Many singles are renters, so the above example doesn’t work. And, even if they do own a home, most people want to stay in their home for as long as possible, so long-term care insurance can help.

Let’s look at estate planning. Everyone needs to pay close attention to their estate plans, but especially singles. And, for the estate planning discussion, I’m going to include same-sex couples because of the special legal challenges they face. It’s been said that everyone has an estate plan...that if you haven’t taken the steps to put one in place, the state has one for you…and you may not like it. You need a plan in place that addresses the possibility that you become incapacitated. Who will manage your assets and make decisions about your health care in the event that you can’t? And who will handle things after you pass? Wills, living trusts, living wills, health care directives and powers of attorney are the tools to plan for these issues.

What we’ve discussed in this post are some of the financial issues of living, and growing older, as a single person. But there are also physical and emotional issues that come into play. Those are more difficult. Some folks are single by choice, some by divorce and some are widowed. But, single or not, we all have physical and emotional issues to deal with as we age. And, single or not, having a solid financial plan in place will make it easier to deal those issues when they arise.

I Don't Like Tim Tebow!

Bob Rall — Sun, 22 Jan 2012 14:18:18 GMT

There, I’ve said it. And I was glad to see him go down in flames with the Broncos last week. Let the cursing, name-calling, and un-friending begin. I know that, in particular, my gator friends will be incensed. But I’m just being honest…I’m weary of all the Tebow-mania that has been going on.

By now, many have stopped reading this article. Some will get past the headline, just to see what garbage I’m about to spew. But once they read that first paragraph, most will be gone. But, if you’ve made it this far, I think you’ll see that I don’t like Tim Tebow for all the right reasons.

You see, I’m an ardent sports fan. I have been all my life. And, I’ve been a true fan of my favorite teams. I grew up in Columbus, Ohio, so my college-football heart belongs to the Ohio State Buckeyes. My mom and dad were originally from Pittsburgh (and I started school while living there) so my pro-football heart belongs to the Pittsburgh Steelers. My pro-baseball heart belongs to the Pittsburgh Pirates, and it’s not easy to say that. It’s been hard to be a Pirate fan over the last 20 years.

Over the years, I’ve celebrated my teams’ victories, big and small. I’ve mourned their losses…and sometimes those losses made me feel like my heart was truly broken. And that brings us back to why I don’t like Tim Tebow.

He seems like a good-enough guy. He’s big, strong and talented; he’s focused and even seems to be a pretty good role-model for kids…something we don’t see enough of in sports. And I don’t have a problem with his outward expression of his religion. I would much rather watch someone take a knee in a private moment with their God, than watch some of the “it’s all about me” celebrations that seem to happen on every other play.

The reason I don’t like Tim Tebow goes back to the heartbreak I mentioned earlier. You see, I can never forgive him for the role he played in two of the many heartbreaks I’ve experienced over the years. The first was on January 8, 2007. He played a role, albeit a relatively minor one, in the BCS National Championship game when my beloved Buckeyes were trashed by the gators. The pain from that loss was magnified because I live in the middle of gator-country.

But that was a few years ago. The pain, but not the memory, eventually subsides a bit. I was happy that he didn’t win his second Heisman Trophy…since that honor has only happened once in college football history…to a Buckeye. But he proved to be a winner through his college career. And, I must admit to a tinge of disappointment when my Steelers didn’t draft him onto their team when they had the chance. And I even found myself taking his side this year when he started receiving criticism for the “Tebow-ing” he did after big wins.

But then he broke my heart again. My injury-plagued Steelers limped into Denver to take on the Broncos in the first round of the NFL playoffs. Even with many of the Steelers nursing injuries, they were still expected to make short work of the Broncos and move on to the next round on their way to another Super Bowl. But, that’s not what happened. A heart-wrenching game ended with a miracle-finish in overtime. Overtime lasted one play; a touchdown pass from Tim Tebow that sent my Steelers home for the rest of the playoffs.

As a Buckeye fan, I learned early the traditional song that “We don’t give a damn about the whole state of michigan because we’re from Ohio.” As a Steelers fan, I’m not particularly fond of the Ravens, the Cowboys or the Raiders. And I’ve still never forgiven the Atlanta Braves for stealing the Pirates chance for a trip to the World Series on a Championship Series-ending play-at-the-plate in 1992. By the way, I don’t like Barry Bonds either.

Notice, I didn't say I hate Tim Tebow. Hate is way too strong of a word. I just don’t like him. It’s part of sports. And that’s why I don’t like Tim Tebow…because I’m a sports fan.

A Look Back at the Looks Ahead

Bob Rall — Fri, 30 Dec 2011 16:47:29 GMT

It’s the time of year when all the talking heads, prognosticators, economists, and other soothsayers are coming forth with their projections of what is to come in the New Year. The idea is that if we follow their guidance, our portfolios will surely outperform the market; we’ll all be rich and live happily ever after.

As a passive asset manager, I don’t believe that anyone can consistently predict what will happen in the markets. We avoid any type of market timing or security selection, because those are subject to factors we cannot control. So, for educational purposes, I started running a little experiment. At the end of last year I saved the predictions from several of the experts, so that I could look back and see how they did. The results of my non-scientific test further cement my decision to keep on as a passive manager.

Here’s what I found:

One of the largest money managers in the world, in an article entitled, “2011: A Look Ahead” presented 10 predictions for the year ahead. Let’s see how they did:

“US growth accelerates as US real GDP reaches a new all-time high.”
- They missed on this one. The growth that we saw at the end of 2010 did not continue in 2011. We saw a 0.4% increase in the 1st quarter, 1.3% in the 2nd, and 1.8% in the 3rd. Hardly an all-time high.
“The US economy creates 2-3 million jobs in 2011 as the unemployment rate falls to 9%.”
- They were close on this one. The economy created about 1.5 million new jobs and the unemployment rate closed the year at 8.6%.
“US stocks experience a third year of double-digit returns for the first time in more than a decade as earnings reach an all-time high.”
- Not even close. The S&P 500 index finished 2010 at 1257. As I write this, with about 5 hours left in the last trading day of 2011, the index is at 1262. Basically flat for the year.
“Stocks outperform bonds and cash.”
- They missed this one too. S&P 500 and cash—flat; A Merrill Lynch index of Treasury bonds returned 9.6%.
“The US Stock market outperforms the MSCI World Index.”
- They got this one right. S&P 500—flat; MSCI World Index down over 6%.
“The United States, Germany and Brazil outperform Japan, Spain, and China.”
- All over the map on this one. Here are the numbers: US—flat; Germany—down 11%; Brazil—down 22%; Japan—down 12%; Spain—down 8%; China—down 15%;
“Commodities and emerging market currencies outperform the US dollar, the euro and the Japanese yen.”
- Wrong again. A broad based commodity index was down 10% for the year. The US dollar gained against most developed and emerging market currencies.
“Strong balance sheets and free cash flow lead to significant increases in dividends, share buybacks, mergers and acquisitions and business reinvestment.”
- They nailed this one. With billions of cash sitting on the books of major corporations, the merger and acquisition environment was strong, led by energy, healthcare and tech sectors. Lots of companies also increased their dividends.
“Investor capital flows from bond funds to equity funds.”
- Missed again. According to the Investment Company Institute, stock mutual funds showed net outflows of more than $300 billion through November. Bond funds increased by about $200 billion.
“The 2012 Presidential campaign sees a plethora of Republican candidates while President Obama continues to move to the political center.
- The Republicans have certainly had a plethora of candidates, but I’m not so sure you could say that President Obama has moved to the political center.

