Wealth-building for Gen Y-ers

Money Magazine's 101 Ways to Build Wealth offers valuable financial tips for each stage of your life.  Listed below are their bits of advice for 25- to 34-year-olds.  To read the full article for more details, click here.   

1)  Start saving for retirement now.

2)  Favor cash-rich stocks.

3)  Add microcap stocks for growth.

4)  Build your career.

5)  Play the numbers.

6)  Get smarter about your money.

7)  Get with the program.

8)  Watch what you buy.

9)  Build your credit score.

10) Slash your student loans.



Debt in Europe? Fiscal cliff?

See what billionnaire mutual fund manager Ron Baron's thoughts are on these issues and find out why he's so optimistic about the future of the market.  Click the link below to read U.S. News & World Report's "Why Ron Baron is Sweet on Stocks":

http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/11/22/why-ron-baron-is-sweet-on-stocks

Post-Election Politics: The 30-Year Mission

Published by GTRUST CO. (GTrust Financial Advisors), with permission from Bob Veres

November 8, 2012

One of the most interesting aspects of every presidential election is the inevitable postelection trauma suffered by the roughly 50% of Americans who supported the unsuccessful candidate. Those of us with long memories will recall Americans vowing they would leave the country after George W. Bush won the disputed 2000 election, and again four years later. Judging by President Bush's extremely low profile during the 2012 presidential election campaign, his eight years in office were not considered an unqualified success even by his own party. Yet the country has survived, and one can predict with confidence that it will weather any political issues (and policies) that arise during a second Obama presidency.

In fact, if the citizens whose candidates won can come down from their highs, and those whose candidates lost can shake off the depression, they would notice that the country's economic system has been remarkably resilient despite the dysfunctional political process that virtually everybody, on both sides of the spectrum, rightly deplore. Despite the selloff the day after the recent election, the American stock market has actually delivered better performance under Democratic than Republican presidents--for no visible economic reason. (The accompanying chart shows the evidence pre-Obama.)

The biggest economic problems that America faces today have actually accrued slowly, gradually, and under the stewardship of multiple presidents from both parties. There is some evidence that the U.S. electorate doesn't yet understand the high cost of avoidance, of political one-liners offered by candidates from both parties that have trivialized very real long term problems or suggested that they can be solved quickly if the right person is elected.

Fortunately, it is possible to understand the nature of these bigger-picture, bigger-than-asound- bite problems--and the solutions. You just have to put up with a lot of charts.

The charts can be found here: http://www.businessinsider.com/politicseconomics-facts-charts-2012-6# courtesy of Business Insider. What you see first is a long, relatively smooth avenue of growth in the U.S. economy since 1947, punctuated by a significant drop in 2008 and a recovery to the former highs since then. A second chart shows real per capita income--the amount of money, inflation-adjusted, that the average worker takes home, and here we see a bigger drop for a longer period of time. Perhaps the most remarkable chart shows essentially the same thing for corporations: you see a very steep drop in corporate profits after tax from 2008 through 2010. But then, unlike the worker income, corporate profits zoom back up again, surpassing record highs. What is most remarkable is that most of the rise in corporate profits--literally much more than half--has been recorded in the last 11 years. Before that, corporate profit growth was slow and steady. In the past decade, it has been very uneven and spectacularly fast.

The next chart shows that companies are making more profit per dollar of sales than ever before. The next set of graphs is about jobs, and you see a big drop in civilian employment as a percentage of the total population during the recession, which bottomed out in 2010 and continues to scrape along at roughly 58%--well below the late 1990s high of 64%. But if you look at the chart as a whole, those high employment rates were a historical anomaly. The current total employment-population ratio is actually higher than it was at any time from 1940 to 1976, and is well above levels in the early 1980s. In the following chart, we see that wages as a percent of the economy have reached an all-time low (roughly 44%). Companies are sharing less of their revenue with employees than ever before.

What about debt and spending levels? You already know that total debt in our economy is at an all-time high, although individual debt has leveled off since 2008. In subsequent charts, this is broken down into household debt, corporate debt, state and local debt, and federal government debt. All of them have risen dramatically over the past 30 years; the lines practically jump off the page. So, of course, you look for where to cut. A chart looks first at the number of state and local workers, and finds that they now represent about the same percentage of total U.S. employees as there have been for the last 40 years. The next chart, the 39th in the series, shows that, despite what you may have heard about a ballooning Washington bureaucracy, the total number of federal government employees has held steady for nearly 50 years, and is actually below levels in the late 1960s. Looked at another way, federal government workers now make up a smaller percentage of the total workforce than at any time since the 1940s.

