Wednesday, February 24, 2010

Ride the Bull!

By Dr. Jason White
Family Investment Center

We all still carry the scars of the grizzly bear market that ran from October, 2007 to March, 2009. It will be etched into our investment consciousness for some time, which is a good thing if we choose to rededicate ourselves to the goal of building long-term family wealth.

I believe the worst of the bear market and the economic recession is mostly behind us. Economic activity is picking up nicely, and job growth will follow in the months and years to come. This recession was a 2-1/2 year demonic slide, and it will probably take nearly that long to dig ourselves out and return our economy to full employment again, which is generally defined as an unemployment rate of about 5-percent nationally. We are currently just a tick below 10-percent.

The Federal Reserve is taking the first steps toward tightening relaxed monetary policy to prevent price inflation as the economy and the employment picture improves in the United States and around the world. The discount rate rose a quarter-point and all the signals are for continued rising rates as the economy strengthens.

For these reasons, and the ones that follow, I believe we are in the heart of a bull market rally that will likely continue for several years into the future, if not even longer. A simple reversion to the mean in stock prices would be a rise of nearly 40-percent from existing market levels for the average company in the S&P 500.

Many companies are starting to report rising earnings from operations that have been generated from top-line (sales) strength, rather than earnings generated from cost-savings and job cutbacks. This is a big positive indicator of things to come.

In addition to top-line revenue growth, American business has rung much expense excess out of their profit-and-loss statements. This should provide for many upside-earnings surprises in 2010 and 2011.

States are starting to see modest increases in some tax revenue streams, particularly in sales tax, and property taxes are stabilizing as most of the depreciation in the market value of housing stock has already been realized.

Companies that have been running very lean-and-mean inventories are now having to restock more often and to higher levels. This will help the manufacturing sector in 2010 and beyond.

The federal government fiscal stimulus for 2010 is large and growing larger. Yes, I lamented the size of the President’s proposed budget deficit as too much for our rebounding economy in last week’s column, and I still hold to that position. That said, the fiscal deficit spending stimulus will still have a short-run positive effect on economic growth and employment until we reach full employment, which as I said earlier may take a couple of years.

Take the bull by the horns. If you have been on the sidelines waiting for some normalcy to return to the markets, I think this is a good re-entry point for you. Market-timing is generally folly, but if you have taken some equity weight out of your portfolio, I think it is time to saddle up that bull and ride again.

Tuesday, February 23, 2010

The new rules of using credit cards

Geoff Williams is a financial writer who has interviewed Dan Danford a few times for pieces that he's written. Geoff has been posting recently on blog that promotes his new book, Living Well with Bad Credit. Dan's quoted in the book.

We want to point your way to the blog because it's got some great information. Geoff posted Monday about the Credit Card Act of 2009, which went into effect Monday, February 22. He hits a few of the highlights and provides good information. Take a look here:

Monday, February 22, 2010

Bedrock retirement considerations

By Dr. Jason White
Director of Investments
Family Investment Center

As many of my friends and colleagues begin their retirement journey, I am often asked about key areas for successful planning. This bedrock advice is essential to securing a long and happy financial life away from the daily grind of work – a glorious time to be alive.

You must match your spending with your means. I am familiar with more than one case where a new retiree goes a little crazy with spending. A vacation here – a condo there – a couple of gifts to the kids and grandkids, and suddenly, we’re running out of money. Not a good situation to say the least.

It is well documented that newly minted retirees do spend more money during their first years of retirement while health is good and that list of “stuff-I’ve-always-wanted-to-do-but-never-did” is fresh and exciting. Nothing is wrong with this, just make allowances for the higher spending level and adjust your asset drawdown accordingly.

If you have your house paid for and can meet most of your monthly bills with Social Security and other annuity or pension payouts – that is fantastic! Just be sure to keep your invest-able assets growing during retirement to counteract the effects of inflation. After all, many folks today are living as long in retirement as they spent as a worker bee. A three or four decade retirement is becoming the norm. Enjoy, but stay within your means.