So, the scorecard would read that they missed 6 or 7 out of 10. Not exactly confidence-inducing. What about some of the other experts?

Laszlo Birinyi, who was one of the first to advise buying stocks near the bottom in March 2009 predicted that the S&P 500 would rise to 1333 this year. He was right, and wrong. The index rose as high as 1356 in May before the European summer sent it to as low as 1100. As mentioned earlier, it’s currently at 1262.

Fidelity Investments published a report, “5 Experts: 2011 Outlook.” How did they do?

The Director of research for the Global Asset Allocation team didn’t exactly go out on a limb, but predicted a higher US market. Didn’t happen.

The Director of Global Macro Strategy was bullish on stocks, gold, foreign stocks and currencies, and bearish on Treasuries and the US dollar. With the information I’ve provided earlier, I would call this a zero-for-six record on the year.

One of their leading Portfolio Managers said “Stocks should trump bonds.” He missed that one. He also said that small stocks would lead large company stocks. He’s oh-for-two. Large stocks, as represented by the S&P 500 were flat. Small stocks, represented by the Russell 2000, were off about 5% for the year.

Another Portfolio Manager said that “relative to fixed income, stocks seem like a good position to me.” Wrong again.

And the final expert, another Portfolio Manager finally got one right for the Fidelity team. He expressed concerns about a number of areas, but summed up his position by saying that “the many government and market uncertainties and risks that exist can be mitigated and dampened by diversification.” He got it!

So, once again the lesson here is that even the experts can’t predict what’s going to happen in the markets, so why should you try? Manage your portfolio by diversifying across several asset classes, keep your costs low and only trade when market movements require you to rebalance to your original allocation. That’s how we do it.

And don’t worry… I’ve been saving all the predictions for 2012 that have been popping up over the last couple of weeks. We’ll see how they did this time next year.

Happy New Year!

2011 Reading List

Bob Rall — Wed, 28 Dec 2011 20:32:02 GMT

I’ve heard it said that you can tell a lot about a person by the books they read. That’s probably pretty true. So, in an effort to let you know a bit more about me, here’s my reading list for 2011. Just like the music I listen to, my tastes are all over the map. There are some books on business, history, politics, investing, and even just a few “fun” reads. I’ve also included a brief comment on each one. Who knows? You might find something in the list that you would enjoy.

Who’s Got Your Back: The Breakthrough Program to Build Deep, Trusting Relationships that Create Success—and Who Won’t Let You Fail—By Keith Ferrazzi. The title itself is more than a mouthful. The book discusses how the key to success in work and in life is to create an inner circle of “lifeline relationships.” We all could use more deep, close relationships with trusted people who will provide us with encouragement, feedback, and support, and who aren't afraid to tell us when we're on the wrong track.

Wise Investing Made Simple: Larry Swedroe’s Tales to Enrich Your Future—by Larry Swedroe. I follow many of the same investing principles that Larry does…passive investing, diversification, controlling risk, etc. I even had dinner with him several years ago in Atlanta when we hosted an investment meeting together. He uses short and simple stories to explain how to invest sensibly for the long run. Don’t pay attention to economic forecasts, Wall Street recommendations or CNBC gurus. Diversify your portfolio, rebalance when necessary, and stick with your plan. Highly recommended!

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything—by Steven D. Levitt and Stephen J. Dubner. One of my favorite books this year! It’s not really about economics in the traditional sense. Instead, the authors look at different parts of everyday life and, by analyzing data, draw some very interesting, and entertaining conclusions. I’ll give you just one as an example…in what might be viewed as a controversial analysis, the authors trace the drop in violent crime rates to a drop in violent criminals, which they attribute to the Roe v. Wade decision of 1973 by the Supreme Court.

Empire of Ancient Rome—by Michael Burgan. I love history and the Roman Empire is the starting place for so many of the ideas and institutions we now have in the Western world. The book was ok, not great.

Go-Givers Sell More—by Bob Burg and John David Mann. This is a short and easy read that uses a story to explain that the way to success in business is by cultivating a trusting relationship and create value for all involved.

Underwater Home: What Should You Do if You Owe More on Your Home than It’s Worth?—by Brent White. Unfortunately, in today’s economic environment, more and more people are finding themselves in this situation. I read it because I was starting to get questions in my role as a financial planner. The author discusses the emotional and practical realities of the situation.

The Tea Party Goes to Washington—by Rand Paul. As we all know, we’re gearing up for a big election next year. To familiarize myself with the candidates, I’m trying to read as much as I can about each. I know this one is by Rand Paul, not Ron Paul, but the father and son share philosophies. I agree with many of their ideas and think we need some big changes in our political system.

Poke The Box—by Seth Godin. The author has had several best-sellers, so I thought I would try this one. The theme is that it is better in today’s world to stand out than to conform; that most people aren’t successful because they don’t “start stuff.” Good ideas, although I didn’t get much new out of it and was a bit disappointed.

The Heart and The Fist: The Education of a Humanitarian, the Making of a Navy SEAL—by Eric Greitens. I saw this former SEAL speak at a conference, the week after the SEALs got Osama bin Laden. Needless to say, his story drew a lot of interest. The book is an autobiography of the lessons he learned traveling the world, first as a humanitarian, then as a Navy SEAL. It is another one of my favorites for the year.

Born to Run: A Hidden Tribe, Superathletes, and the Greatest Race the World Has Never Seen—by Christopher McDougall. As a runner struggling with a knee injury all year, I wanted to find out more about the Tarahumara Indians from Mexico, who run hundreds of miles without rest or injury. Well done and very inspirational. We all are…born to run.

Ok, there are the first 10 of the year. I completed 31, so I’ll have to break this list into bite-sized pieces. I hope you find something you might like, or find out something about me you didn’t know. I’ll post books 11-20 next week.

Happy New Year!

Learning to Prevent Fraud, From a Fraudster

Bob Rall — Mon, 14 Nov 2011 20:21:35 GMT

In September, I attended the annual conference of the Financial Planning Association in San Diego. It was 3 ½ days filled with a variety of financial planning educational sessions. Each year, the FPA® invites interesting keynote speakers to kickoff and close the conference. The speakers are from outside of the financial planning profession, but tie their discussion to a financial planning concept.

This year’s opening keynote presentation was a session on financial fraud, delivered by a very well-known convicted fraudster. Frank Abagnale led a life of crime in his younger days. His crimes consisted of forgery, identity theft and embezzlement. You may recognize his name from his best-selling book, but more likely from a Steven Spielberg movie starring Leonardo DiCaprio and Tom Hanks entitled “Catch Me if You Can.” Mr. Abagnale was in San Diego to tell us how, before his 19^th birthday, he successfully conned millions of dollars posing as a Pan Am pilot, a doctor and a lawyer.

After finally getting caught and serving time in both a foreign and a U.S. prison, Mr. Abagnale went to work for the FBI as a specialist in fraud prevention. That was 36 years ago and he is still there today. In his keynote address, he suggested that in today’s world, fraud is easier for criminals than ever before. His focus is on the crime of identity theft, which according to the Federal Trade Commission has affected 15 million American victims. After an entertaining story of his life of crime, and sharing his feelings of disgrace for those crimes, he gave us his top tips for preventing identity theft. On his website, www.abagnale.com, he says that “because punishment for fraud and recovery of stolen funds are so rare, prevention is the only viable course of action.”

Number one on his list of tips on how to prevent someone from stealing your identity was to use a credit monitoring service. Specifically, he recommends choosing a service that monitors all three credit agencies and one that will notify you in real time when some activity occurs.