The federal debt problem is not complicated: charts show that spending has gone up as federal tax revenue (due to the recession and slow recovery) has fallen dramatically. The most interesting subsequent chart shows that by far the biggest contributor to the increase-- really, the reason there has been any increase at all--has been an explosion in the cost of Social Security, Medicare and Medicaid. You look at the line rising from 1960 through 2011 and it looks a bit like the slope of the Matterhorn: straight up. These programs now make up a record 16% of all American economic activity--up from roughly 4.5% in 1960. And, of course, every year sets a new record.

The inescapable conclusion of this economic graphic slideshow is that corporations have done very well during the four-year term of a president who business leaders have accused of being a socialist. Individual workers have suffered under what many have called a "populist" president. Overall debt has leveled off, but somehow, the U.S. is going to have to gradually fix the out-of-balance social programs, by reducing benefits and collecting more revenue to pay for them.

The slide show commentary suggests that it took us 30 years to get into this mess; it may well take us 30 more to climb back out of it. Let's see; that covers the span of between four and seven future presidents, and the White House will almost certainly change hands (or parties) several times over that time period. We will need all of them, plus Congress, to recognize what you now know. And we will need all citizens, even those who were disappointed by the recent election, to continue to push for meaningful solutions rather than take their money and vote to Canada. 

 

 

Investment Update

Recent years seem to have brought more bad investment news than good, so it’s nice to enjoy some positive markets. Sometimes we have to remind ourselves that good years are normal and that recent bad years are abnormal!

Bob Siemens, one of my early mentors, used to remind us that a market bottom is the “point of maximum pessimism” and that a top is a “point of maximum optimism.” He also used to say that a rising market “climbs a wall of worry.”

I share these thoughts because I’m fairly confident we have passed the point of maximum pessimism, and that 2012’s stock market is certainly climbing a wall of worry. Both points create some enthusiasm for investing over the next few years.

What about the presidential election? What about the Federal Reserve’s artificial low interest rates? What about the European debt crisis? What about geopolitical issues in the Middle East or Asia or Africa? Troubling, all, but not devastating for investors.

The most influential factor for investors today is noise. Stupid, senseless, loud, relentless, and insulting market noise. You can’t escape it and it creates a false sense of urgency about finance and investing. Noise blares from every television, computer, magazine, newspaper, and billboard. There’s a Crisis Everywhere … crisis … crisis … crisis. Mostly, it’s absurd.

Stop the madness! We are going to continue doing what has worked best in the past and we expect it to put money in our collective pockets. Our process and policies are based on facts, studies, and proven techniques. We aren’t responding to crises, or whims, or screeching monkeys on television. We are carefully selecting managers and/or securities to meet the specific needs of your portfolio and family.

Our promise when we started in 1998 was simple. We would invest client money using the same principles, strategies, securities, and safety that we use for ourselves. In other words, we treat your family in exactly the same way we treat our own. It’s still true and it’s still our promise.

Our goal in 1998 was also simple. We wanted to build the premier investment management firm in this region. Frankly, we welcome your questions and ideas. Anyone on our team will be pleased to talk with you by telephone, email, or in person. We are proud to serve your family, and we are happy to explain things or discuss alternatives. Every discussion makes us better!

Dan Danford

Founder/CEO

Family Investment Center

Profits rising, stocks falling

It's always nice to read some good news about the stock market and economy. Click the following link for the full Bloomberg article: "Stocks Cheapest in 26 Years as S&P 500 Falls, Profit Rises"

Lessons from the wealthy

By Dan Danford, Founder and CEO of Family Investment Center

We often hear that “the rich keep getting richer,” and that’s a common refrain in America. I usually enter this fray by noting that the “educated” keep getting richer; and that the best economic solution seems to be further education.

This is particularly true of financial education. I’ve been managing money since 1984, and I’ve noticed some important gaps in the typical family’s financial knowledge. Simply, wealthy people behave differently, and we can learn some important lessons from them:

The stock market isn’t a casino. Many middle-class people think it is. It’s true, buying a stock is risky. Buying many stocks, though, is prudent. Millionaires own stocks, but they aren’t frequent traders. When Drs. Tom Stanley and Phil Danko wrote The Millionaire Next Door (Longstreet Press, 1996), they discovered that fewer than one percent of interviewed millionaires traded stocks on a daily basis. Another one percent traded on a weekly basis. In fact, over forty percent hadn’t traded a single stock in the year prior to interview! Clearly, millionaires were investors, not gamblers.

The heart of wealth management is the idea of thoughtful diversification. This scientific basis for portfolio theory won a 1990 Nobel Prize in Economics (several, actually). In essence, risk is reduced and performance enhanced by owning a wide variety of investments. There’s a lot more to it, but that’s the basic concept.

Many so-called “safe” options collapse to genuine evaluation. Low interest rates, inflation, and taxes eat much of the gain from bank deposits or government bonds. Comfort comes at a very high price, and a bit of education about stocks and diversification can put your mind at ease.