You and your spouse will need to make decisions about the timing and amount of distributions to draw from various retirement plans pools of money. If you are fortunate enough to have a traditional pension, you must decide if you want payments to end with your death, with the death of your spouse, or some sort of reduced benefit amount regardless of who dies first. From an actuarial standpoint, as my partner and founder of Family Investment Center, Dan Danford, taught me, these options are all equal. The amount of money you will receive as a pension benefit is determined based on your life expectancy, your spouse’s, and the benefit payment scheme you select. There is no better or worse option – the selections have identical risk/reward characteristics.

What does make a big difference is how your pension benefit choice fits in with other annuity payments, like Social Security, and your lump-sum retirement accounts – 401(k) rollovers, Traditional IRAs, Roth IRAs, and any additional savings you have accumulated.

If the total of your lump-sum retirement accounts exceed $100,000, your best bet is to seek out professional investment management to help ensure you do not outlive your nest egg. Most folks have never had the experience of managing that much money, particularly when their lifestyle now depends on those funds. A good attorney would never manage litigation in which s/he is involved as plaintiff or defendant – emotion and personal interest can cloud good judgment and dispassionate decision-making. The same principle holds true for large retirement accounts. Rely on trusted financial professionals to make sure your interests are protected.

Friday, February 19, 2010

Buying a home

Dan Danford regularly podcasts for Dad's, a web site for men going through the divorce process. This week, he fielded a question from a viewer about buying a home with inheritance money.

You can learn what he thinks about it here:

Thursday, February 18, 2010

Government debt must be reduced

We want to thank the Kansas City Star's Dollars and Sense blog for bringing this great editorial to our attention. Thomas Hoenig of the Kansas City Federal Reserve wrote a great piece published in today's New York Post on why the U.S. must reduce its debt. You can read it here. It's a well-written piece that makes his point.

Wednesday, February 17, 2010

Student loan debt can spiral out of control

As education becomes more expensive, it stands to reason that student loan debt would be climbing. We ran across this story today about a female doctor who now has more than a half-million in student loan debt. What many people don't realize is that student loan debt is tough to get out of - bankruptcy won't clear it, and it's not tied to any particular asset that you can sell or give back to the creditor, as you might do if you got in over your head on a house.

In this particular story, the doctor notes that if she pays off the loans according to the schedule, she will be 70 when the debt is paid up in full. Wow.

If you have children, it would be a wonderful gift to help out with their education. With the cost escalating, it will be increasingly important.

Read the full story from The Wall Street Journal here:

Monday, February 15, 2010

Baby boomers need to review issues, goals

One of the largest population groups out there that gets a lot of ink is Baby Boomers. That's everyone born from 1946 to 1964.

This group is often spoken of as a single generation, and financial issues are lumped together for this group. But really, that doesn't make much sense. The group spans nearly 20 years, and their needs can vary widely.

Here's a nice piece on Yahoo! Finance about the needs of Baby Boomers and the issues they're facing. It has some solid advice. As we always recommend, a good, fee-only financial planner is essential for meeting long-term goals such as retirement.

But for now, read on:

Friday, February 12, 2010

Dad's Divorce: Saving for college

Paying for college is one of the most daunting financial challenges parents face. It can be done, but it takes strategy and patience. Dan Danford reviews the best steps to take and some of the vehicles available to parents (and grandparents) in his latest podcast for Dad's Divorce.

Thursday, February 11, 2010

Chasing recent winners

By Dr. Jason White
Director of Investments
Family Investment Center

For those of us in a haze of emptiness now that the National Football League season has come to an end, I wanted to share a fun summary I ran across in my research activities entitled “NFL Alphas 2009-2010” from Analytic Investors.

Dr. Steve Sapra and Lisa Bosley authored this study which defines a positive-alpha NFL team as one that exceeds market expectations by winning games which most folks think they should lose. Thus, the teams with the highest positive alphas are those who record the most upset victories based on measured legal wagering activity.

During the regular season, 14 of the NFL’s 32 teams earned positive alpha returns, led surprisingly by the hated Oakland Raiders. The Raiders were only favored in one game this year, the epic Futility Bowl against the beloved Kansas City Chiefs – and the Chiefs won! Oakland recorded 5 unpredicted upset wins on the year, earning the highest alpha ever recorded in the history study.

Disappointing fans and earning the lowest negative alpha returns were the underachieving Redskins, Lions and Rams.

Historically consistent winning squads, like the Patriots, Giants and Ravens, ended the regular season with negative alpha returns as they lost to several teams they were heavily favored to beat.