Mr. Abagnale’s second suggestion is to use a shredder for any and all documents that contain any personal information. He suggested using a “micro-cut” shredder, one that turns documents into confetti.

His next tip led directly to a change of behavior for my wife and me. Because we don’t like credit card bills or balances, we’ve been in the habit of using our debit card to pay for purchases. Mr. Abagnale strongly suggests that you do not use a debit card when you can use a credit card. Why? When you use a debit card, you are putting your money at risk. When you use a credit card, you are putting the bank’s money at risk. Credit cards have a maximum liability of $50 for unauthorized charges. Debit cards can go to $500 or more. Immediately after his presentation, we put this one into practice.

Finally, he said to make sure that your computer is protected with: 1) a firewall to block hackers from accessing your computer; 2) antivirus software to keep bugs and viruses out of your system; and 3) spyware protection to keep malicious software from hiding on your machine and sending your personal information out to the internet. He also suggests that you should always careful about the ads you click and what programs and other items you decide to download.

These are the most important steps you can take to protect yourself from identity theft, but it is by no means inclusive of all the things you can do. For move identity-protecting ideas, you can visit his website.

A victim of identity theft spends more than $1000 and 175 hours to get their credit report fixed. Taking the steps that he suggests won’t guarantee that you won’t be a victim, but they will greatly reduce your odds of being one.

Are You Leaving Money on the Table?

Bob Rall — Wed, 09 Nov 2011 18:05:17 GMT

Free money? It sounds too good to be true. But it is true…and many people are passing it up. A recent investor alert from FINRA (Financial Industry Regulatory Authority) pointed out that roughly 30% of American workers are passing up free money. How? By not contributing enough to their company’s 401(k) plan to receive the full employer match. The alert from FINRA urges those workers to step up their contributions.

One of the most common arrangements in a 401(k) plan is when your employer matches your contribution dollar-for-dollar, up to 3% of your salary. So, if you are not contributing at least 3%, you are passing up free money. And, what may be even worse, you are putting your financial security in jeopardy because you are simply not saving enough.

A rule of thumb in the financial world is that you should save 10% of your income for your future needs. Some will need to save more, some less. But even in the tough economic times we have been experiencing, everyone needs to take responsibility for their future by preparing for their retirement. By not taking full advantage of a company’s match, you are passing up on a no-cost way to boost your savings. Free money!

And it seems that those who need it the most are passing on the opportunity. FINRA says that “millions of workers, especially younger and lower income workers… are leaving money—free money—on the table.” They estimate that 43% of workers age 20-29 are not contributing enough to their plans to get the full match. An earlier study showed that 40% of employees making less than $40,000/year are leaving some of that free money behind by not contributing enough to get the match.

I know that it can seem hard to put money away for the future when you are struggling to make it day to day. But, if you don’t take care of your future financial security, who will? A good rule to follow is that you should pay yourself first. And, if you are lucky enough to work for a company that is offering free money via a match in your 401(k) plan, there’s not a better way to do that. The money comes out pre-tax, saving you on your income tax, and it comes out before it hits your paycheck, so it’s effortless. And, once it is setup, it will be on cruise control. You’ll get accustomed to living on your net paycheck and will be more confident in your financial future knowing you are picking up free money every time you get paid.

So, are you leaving money on the table?

An Annual Insurance Checkup Can Save You Money without Hurting Your Coverage

Bob Rall — Thu, 29 Sep 2011 18:26:08 GMT

As we go through life, our insurance needs change. It makes sense to put certain dates on the calendar each year to see if your home, auto, umbrella liability, life, health, business and disability coverage not only fit your current needs at the right cost but protect you and your family in case of a disaster.

It really hasn’t been that long since Hurricane Katrina underscored the need for individuals and families to think about how insurance fits into an overall financial plan. Weather-related disasters, however, should be only one part of your assessment – it’s wise to consider if you are adequately insured in case a spouse or partner dies suddenly or becomes disabled or if your business is damaged or destroyed.

Here are some ways to examine the coverage and cost issues unique to your situation:

Homeowners’ insurance: It’s always good to see if you can afford to take a higher deductible to get a lower premium, but first, review whether you have the maximum home replacement coverage on your house and its contents. Go to several agents to see what you would get for maximum replacement coverage in your community. This particular coverage is particularly important since so many homeowners carry big mortgages and probably won’t have enough in savings to cover the difference of what insurance won’t. Also, be clear that “replacement cost” means the amount that it will cost to replace your home on the land where it stands – that usually means an amount considerably less than the market value of your home.

Also, make an effort to inventory your collectibles, home office equipment or additional furniture or assets you’ve acquired since you last took an inventory of your home. Make a list of those changes to review with your agent. Then take photos of all significant items and keep them in a safe place -- possibly outside the home.

Auto insurance: If you’re driving an older car that if totaled wouldn’t result in a financial burden to you, you might want to drop collision coverage and/or boost the size of your deductible. Take the money you save and put it in an account for your next new car in case your car is totaled. Also, if you consolidate your home and auto insurance at the same company, you’ll generally get a discount.

Health insurance: Do you fully understand all your deductibles and co-pays? If you’re getting ready to have kids, emergency room visits happen. Does your current plan provide for out-of-network care? Check your prescription coverage -- see what options your health coverage provides you for prescription discounts and prescription-by-mail availability so you can have uninterrupted access to important medications wherever you are. Also, if you travel frequently for work or vacation, check to see what your employer or individual health plan provides in the way of coverage across state lines or outside the country. One uncovered travel-related medical bill can leave you thousands of dollars in debt.

Disability insurance: Many people get disability coverage through work, but some advisors think you should have separate coverage because group policies can be more restrictive and therefore inadequate if you’re out of work for a considerable period of time.

Life insurance: Talk to a trusted advisor, such as a CERTIFIED FINANCIAL PLANNER™ professional, about the right coverage to protect your spouse and children with enough money to help them continue their lifestyle and their educational goals if you die. That includes money for ongoing expenses, mortgage payment and tuition. Your spouse should also consider similar coverage, particularly if he or she is working. You might also consider life insurance for the children if only for burial coverage.

Lastly, remember how external forces affect your ability to buy insurance. For instance, if you buy in a high-crime area or an area hard-hit by weather disasters, you’ll find home and auto insurance tougher to afford. Separate of all local factors, though, you’re going to have to keep a very close eye on your credit report. Your ability to handle credit is pricing your attractiveness as an insurance buyer, a homebuyer, even as a prospective employee. If you really want to save money on insurance, keep your credit record clean.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert J. Rall, CFP®, a local member of FPA

Decisions, Decisions

Bob Rall — Mon, 26 Sep 2011 13:28:58 GMT

With the unemployment rate stuck north of 9%, many people have had to face situations that they are not used to facing. Many have had to fine tune their resume and polish their job-seeking skills in order to try to find new employment to replace a lost job. If they are among the lucky ones, they will then have decisions that come with considering a new employment opportunity. Some have had to pack up and move to another state in order to try and find work. Besides all that, losing a job can have a powerful emotional impact.

There’s also the financial impact. Is unemployment compensation available? How do you manage cash flow while out of work? Is there a severance package available? What about your health insurance options? Can you keep your group life insurance? What should I do about my employer-sponsored retirement plans?

Usually, your company’s Human Resources Department can help with a lot of these questions. But that last question, the one about retirement plans, seems to go unanswered in a lot of cases. The findings of a recent study by Fidelity Investments seem to bear this out.