We can learn some important financial lessons from human behavior in this study.

People have a tendency to chase last-year’s winners, much like in investing. It appears that even in football prognostication, past performance is no guarantee of future result. Behavioral finance has proven that the one of the biggest barriers to reliable long-run investing strategy is our own psyche. Investors tend to run in the same direction at the same time, like a stampeding herd of cattle spooked by a coyote or lightening strike. The herd has no idea where they are headed, or even why they are running, but they all fear being isolated from the herd.

Successful investors have learned to stick to their proven game plan despite the peer pressure of emulating what the herd is doing. A good team needs a good coach to properly devise and execute a winning strategy, just as serious family wealth grows best under the watchful eye of a skilled advisor.

Reversion to the mean is a predictable phenomenon. With so many closely matched teams in the NFL, parity if you will, the days of the perennial dynasty are over. While we may fondly recall the great Cowboys, 49ers, Steelers or Packers teams of decades gone by, today’s league is characterized by annual unpredictable winners and losers. Last year’s loser is this year’s champion, and vice-versa. If you look closely at the long-term records of many hall of fame coaches, they often are not that far above .500.

Investments typically revert to their long-run mean as well. When oil, gold, bonds or stocks have a stellar year or two, you can bet that below average returns are coming soon. The problem is these changes of fortune are not reliably predictable, despite the siren’s song any number of experts may sing.

So where does that leave us? Are we to just “place our bets” and hope for a lucky streak? Of course not! There is a science to long-run investing. Asset allocation, the mix of commodities, stocks and bonds in your portfolio, must be strategically managed, diversified, and rebalanced with emotional detachment, discipline and professional judgment. This is the only long-run success strategy that is a proven winner.

Wednesday, February 10, 2010

Audit red flags: what to watch for

By Robyn Davis Sekula

If you aren't currently obsessed with snow, like much of the country, chances are, you're thinking about taxes. We ran across a well-written article on the Yahoo! site today by Investopedia detailing what raises your risk of being audited. It is a quick read and must-have information for every taxpayer.

You can read it here:

Tuesday, February 9, 2010

Budget Obamination

By Dr. Jason White
Principal and Director of Investments
Family Investment Center

The White House delivered its proposed 2010 budget to Capitol Hill by forklift, which was an interesting visual to say the least. The economy is slowly clawing its way back from the worst recession since the Great Depression, or at least since 1980-81, depending on the measures used to evaluate our current circumstance. Either way, the situation has been grim, but there are signs of life.

The “green shoots” have sprouted into seedlings in various industry and geographic pockets in the United States, but I am far from declaring economic victory for the private sector. The proposed federal budget concerns me deeply.

The Obama budget, if approved as submitted (which will never happen), sets a new standard for fiscal irresponsibility and governmental intrusion. Fully 25 percent of Gross Domestic Product, $3.4 trillion of spending, will come from Washington, DC – far more than during any year of Dubya’s presidency. In fact, the projected 2010 budget deficit of $1.4 trillion is 9-times higher than is was in 2007. Unbelievable!

As a practicing economist and financial professional, I truly do understand the continued need for federal deficit spending, given tepid demand in the consumer sector. In particular, states from coast to coast are struggling with budget imbalances and are looking to federal injections to help solve their own budget woes.

When the economy is mired in recession, Keynesian economists believe that the federal government can help mitigate conditions through deficit spending AND targeted tax cuts. The Obama administration has had no problem satisfying the deficit spending part of Keynesian expansionary policy, but tax cuts have been viewed as heretical and “not affordable,” according to the Democrats in power.

I will set aside a discussion of tax policy for a future column, but I do have a few comments on the federal budget Obamination.

At this moment, the National Debt of the United States of America stands at $12 trillion, $360 billion and some spare change. Our Debt-to-GDP ratio is 86.62 percent, thus if every dollar’s worth of goods and service produced in our great nation were funneled to pay down the national debt, it would take almost an entire year to retire it. This amounts to $40,051 per citizen, or more importantly, $113,113per taxpayer.

The data is staggering, sad and outrageous. The federal budget is completely and apparently deliberately out of control. One can only hope that the House of Representatives has the will to take a meat cleaver to this budget Obamination.