Over 42 million Americans have pension plans. But apparently, they don’t understand them very well. The Fidelity study showed that 31% of those surveyed don’t know their plan’s vesting schedule, 40% don’t know what their payment options are when they either retire or leave the company, and 27% don’t know when they can start receiving benefits. This is a big problem because the same study showed that more than 50% of those surveyed plan to use those pensions to pay expenses in retirement.

The number of workers with pension plans has been declining for several years as the 401(k) plan has become the employer-sponsored plan of choice. But the study had some troublesome numbers here too. More than 30% of those involved in a job transition are unsure about what to do with their workplace savings plan. Since the assets in the plan are often a big portion of your savings, this is an important decision.

Should I stay, or should I go?

There are generally four options available to you with the funds held in a 401(k) or 403(b) plan with a former employer: you can leave them in the plan; you can roll the assets into an IRA; you can roll them into a new employer’s plan, if it allows; and you can cash out. There are pros and cons for each option. Fidelity has put together a pretty good review of the things you should consider when facing this decision. You can access the article by CLICKING HERE.

71% of the survey respondents who had left an employer at least four months ago said that they were consciously leaving the money in the existing plan. 59% of those said that satisfaction with the plan’s features and access to specific investments was the number one reason they were staying. But 27% answered that they were leaving their money in the old plan because they didn’t have the time or the interest in taking action. No time or interest? Benign neglect is not a good way to manage investment and retirement decisions.

So, while losing a job can be a very traumatic experience, putting together a plan to deal with the many decisions you may face will help you get through it. There will be tax questions, investment questions, retirement questions and cash flow questions. There are many resources available if you decide to handle these questions on your own. But you might benefit from some objective outside guidance too. A Certified Financial Planner^TM is qualified in all of those areas and can help you make a difficult process less difficult.

When Passive is not Passive

Bob Rall — Mon, 29 Aug 2011 15:49:29 GMT

As a portfolio manager who follows the passive management strategy, I’ve never really liked the term “passive management.” It just seems to elicit thoughts that we aren’t really managing the portfolios we oversee. Nothing could be further from the truth. While we follow the passive management strategy, we are anything but passive in our approach to make sure our client portfolios are the best they can be.

The passive management strategy means that we don’t do any forecasting of the financial markets. We truly believe that no one can accurately predict what will happen in the markets. We do not believe in market timing, or trying to determine when to be in or out of the markets, an asset class, or an individual investment. We also don’t believe in stock picking, which involves trying to determine whether we should own Coke or Pepsi, Apple or Microsoft, or Exxon Mobil or Chevron.

With a passive management approach, we focus on building a portfolio that is structured properly for each client. We own all of the market and are invested at all times. Then, when market moves change the mix of our portfolio, we rebalance, which makes sure our level of risk doesn’t change. We are also always working to review the model portfolios we use to make sure they are providing the diversification we desire. And that’s where we are making some changes.

The purpose of diversification is to reduce risk in the portfolio by investing in a variety of asset classes. We want asset classes that do not move up and down in tandem. The technical term is correlation. We want to build our portfolio with asset classes that are not highly correlated. A good example can be seen in the broad asset classes of stocks and bonds. As we have seen over the years, and especially this summer, stocks can be highly volatile, moving up and down in large amounts. We add bonds to the portfolio because bonds tend to go up when stocks go down and vice versa…and usually to a lot lesser degree. So, they help to smooth out the ride, or lower the risk, of the overall portfolio.

For the last several years, our portfolio models have been made up of the following asset classes: US large stocks, US small stocks, International large and small stocks (developed countries), emerging market stocks (developing countries), real estate, commodities and short-term and intermediate-term bonds. So, what about those changes I mentioned earlier?

We are living in a world that is becoming more and more a global economy. In fact, I read recently that 52% of the earnings of the S&P 500 companies come from overseas. From an investment standpoint, recent research has indicated that several asset classes have become more highly correlated and are not providing the diversification we need. For example, over the last two years, US stocks and the stocks of international developed countries have had a correlation of between 85-95%, meaning they are moving up and down almost in lockstep.

I won’t turn this into a technical paper by going over all the correlations; I just want to convey the updates to the portfolios we manage. We will be, in a broad sense, combining our domestic and international stock holdings. We will keep emerging markets as a separate asset class because stocks from the emerging countries, while moderately correlated with US and international stocks, still provide some diversification benefits. We are also folding our real estate asset class into our domestic small stock class because many of the real estate companies are included in the small cap index.

There are a few other small changes, but basically, our new models will consist of four stock indexes (large, small, emerging markets and commodities) and our three bond indexes. There will be no changes to our bond mix.

We do not take changes to our models lightly and a lot of time and research went into the process that resulted in these changes. And, we will not be implementing the changes all at once. We will make them as opportunities present themselves based upon the unique situation in each client portfolio. The implementation decisions will be based on rebalancing needs, liquidity needs, and any potential tax consequences with an eye toward keeping transaction costs to a bare minimum.

I believe these changes will have a positive effect on our portfolios, providing us with better diversification. But remember, just because we are “passive” doesn’t mean that we are being passive. As the financial world evolves, so will our approach. As always, if you have any questions on your individual situation, don’t hesitate to contact me.

The Debt Crisis and Your Portfolio

Bob Rall — Sun, 31 Jul 2011 21:11:08 GMT

It’s almost 3pm on Sunday, July 31, 2011 as I write this. We are less than two days away from our nation running out of money and defaulting on our debt. And, for those of you who may not know…yes, I am in the United States of America!! The U.S. Government has put itself in the position of not being able to pay its bills. There’s word today that our illustrious leaders have delayed, until later today, yet another vote on a deal that would, or could, resolve this crisis. So, it’s possible we may have an agreement by the time I finish writing this.

But, the inability of our leaders (from both parties) to keep us from getting this close to the edge, is not the point of this article. Instead, I will address what I think we, as investors, should be doing to prepare ourselves in the event that an agreement doesn’t happen.

If you are a client of Rall Capital Management, or of a firm with a similar investment philosophy, then the short answer to the question of what to do is…nothing. I have received a few phone calls and emails from clients who are understandably nervous. The financial media and political pundits have been warning of a meltdown in the financial markets if we don’t have an agreement by Tuesday. And…they might be right. But, they might not be. Last week, the markets were reflecting the uncertainty and moved lower, although it wasn’t a dramatic selloff.

Our investment philosophy, and our historical success, is based on not trying to “guess” how the markets will perform. That’s because we believe that when someone makes a market prediction, that’s all it is…a guess. Investing can be a very emotional experience, dominated by two emotions, fear and greed. When you combine a guess about what will happen in the markets with a strong emotion like fear or greed, the results are often disastrous.

The best way to prepare for the “end of the world as we know it” scenario is to have your portfolio properly positioned before it becomes an issue. That means to make sure that you have enough liquidity to live your life. Make sure you have enough cash on hand to pay expenses for several months, so that if the market does take a dive due to the crisis (or for any other reason), you won’t be forced to sell off your holdings at depressed prices.

This is how we got through the financial meltdown of 2008. We made sure that clients weren’t living off of the invested assets, then held our breath and hung on when things looked the darkest. We got hurt, but we didn’t get killed. And we have recovered nicely over the last couple of years by staying with our strategy.

The next best thing you can do is to make sure your portfolio is well diversified. It’s probably true that if the U.S. defaults, the rest of the world markets will also suffer. So diversification may limit the damage, but probably can’t prevent it. But different asset classes behave in different ways, so owning a mixture of U.S. and international stocks, real estate and commodities should help.

I believe that the real key is in your fixed-income, or bond, allocation. Interest rates have been at record lows for a long time. Because of the low rate environment, many investors have taken on additional risk in the fixed income side of their portfolio. They are trying to increase the interest payments they receive, so they either buy longer term bonds, which are by definition riskier; or, they take on additional credit risk, buying lower-rated securities, or higher-risk bonds than they normally would.

For many, the fixed-income side of their portfolio is supposed to act as the anchor, providing some stability to the rest of their investments. Adding additional levels of risk to the “stable” side of your portfolio can work well when markets are stable, but can whipsaw you and cause greater losses when markets get shaky.

I just checked the news again…and we don’t have a deal yet in Washington. So, as we all try to keep the faith that our leaders will come through with a solution, from the perspective of our investments, the best advice I can offer is to “prepare, not panic.”

How Is Planning a Vacation like Planning Your Investments?

Bob Rall — Thu, 23 Jun 2011 12:57:15 GMT

Summer has begun. This is the time when your thoughts may turn to that wonderful break in the year called a summer vacation. Maybe you’ll think about a trip to a theme park, a secluded resort, or a cruise to the islands. And maybe you’ve heard the expression that most people spend more time planning their vacation then they do planning their investment strategy. Unfortunately, the statement is true more often than not.

My wife and I have recently started thinking about our vacation. We travel a fair amount, but most of our trips are to business conferences or to run a marathon. Those aren't vacations. And working out the details for those trips is usually pretty easy. For example, in July I'm attending a business conference in Chicago. I didn't have to make the decision on where to have the event or the details of the event; I just needed to find a flight and a hotel.

Planning a vacation is an entirely different animal. Thankfully, there's this thing called the Internet that makes researching all those details pretty easy. Or does it?

Last weekend we sat down at our computers to start the process. First, we have to decide where we would like to go. While we have traveled a good bit, there are still a lot of places we would like to visit. We've been to all-inclusive resorts in Mexico and the Caribbean in the past, and have enjoyed those trips. We would also like to take a tour of wine country in either Napa Valley or Sonoma. We’ve never spent any time in the Keys, so that's an option. Or, may be a cabin in the mountains of North Carolina in search of some cooler weather? After about an hour of searching different websites I realized that this was not going to be easy.

Of course, once we have decided on a location (and we still haven't done that), we have to find acceptable accommodations, make travel arrangements, and plan for whatever activities we would like to do while we are there. And, we have to do all this within the budget limits we have established for the trip.

After a little while longer, it finally dawned on us…there are professionals that do what we're trying to do. And they do it professionally. I've always been somewhat resistant to using a travel agent because I didn't want to pay their fees. And then an even bigger realization hit me. I make my living as an investment advisor. Some people try to manage their own investment portfolio because they don't want to pay advisory fees.

Just like planning a vacation trip, managing one's own investment portfolio isn't really hard work, but it's very time-consuming and you often don't know what you don't know. Sure, there are lots of websites out there that can help you. Some will try to help you determine your risk tolerance. Others can help you determine the return you need in order to meet your financial goals. There are lots of them that will try to help you determine the proper asset allocation based upon your willingness, and need, to take risk. There are lots more that will help you pick the right investment vehicle to build your portfolio. Unfortunately, most of those sites are trying to sell you their funds, so be careful. Once you have your portfolio built, there are sites that will help you monitor the progress and determine when and how it’s best for you to rebalance as time goes on. Get the picture yet?

There’s no heavy-lifting when it comes to managing an investment portfolio, just like there’s no heavy-lifting when planning a vacation. So, theoretically at least, anyone can do it. But there’s a lot to be said for experience and education in both areas. I would rather spend my free time doing things I like to do…and digging through all the various travel sites out there is not on my list. Yes, I may pay a fee to turn it over to a professional. But with her experience, she may find a package plan for our trip that I wouldn’t be able to, and actually save us money.

This is why my clients hire me. They could take the time to learn about how to build an investment portfolio, and spend the additional time needed to manage and monitor it. But they have other things that they would rather spend their time and energy doing. And yes, they pay me a fee for my service. But not only do I save them time and energy; with my experience I just might be a better investor than they would be. What do you think?

I know what I think. I’m calling my travel agent.

Why Can't They Just Do The Right Thing?

Bob Rall — Tue, 24 May 2011 11:53:06 GMT

Knowing what we know about the reasons for the financial crisis of 2008, and our continuing economic struggles, it has become more difficult to trust the institutions that we must rely on. Not that it was easy before. There’s a lot of blame to be passed around. Government agencies get a lot of well-deserved blame. But Wall Street, the banks and insurance companies let us down as well. Too many times, they put their interests ahead of their clients’.

Most of the blame assigned to the financial institutions focused around names like CountryWide, Lehman Brothers, Goldman Sachs, et al. Many of their business practices, while maybe technically legal, reek of self-interest and are not the ways to earn client trust. We all need a variety of financial products through our lifetimes, and we rely on our financial institutions to provide us with access to the financial marketplace. We would like to think that we can deal honestly with the companies that we decide to do business with. But unfortunately, many of our large institutions take advantage of their position in the marketplace to take advantage of their customers.

A story out this week about an investigation into the insurance industry is another example of how it is not an even playing field. Kevin McCarty, Florida’s Insurance Commissioner, hosted a hearing last week as part of a 35-state investigation into 21 insurance companies. The states are investigating whether the insurance companies are violating state unclaimed property laws.

The issue surrounds how the insurers are using the Social Security Administration death master list. Sounds creepy, doesn’t it? You see, the insurers were using the list so they would know when to stop making annuity payments when one of their customers passes away. Annuity payments, like a pension, are usually paid until the death of the annuity holder. So, this seems like a reasonable business practice. The insurer shouldn’t make payments they are no longer obligated to make.

But what about the payments they are obligated to make to their clients with a life insurance policy? Often, an insured will pass away and the family either didn’t know about, or forgot about an old policy. If beneficiaries don’t submit a claim for life insurance benefits, the insurer gets to keep the money, for awhile. The laws say that those funds must be turned over to the state’s unclaimed property fund after 3-5 years, depending on the state. Regulators claim that the insurance companies have been using the list to know when to stop making payments to annuitants, but didn’t use the same list to find policyholder beneficiaries who are due policy benefits. But whether laws were broken or not, it just smells bad.

Some progress is being made. The Florida hearing last week followed the announcement, a day before, that John Hancock had reached a settlement with the state for $3 million over the issue. And, in 2007, MetLife, after not using the list for death benefits for 20 years, finally matched the list to their policies. The insurer ended up transferring $51 million to various states’ unclaimed property funds, $32 million to their unclaimed fund system, and another $325 million is awaiting transfer to state authorities.

It bothers me that the focus is on getting the funds into the states’ hands and I hope that more effort is made to find the rightful beneficiaries. The investigation is causing some light to be shined on the issue, so things are slowly changing. It’s just sad that we can’t count on our financial institutions to do the right thing. They should stop making annuity payments when someone passes, but also let’s cross-check to see if any families are due benefits. If nothing else, it’s a good reason for us to check the state database to see if we are due funds that have been lost over the years. You can check Florida’s database here, http://www.fltreasurehunt.org/index.jsp . By the way, Florida’s Unclaimed Funds alone total more than $1 billion!

Florida’s McCarty, the Insurance Commissioner, said that regulators aim to create “best practices” for the insurance industry. As a rule, I am not in favor of increased government regulation. If people and companies did the right thing more often, maybe we wouldn’t need as much.