Monday, February 8, 2010

Is debt against Biblical principles?

By Dan Danford

This past week, we posted a tweet on Twitter (our ID is @family_finances) having to do with debt. We received a reply from @questforsouls asking "yet debt, any debt is sin according to the bible! Is it smart to encourage debt?"

First, let me clarify something. I don't necessarily encourage debt. I think that debt can be a better alternative, in some cases, than being cash poor. It's also necessary to build your credit score. For most people, it's a reality, and as I've always said, smart debt can be good. The key is distinguishing between smart and dumb debt. Smart debt: buying a home with a sensible loan. Dumb debt: credit cards.

As a Christian, I also consider the morality of how we handle money to be a big part of what I do. I am re-posting this essay about the morality of money. I would really love to know what you think - so please post a comment if you have an opinion on this topic.

The Morality of Money
Ideas About Christian Responsibility and Family Investing

Money is central to our living, but with it come several questions about the relationship between money and faith. As a lifelong Disciple of Christ, I have wrestled with issues of faith, and have grown in my own faith. For nearly two decades, I have been a professional financial advisor in the fields of trust and investments. During that time, I have dealt repeatedly with faithful people who wrestle with some of the same questions I’ve considered. Is it possible to be financially successful, and still be faithful? Is money a force – does it have its own morality? How should a Christian view money?

Over the years, the same basic questions have come up repeatedly, and as I’ve grown both in my faith and understanding of finance, my answers have grown as well. What I offer here is the way I answer those frequently-asked questions today.

Is there a morality of money? There’s no question about it. Money is a tool that can be used for good or evil. But, money isn’t the root of all evil; Paul tells us in Timothy that the love of money is the root of evil. In the hands of the wrong people, money can be very destructive.

Jesus told a parable about the rich young man. His point about being rich seems pretty clear. It’s clear that money can be a huge distraction in a Christian life. But, Jesus didn’t say that it’s impossible for a rich person to enter heaven. He said that it’s hard for a rich person to enter heaven. Actually, as I recall, he said it was easier to pass through the eye of a needle.

Why? What makes wealth such a destructive force? It’s not wealth per se. It’s power. Our society – most societies, really – reward great power to people of wealth. Look around. Who are the celebrities of our age? In large part, celebrity belongs to people of power. Power belongs to people of wealth. Wealth has always allowed people to engage in bad behavior without serious consequences. That’s why money can be such a distraction.

Is it better – holier -- to be poor? I don’t think it’s that simple. There are good people who have money and good people who don’t. I think maybe there’s a feeling among some people that being rich is bad. Some of that may come from Christian tradition, or maybe it’s a way of rationalizing our own lack of money. Anyway, I can’t remember any direct endorsement of poverty in the Scriptures.

A different way of looking at things is that having more allows us to give more. I mean that. Many hospitals, colleges, and museums owe their existence to a wealthy family or families. The same with church buildings and outreach ministries.
We can be even more philosophic about this; perhaps people have more because God gave them a gift for commerce. Why is making money different from singing, or painting, or other personal gifts? And, shouldn’t we use all gifts and the powers they grant for good purpose?

So, let’s agree that we should stay focused on matters of good purpose. Are there special problem areas or challenges? A huge area is the extra responsibility that comes with having extra money. In my business, I’ve been blessed with clients who understand this and take stewardship seriously. Yet, I’ve also seen horrible examples of waste that make me sick. Of course, people have a legal right to use their own money any way they choose. Yet, it bothers me to watch them squander it or use it on ridiculous excess.

It bothers me in the same way it would bother me to watch someone burn hundred dollar bills. That money might have been used for good purpose.

What kind of financial things offend you? On a large scale, I hate watching people waste an inheritance. With rare exceptions, wealth was created by somebody’s discipline and hard work. I think there’s a certain respect owed to the wealth’s creator, even if we didn’t particularly care for them or some of the things they did. Most times, the money can now be used for good things, say college expenses or to do something worthwhile in the world. ’m not against enjoying money, it just bothers me to watch it shrink through waste, abuse, or neglect.
This may not seem such a big issue, but it is. Baby-boomers stand to inherit trillions of dollars over coming decades. This huge transfer of wealth has already started. What we do with those dollars can have a huge impact on our collective lives.