Is Your CD Safe?

Bob Rall — Thu, 28 Apr 2011 12:06:00 GMT

With all of the turmoil going on around the world and the uncertainty of the economic environment, a lot of people are hesitant to be invested in the “markets.” Many prefer to have the safety and security of a bank-issued Certificate of Deposit (CD). After all, a CD is guaranteed. What most don’t realize is that while they are guaranteed…the guarantee is that they will lose you money!

No, you won’t lose your principal, which is the money you put into a CD. If you buy a CD for $10,000, you will get your $10,000 back when it reaches the maturity date. And you’ll get it back no matter what happens in the markets because it is FDIC-insured. So, how can you lose money? Let me explain…

Yesterday, the Wall Street Journal reported that “The average yield on one-year “jumbo” CDs, which typically require deposits of $95,000 or more, was at 0.51%, according to Bankrate.com.” So, you might be thinking, “0.51% isn’t a lot, but at least I’m not losing money.” But you would be wrong.

Here’s the problem…and it’s one that most people don’t think about. On April 15^th, the Bureau of Labor Statistics reported that the Consumer Price Index increased 0.5% in the month of March. The Consumer Price Index is a report on the change in prices paid by consumers for a representative sample of goods and services. In other words, it’s a measure of inflation. The report goes on to say that over the last 12 months, the index increased 2.7 percent. As part of the monthly report, they also provide data that leaves out the more volatile food and energy prices. That data shows that the CPI, minus the food and energy components, gained 0.1% in March and 1.2% over the last 12 months. I don’t know about you, but a big part of the goods and services I buy each month are food and energy. And the energy part seems to be getting bigger each day!

So, let’s say you are lucky enough to have $100,000 sitting around and you want to get one of those one-year “jumbo” CDs mentioned earlier. With an interest rate of 0.51%, you would earn $510 on your $100,000. So far, so good. And that’s where most people stop their analysis. But, when you get your $100,000 back, you’ve actually lost money. Well, maybe you haven’t really lost money. What you’ve lost is even more important…purchasing power. When you bought the CD, that money could have purchased $100,000 in goods and services. If we assume that the increase in the CPI stays at current levels, when you get your $100,000 back next year, it will only buy $97,300 worth of goods and services. Inflation is the thief that guarantees that your CD will lose you money.

This is the reason that you will hear financial-types like me say that the biggest risk to someone living on a fixed-income isn’t the risk of being in the markets. The biggest risk is that your dollars will buy less and less each year. This is also the reason that we generally suggest that you keep some portion of your portfolio invested in growth investments…to try and stay ahead of the inflation thief. Yes, growth investments come with some risk to your principal. But I’ve already illustrated how that “safe” CD is guaranteed to lose you money. It’s just a different type of risk.

We try to minimize the risk to your principal by properly diversifying your portfolio. It doesn’t always work…even the best diversified portfolio lost money in 2008. But over the long-term, a well-diversified portfolio, one that is put together based upon your risk tolerance and your goals, will allow you to stay one step ahead of that inflation thief.

Retirement Crisis

Bob Rall — Fri, 22 Apr 2011 18:00:00 GMT

What pictures come into your mind when you think about the word “retirement?” Maybe a round of golf or a trip to the beach anytime you want? Traveling? Spending time with the grandkids? Taking up a new hobby? If you are already retired, are you experiencing what you expected?

As the baby boomers creep closer and closer to “retirement age” the definition of retirement has been evolving. Granted, some still hold onto the traditional visions of retirement. But more and more, people are looking at it in a different way. In the generations before us, retirement meant removing yourself from the workforce, picking up your gold watch at your retirement party, and spending your remaining years gradually slowing down. But now, as our life expectancies have dramatically increased over those earlier generations, we are faced with more years in “retirement” and our visions are changing.

More and more of us are working past the traditional retirement age. Many take on some part-time work or start a small business. Is this because we want to “stay in the game” and keep our minds and bodies active? Or, is it because we need the money? A couple of studies released recently point to the latter…we need the money.

A study for the American Institute of Certified Public Accountants found that 40% of working Americans say that they will never be able to afford to retire…in the traditional definition. That’s sad. Asked how much they will need to retire, 55% said they don’t know. That’s more than sad, it’s troubling. And even those who think they know are way off the mark. When those earning between $50,000 and $75,000 a year were asked how big of a nest egg they would need for a 20-year retirement, starting at age 65, they gave a median estimate of $250,000. They’ll probably need at least twice that amount.

Even more startling is that 56% say that they cannot afford to save for their retirement. This is probably partly attributable to the current economic conditions. But we must also consider our priorities. Baby boomers in particular have been known to “live for the moment.” The “I want it now” mentality is probably one of the reasons we’re not saving as much as for our futures as we should.

Another recently released study, a survey of working Americans, really drives home that point. The report from the Employee Benefits Research Institute found that nearly half, 46%, have less than $10,000 saved for their retirement.

Financial literacy has always been, and still is, a big problem in our country. For some reason, we don’t teach the basic financial knowledge we need in our schools. As a result, it seems that a lot of Americans don’t know how to prepare for their retirement years. And many seem to have put off trying to figure it out because they can’t save right now anyway.

Combined, the two studies paint a pretty bleak picture of what many of us will be facing in the not-too-distant future. They strongly suggest that we are on the verge of a retirement crisis. Jordan Amin, chairman of the National CPA Financial Literacy Commission said, “Americans don’t know how to prepare for their twilight years, and many have put off figuring it out because they are struggling to make ends meet now.” He added, “Here’s the best advice I can give for retirement planning: START!”

Have you started?

Still the American Dream?

Bob Rall — Tue, 29 Mar 2011 18:25:00 GMT

An article in today’s newspaper grabbed my attention. The article was entitled “Economy Doesn’t Deter Dream” and it discussed a survey that shows Americans still want to own homes. It sparked my interest because of a conversation I had over the weekend with my wife, Gina. It’s actually a conversation that takes place a couple of times each year…usually on a Sunday afternoon.

You see, part of my Sunday routine is doing some of the outside household chores that I am not particularly fond of. I am not one who finds pleasure in “tooling” around in the yard. I am not good at, and do not enjoy, almost any kind of household maintenance. On those Sundays when the list of things that need attention is longer than my attention span, we have this conversation.

“It’s time to move,” I say. It’s not that I really want to move; we love our home. But the lure of maintenance-free living is attractive. It’s an elusive, and recurring dream of mine that when the weeds in the yard need taken care of, someone else does it. When the pool system needs fixed, it magically happens. Cleaning gutters, painting, etc; the list goes on. So, in the past, the conversation has always been about buying a townhome or condo.

But lately the discussion has taken a new twist. Instead of condo-living, we become renters. I recently read an article entitled “Why I Am Never Going to Own a Home Again” (click here for the article). The author discusses the financial and personal reasons why he will not own another home. The financial reasons include the huge amounts of money spent to make the down payment and closing costs, and the ongoing costs of maintenance and taxes. Personal reasons include the feeling of being trapped and the time you spend working on your house.

I can identify with him on several points. When Gina and I got married, we used the proceeds from the sale of our “single” homes for the down payment and remodeling costs of our “married” home. Unfortunately, we bought that home in 2005, just before the real estate market tanked. It will be a long time, if ever, before we are able to see that money again. If we would have rented a home, instead of buying the one we did, we could have either put that money in the bank or invested it, and now would have a very nice pile of cash that we could use for retirement, a trip to Italy, a couple of new cars, or a lot of other things we would like to do. And that’s not including the costs of maintaining the house and paying property taxes.

It used to be that buying a house was the best investment ever for most people. In our case, it’s the worst investment ever. (Well not exactly. I once bought stock in a company that I thought was going to be the next Microsoft. At least our home is still here, unlike that company). But, not only is the value of our home well below what we paid, it’s also illiquid…we’re trapped. The crash in the real estate market affected the entire country, but Florida was one of the hardest hit areas. And the news isn’t getting better. The most recent reports on home prices show that the housing market is still weakening even though the economy is improving.

That’s why that article in today’s paper surprised me. I thought that maybe the allure of owning a home, “the American Dream,” had faded. But according to the article, the 3000 people surveyed in the “prime homebuying age group of 20-31,” when asked if they still want to buy a home, considering it could lose value, overwhelmingly answered yes. Just as an aside, I do have to question the validity of a survey that considers 20 year-olds part of the “prime homebuying age.”

Now, don’t get me wrong…we love our home. It’s a very nice home in a very nice neighborhood…but we could also have that same thing if we were renting…along with that pile of cash.

Beware the "Savage Bear Market" in Bonds?

Bob Rall — Tue, 15 Mar 2011 21:02:00 GMT

The news media has been full of stories lately how the bull market in bonds is coming to an end. Interest rates have been at record lows for the last couple of years, and there is really only one way for them to go...and that would be higher. Since the price of bonds move in the opposite direction of interest rates, we would expect to see bonds lose value. The media has run story after story about the "experts" who are bearish on bonds...and there are a lot of them.

Bill Gross, the manager of the world's biggest bond fund, recently announced that he cut his holdings of US Treasuries to zero. Jim O'Neill, Chairman of Goldman Sachs Asset Management, says that US Government bonds may post losses like they did in 1994 if "vigorous" economic growth causes the Fed to change their policy. Mr. O'Neill says that there are several circumstances that could lead to the kind of battering bonds took 17 years ago, the most important one being a "very dramatic recovery in economic growth."

If you read beyond the sensationalist headlines, you'll learn that US Treasuries lost 3.3 percent in 1994. While any loss of value is never pleasant, especially for the so-called "safe" portion of your portfolio, I have a hard time describing a loss of 3.3% as a "savage bear market."

I also found it interesting that, while researching this article, the bond bears were predicting the same thing this time last year...and the year before that...and the year before that. They all cite the record low interest rates, the economic recovery, and more recently, the massive purchases of bonds by the Federal Reserve.

Now don't get me wrong, I'm not disagreeing with their logic. When rates move higher, and a big buyer stops buying, we'll probably see their predictions come true...to some degree. My point is that if you would have adjusted your portfolio based upon their predictions, you would have missed a couple of more years of steady returns from the bond market. It is just another good example of why you can't let the headlines drive your investment decisions.

So, what to do? We recommend diversifying your bond portfolio just like your stock or fund holdings. For our clients, we split the bond holdings into short and intermediate-term maturities. We do not hold any long-term bonds because the academic evidence suggests that while, over time, you are compensated with some extra return for the additional risk of a longer term bond, it is not commensurate with the extra risk you take on.

We also diversify across government bonds, both foreign and domestic, and high-quality corporate bonds. We also hold a percentage of the bond mix in Treasury Inflation Protected Securities (TIPS). We do not hold any junk bonds because of the extra risk that they bring. If bonds are truly the anchor of a portfolio, we want to keep them as safe as possible. While we can't make them bulletproof, and sometimes they will decline in value, we try to limit the damage as much as we can.

Finally, it's important to remember that the so-called experts are basing their predictions upon the best information available to them at the time. But when an event occurs that is truly a "black swan," meaning a completely unpredictable event with important ramifications, their assumptions often go out the window. I would venture to say that we've experienced two black swans recently.

The first would be the recent uprising in the Arab world. While some may say it was predictable, the magnitude certainly wasn't. And the earthquake/tsunami in Japan, and its aftermath certainly couldn't have been predicted. When dramatic events like this occur, investors typically seek the safety of what they know best. And that often means US Treasuries. So, those bond bears may find themselves playing the waiting game once again.

A Dad's Lesson

Bob Rall — Mon, 28 Feb 2011 19:40:00 GMT

Sometimes we get so wrapped up in our daily activities and plans that we can easily miss the really important things. I almost missed something really important this weekend. Lucky for me, I didn’t.

For some crazy reason, my 18-year old daughter came up with the idea that she wanted to jump out of a perfectly good airplane. Now, I did a lot of crazy things when I was her age, but throwing myself out of a plane at 15,000 feet wasn’t one of them. But she insisted. She’s old enough to make her own decisions and my job now is to provide the best guidance I can. I tried to influence her decision by telling her that I wouldn’t help her pay for it…it had to be her own money. It didn’t work. She was going to jump.

I struggled a bit while deciding whether to go. While I wasn’t thrilled with the idea of seeing her fall from the sky, I wanted to be a part of the experience with her. It didn’t help when she planned her jump on a day that was already packed with other commitments on my calendar. I had a race to cover for the runner’s newsletter, my wife and I had a Special Olympics practice to coach and, to top it off, I was leaving on a long drive to Atlanta.

When she told me that she had to be at the jump facility at 11am to attend the 45-minute pre-jump lesson, I assumed I could be there to watch her jump and be on the road by 12:30 or so. I got to the airport at 11:30 to learn that she was just going through the registration process and she wouldn’t be jumping for another hour and a half. Delay #1. We fought a wave of lovebugs outside the hangar as we waited. More fun. And then some clouds rolled in, so jumps scheduled earlier than hers started backing up. Delay#2. When the clouds finally cleared and the flights resumed, we were told it would be another ninety minutes before her jump!

All that initially came to my mind was that it was now going to be three more hours of nighttime driving than I had planned. I decided that I needed to hit the road. I told her I was sorry, but that I needed to get going. I’m pretty sure I saw a look of disappointment from her, but she hid it well and seemed to understand. She even gave me a hug goodbye. I went out and started my car. But I couldn’t drive away. My daughter is getting ready to jump out of an airplane, and I’m worried about driving in the dark?

I went back to the hangar and, while she did a good job of hiding it again, I think she was happy I was back. I know I was. I almost missed being a part of this (hopefully) once-in-a-lifetime experience for her.

Finally, we learned that her group was next, right after they refueled the plane. While this was cause for Delay #3, I was ok with them making sure the plane was fueled properly. The instructors and videographers started getting them ready. They strapped her into a jump harness and started taking the “before” video. My anxiety grew. We took pictures and I gave her a big hug before she boarded.

While we were waiting, it seemed like the time it took for each jump group ahead of hers was just this side of forever. Once it was her turn, time sped up. In minutes, the plane was airborne and out of sight. Those of us safely on the ground, with loved ones in the air, strained our necks trying to see them the moment they popped through the clouds. There they were! And in what seemed like just a few seconds, they were on the ground. Safe! And with all body parts intact!

I celebrated with her for too short of a time, gave her a final hug and was finally able to hit the road. As I drove in the darkness, I mulled over the lesson I learned. Or maybe I didn’t learn it. I hope I already knew it, and that I had only forgotten about it for a short time. Because I was so focused on the details of relatively unimportant stuff, I almost missed a moment that we’ll share forever.

So, why is this article in a “financial” blog? Because in my financial planning practice, we try to help clients look past the unimportant details, like the short-term movements in the financial markets, and instead, focus on the things that are the most important in their lives.