What do you mean when you say that you hate watching money shrink through “abuse and neglect?” There really are well-known principles for managing money. Investing isn’t that complicated, and anyone wanting to learn the rules can read some good books or attend a college finance class. It’s an in-exact science, though – like predicting the weather, perhaps – where the principles have great value even when they aren’t absolutely accurate every single time.

Most people investing outside these principles fall into two basic categories. One group tries to avoid all risks; the other group seems to seek them out. Both groups take a serious chance of abusing or neglecting their money.

Start with the latter. Some people are drawn to high risk investing for the same reasons that they love roller coasters or high-stakes gambling. They love the thrill. They may be investment hobbyists, or they may rely on outside advisors, but they seek extraordinary investment returns by taking on extraordinary risks.
By risk, you mean the short-term chance of losing money. Surely, an aggressive approach would seem to have some merit under the economic laws of risk and reward. Of course it does. There’s a strong case for owning some speculative investments as part of a diversified portfolio. Higher-risk opportunities can boost overall returns and lower volatility. But, they should be part, not all, of an investment portfolio.

Jack Bogle, founder of Vanguard Mutual funds, summarized this in an interview I once saw. He was asked whether a certain undervalued fund might offer high future returns. “I think that’s a good bet,” responded Bogle. “I just don’t think you ought to be betting with your retirement money.”

Isn’t that true of most family investing? Remember, any investment which offers the prospect of high returns also offers the reverse – that is, high potential losses. Should high potential losses be the right choice for your entire family investment account? Again and again, I see people chase absurdly high risks for entertainment purposes or as some personal adventure. Family resources are far too important for that.

So, you’re saying that people should avoid risks with family money. No, not at all. I think people should avoid unreasonable risks with family money. There are many good ways to document and reduce certain investment risks. Investors should take time to learn and understand potential risks and rewards, or find someone knowledgeable to help. When you skip this step, you’re gambling. And, in my opinion, gambling has no place in family finance.

You say that too little risk is also an abuse. What do you mean by that? There’s a powerful psychological tilt away from risk. Risk aversion, it’s called. Yet, a corollary to what I said earlier is that family investors should accept reasonable risks. Risk and reward are absolutely related, and investors who accept reasonable risks enjoy good long-term returns.

There’s more to it than that, though. There’s another parable in Matthew speaking exactly to this point. It’s called the Parable of the Talents and it recognizes our human tendency to avoid risk. Three servants are entrusted with a master’s money. Two of the three invest the money wisely, and earn the master’s praise. The third, fearing loss and recrimination, buries the money and returns it without interest. The master is furious at the servant for not trying to do better.

Though the illustration is about money, the point is much broader than that. Generally, most people agree that the story is about using personal gifts to the glory of God, and about taking risks when using those gifts. Whatever the gift, we risk the Master’s wrath when fear keeps us from trying to reach our full potential.
As families, we face many options with our money. But, options offering the lowest risk also provide the lowest potential rewards. Choose them, and you’ll have less money for college, retirement, or charity. Unnecessarily less money. Less than our full potential.

Since some options offer reasonable risks and reasonable returns, choosing not to use them is neglectful, too. I make similar points with nonprofit boards or churches. Ignorance of investment principles isn’t mentioned in the parable as a good defense.

You’re saying that since we can learn better, we should learn better. Is that it? Sure. Most of us agree that it’s wrong to skip child safety restraints in a car; in fact, it’s illegal in most states. The seat belt isn’t a guarantee against injury, but it statistically reduces risk for the child, and increases chances for survival in an accident. Why shouldn’t we use the same statistical standards when investing a college account? Or a church endowment fund, for that matter.

It’s a stewardship issue. Most states have enacted the Uniform Prudent Investor Act as law governing proper guidelines for investing someone else’s money. These rules are based on statistical principles of investing. It’s ridiculous – and irresponsible -- to ignore the evidence simply because it makes us uncomfortable.

Millions of people do have fun managing their money. Yet, you’ve just implied that family investing is too serious for that. Can you elaborate? One day last fall, a local stockbroker jumped on the adjoining machine at our YMCA. We talked about a variety of things, including the college personal finance classes I teach. Eventually, we got to the semester-long investment project where I have students choose and follow one common stock and a separate mutual fund. “Well, the stock sounds like fun,” he said, “but mutual funds are boring.”

I’ve pondered his comment since that day. Maybe mutual funds are boring, but they’re still the right choice for many investors. Chances are good that a college student will own mutual funds long before they own a common stock. Truly, the most important issue isn’t how much fun a choice is, but how effective it will be in helping to meet financial goals.

Investing isn’t recreation. Choices made today necessarily change our personal future. They help determine our future living standard and our long-term ability to do something for others. And, considering all that, bad choices are simply more critical than good choices.

Look at it this way; a very good investment may mean the difference between driving a Buick or Mercedes in retirement. The Mercedes is a nice bonus, perhaps, but it’s just a marginal increase in living standards. Maybe you’ll be able to buy a newer condo or live in warmer climates a few weeks longer each winter. Hardly life-changing.

But, bad investment choices can have devastating results. No college fund for the kids. No retirement account to augment Social Security or Medicare. No extra money for the little things that keep life meaningful or – even – fun. Where do most people adjust the budget when they end up short – the monthly rent, or gifts to charity? Obviously, the downside of making investment choices is more important than the upside.

It’s not that investing can’t be fun. It’s that it isn’t necessarily fun. There’s a huge difference. It’s serious because choices made today have far-reaching consequences for our families and how we use the financial gifts we have. Are we doing all we can financially to meet our full potential? I just want people to give financial choices the respect they deserve.

Thursday, February 4, 2010

Relocation for a job isn't always worth it

For many people who are out of work, or fear they soon will be, relocating seems to be the only way out. We ran across an interesting article from Money magazine that discusses the good and bad about relocating - great information for those out there still in the work-force.

Wednesday, February 3, 2010

Keep some financial records, but not all

Each week, we take a question from a reader. This week's question concerns financial paperwork - much of which is coming as a flood into our mailboxes right now. If you have a question, please post it in the comments section.

QUESTION: I spend most of January going through my files and pitching files I no longer need. But there are some financial records that I haven’t been able to bring myself to get rid of. I have statements from a credit union I had an account with 15 years ago. Do I need those? Do I need carbons from old checkbooks, or account statements for retirement accounts that have since been closed and merged with other accounts? How long do I keep this stuff?

ANSWER FROM DAN DANFORD: Financial records are a common frustration. The main reasons to keep anything is to prove your tax return, or in the case of receipts, any warranties that apply to items you buy. After that, they have no real purpose except clutter for your kids to sort decades from now. The general rule on tax income and expense information is three years, and most product warranties expire long before that. In the case of credit union or bank statements, keep them for a few years to prove any claims to the IRS or manufacturers. Not much use beyond that.

I also tell people to toss interim statements. Once you have the December 31 summary bank or brokerage statement, you likely don't need all the rest of that year. Shred it!

Do not destroy confirmation statements for the purchase of stocks, securities or property. For many other tax purposes, historical cost is very important. You may sell something next year that you bought 20 years ago, and that will show up on your tax return. You'll need to prove that cost if you are ever audited. In our firm. we keep security records for our clients, so they don't have to. But, if you do-it-yourself, those cost records are important and you need to keep them. Among the worst I ever see, are long-term holdings in bond mutual funds where the monthly dividends are re-invested. Whew! Keep those annual statements until you sell the fund.

Truthfully, we all keep more than we need and it clutters our life.

Tuesday, February 2, 2010

Dad's Divorce: integrating finances

Most couples don't give enough thought to how to integrate their finances. For someone who has gone through a divorce, this is probably something they think through quite a bit before remarrying - and it's far more complicated than two young folks getting married for the first time. On Dad's Divorce this week, Dan Danford discusses how to integrate two people's finances. You can watch the podcast below.

Monday, February 1, 2010

Glass half full? Or half empty?

The stock market is largely run on emotions. Are people feeling good? Great! They're buying, and stock prices go up. Are people scared, feeling depressed? That's bad - they don't buy.

Analysts and other experts have weighed in lately on what companies are expected to do poorly and what will do well. We spotted an optimistic article this week by Motley Fool and we thought it was worthwhile to share it with you.

Naturally, we aren't endorsing these stocks, and aren't telling you to go out and buy them. We're just passing along this information for our readers who like to talk specific stocks.

Read - and cheer!