My daughter’s smile is one of the most important things in my life. As she walked out of the landing area, she had one of the biggest and best ones I’ve ever seen. Priceless.

A New Asset Class?

Bob Rall — Mon, 21 Feb 2011 14:35:00 GMT

Sometimes an investment idea just doesn’t feel right. This article discusses one of those ideas. An investment that has been becoming more popular, and a bit more mainstream, over the last couple of years is known as Stranger-Owned Life Insurance (SOLI). In a nutshell, SOLI is when an investor, or a group of investors, offers upfront cash to a person in poor health. The investors cash in when the insured dies, collecting the death benefit from the insurance company. Kind of creepy, isn’t it?

On the surface, it’s not a terrible idea. The insured may not feel they have the need for the death benefit of the policy any longer and could benefit instead from the cash payment before they die. The investors take over paying the premiums, which also frees up additional cash flow for the insured, who had been making those payments. There has even been a bit of a cottage industry of “life settlement” companies popping up recently where companies arrange to buy the policies and then sell fractional interests to investors. It has even evolved to the point where seniors are approached by a sales agent encouraging them to buy a new life policy with the idea of transferring it to an investor a couple of years later.

But what happens if the insured lives longer than expected? And do you really want a group of strangers looking forward to you passing away so they can collect on their investment?

Those are just a couple of the questions surrounding this somewhat controversial investment plan. In 2005, a company called Life Partners Holdings estimated that a 79-year old Idaho rancher had two to four years to live. They sold a $2 million policy on his life to investors based on that estimate. (No information is available on how much the rancher received in payments). But it’s now six years later, and the rancher is not only still alive, but he runs on a treadmill, lifts weights and chops wood. He says he’s “as healthy as a horse” and that “There’s going to be a lot of disappointed investors.”

The rancher’s case illustrates another potential problem with SOLI. Properly estimating life expectancies is a big factor in the business. If the estimates are too low, like with our rancher, investors face not only a delayed payout on the policy, but they must keep paying premiums longer than expected. Offering an attractive return is how a company like Life Partners sells their “products” to investors. In general, the lower the life expectancy on a policy, the more a company can charge investors. There seems to be an inherent conflict of interest that would lead them to underestimate life expectancies so they can offer their potential investors more attractive returns.

A recent report by the Wall Street Journal showed that in 2002, Life Partners brokered investments in 297 life policies. Insurance industry actuaries say that if the life expectancy estimates were well done, half of the people in the group should have died by their estimated dates. But in 95% of these policies, the insured was still living. In fact, they were often living two or three times longer than the estimates. The Journal also was able to review about 20 cases where the life expectancy estimates had been done both by Life Partners and by independent firms. The estimates from the independent firms, which had no profit motive in the estimate, were greater, usually by 50% to 100%.

Hmmmm…a company that has a financial interest in misleading its investors? Oh, and I haven’t mentioned that the typical commissions paid to sales agents are about 12% of the amount that investors put into the program. Sounds a lot like Wall Street and the banking industry doesn’t it?

So, we’ve got a product that many find offensive…investors hoping that their insured dies soon. Combine that with questionable estimates that determine the rate of return on the investment, and agents being paid high commissions to sell the product, and you’ve got the mix for an investment that you might be better off leaving alone.

And a final thought…my firm diversifies our client’s assets across several different asset classes: large companies, small companies, foreign and domestic, real estate and fixed-income. Even if I could figure out how to classify a human life as an asset class, I think it’s one that we can do without.

Now, A Look Ahead

Bob Rall — Fri, 28 Jan 2011 19:09:00 GMT

In my last post, I took a look back at the year that was 2010 and the major news and investment headlines that made it such an interesting year. It was a l-o-n-g post. In this post, I will take a look forward into 2011. At our firm, we manage our clients’ (and our own) portfolios using a passive investment strategy. By definition, that means that we don’t try to forecast the future of the economy, markets, or individual securities. We use an academic approach to portfolio management that focuses on diversifying across many different asset classes and keeping investment costs as low as possible.

But the folks on Wall Street make their living by encouraging an active management style of investing. And that means there is no shortage of “gurus” willing to offer their forecasts for the economy, the markets, or individual stocks and bonds. In January of each year, they issue their predictions for the new year. I have compiled some of those forecasts and will provide a short summary here. But the real fun will be at the end of this year. I am going to keep their forecasts and at the end of the year we’ll take a look back to see how they did.

Let’s start with the Director of Investment Research from Fidelity Investments, Jurrien Timmer. In his forecast, he calls for growth in the global economy and says the he is “generally bullish” on stocks and commodities for the year, but bearish on US Treasuries and the US dollar. He is bearish on treasuries because he sees a risk of rising interest rates. However, one of Fidelity’s Fixed Income portfolio managers, in his “2011 Outlook”, commented that he sees “low rates for the foreseeable future.”

Billionaire investor Kenneth Fisher, in his forecast “Why Everybody Loses in 2011”, thinks that the largest US companies will lead global stocks, but sees diminished returns after a bull market that has run for almost two years. “I do not think the bull market is over, but I expect this year to be frustrating for almost everyone,” Fisher said. “This is a year where returns are likely to be disappointing to bulls and bears alike.”

Laszlo Birinyi, who was one of the first money managers to advise buying stocks before they bottomed in March of 2009 made a prediction that Investment News magazine called a “jaw dropper.” Birinyi analyzes historical charts and patterns to make his forecasts and says that he expects that the current rally should last another 32 months! He goes beyond 2011 and looks for the S&P500 index to hit 2854 on September 4^th, 2013. (The specificity of some forecasts is almost funny) As I write this article, the index is at 1280, so 2854 would represent a gain of over 120% in the next 2 ½ years! His forecast for 2011 calls for the S&P500 ending the year at 1333, which is in line with the average of 1371 from 11 strategists surveyed by Bloomberg News.

Bob Doll, Chief Equity Strategist for BlackRock Investments predicts that 2011 will be the third straight year of double digit percentage returns for US stocks. If correct, it would be the first time in more than a decade the US markets have enjoyed such a bull run. Doll believes that GDP growth in the US will move to all time highs this year. He also calls for the unemployment rate to fall to 9%. He calls for a target of 1350+ on the S&P500 at the end of the year and feels that upside possibilities could push it substantially higher. Doll makes 10 economic and market predictions for 2011 in his year-end report which also includes a list of his predictions from last year and commentary on whether he was right or wrong (he was correct on 7.5 out of 10).

So, it looks like all four of our experts are calling for economic growth in the US…but they disagree on the level of growth. It also looks like all four are calling for rising stock prices for the year…but once again their forecasts vary from “mildly positive returns” to “jaw dropping.” All four think that stocks will outperform bonds and that US stocks will outperform international stocks.

All of these forecasts should serve to remind you that Wall Street wants you to think that, with their help, you can position your portfolio to take advantage of opportunities and avoid the pitfalls. They almost seem to turn investing into a sport. In fact, I recently drove by a Raymond James office in my area and the sign out front let us know that their “2011 Best Pick List” was out. It made me think of the sports gambling services that offer you the NFL “Pick of the Week/Month/Season.”

Investing is not a game and it is not a sport. If you want to gamble, go to Vegas or Atlantic City…at least there you get free drinks. But for your “serious money”, use low-cost investment vehicles to develop a well-diversified portfolio that matches your need and tolerance for risk, and then tune out the noise of the forecasters. But just for fun, we’ll check back at the end of this year to see how this year’s predictions turn out.