Not all debt is bad. “Neither a borrower or lender be,” Shakespeare advised. And it’s become a sort of holy middle-class mantra. Despite that timeless advice, there are different kinds of debt, and not all debt is bad. Borrowing for consumer goods is almost always bad. Borrowing to buy a nice house in a nice neighborhood is almost always good.

Many quality advisors recommend against paying off a mortgage early, and there is solid evidence supporting this approach. Nevertheless, many middle class folks want to “pay off the house” as quickly as possible.

They think they’re doing the right thing, but money for paying down a mortgage comes from somewhere, and it’s no longer available to invest. That can be counterproductive. Our wealthy friends understand the difference between good and bad debt and they aren’t in a big hurry to pay off the mortgage.

There’s a distinction between price and value. In The Millionaire Mind (2000, Andrews-McNeel Publishing, his follow-up to The Millionaire Next Door), Dr. Tom Stanley discovered that millionaires tend to look at products on a long-term basis. They bought shoes or furniture based on the lifetime costs of ownership. Quality shoes or furniture cost more, but last much longer. Briefly, millionaires tend to focus on value instead of price.

I once worked with a fellow who proved this folly every three years. We were on the same purchase cycle with new automobiles. I’d carefully research various options, then choose my car with an eye towards resale value. He ignored this methodical approach, looking instead for the “cheapest” deal. We’d spend similar amounts when we finally reached a decision.

Three years later, I always got more money for my used car. And he never understood why. Instead, he’d launch right back into the very same pathetic cycle. Destructive buying habits are everywhere. In creating wealth, price is important, but value is more important.


Time is money. I used to be Moderator of our local church. Meetings just drove me crazy. I’d create agendas, monitor the time, and cancel unnecessary meetings. For me, a meeting is an avenue towards reaching some goal. Get together, have discussion, accomplish some objective, adjourn.

Well. It turns out that other people see church meetings in a different light. They’re social gatherings. The point of the meeting is – well, to meet. They get satisfaction from the activity, not necessarily the accomplishments.

Many people get similar satisfaction from investment chores. They drive to or telephone various banks about new rates on CDs. They study stocks, bonds, and mutual funds. They spend hours assembling, then computing annual tax information. A lot of very satisfying activity.

But, not necessarily productive activity. Who says that hours of amateur study generate better investment returns? Can a computer really replace a qualified and knowledgeable accountant? Will an extra quarter percent at the bank justify a tankful of gas or hour of time?

Do-it-yourself isn’t the best choice. “No one cares about my money as much as I do.” How many times have you heard that? It’s true, no one does care as much about your money.

But caring about your money isn’t always good enough. With rare exceptions, a good advisor knows more about your money than you do. I’ve spent a career studying financial issues and helping people manage investments. I’ve passed licensing exams and met professional credentialing standards. I have a graduate degree in business and I’ve started two successful investment companies. Modestly, I have insights and understandings my clients can’t have.

Further, caring about something isn’t always the best way to face decisions. It can be very hard to press a loved one to do a necessary, but painful, thing. We know how difficult it can be to use self-discipline – even when our own health is involved. The fact is, caring too much can be every bit as bad as caring too little.

Wealthy people hire advisors because it’s good business. It helps to have a knowledgeable, objective professional by your side. The cost is far less than the value. By definition, that’s a wise family choice. Plain and simple.

This week: Retailers release quarterly reports

For those of you who keep some money in the market, take note that this week, many retailers will be releasing their quarterly earnings reports. The Kansas City Star's Dollars and Sense blog had a nice post today quickly and neatly outlining who will be making reports on which days. To see the list, go here:

http://economy.kansascity.com/?q=node/7983

Today (Monday) Lowe's opened with its earnings, which were up. Reaction was mixed in the market, with Lowe's keeping its thoughts on the matter cautious but optimistic. Here's that report on Market Watch: http://www.marketwatch.com/story/retailers-open-mixed-on-lowes-report-2010-08-16

And here's Lowe's own press release: http://investor.shareholder.com/lowes/releasedetail.cfm?ReleaseID=499393

Time to buy: any time you can

By Robyn Davis Sekula

I did something a little unusual on Friday. I swam upstream, if you will, from the way other investors were going. I bought shares in a mutual fund in my Roth IRA.

To me, a great thing to do on a down market day is BUY. I had put $5,000 each in Roth IRAs for my husband and myself through Fidelity, but simply had it sitting in cash reserves. I hadn't thought about how to invest it - but asked my financial planner (it happens to be the Family Investment Center - of course!) for a recommendation. They analyzed my portfolio and told me I could stand to go heavier in stock, given my age (upper 30s) so that's what I did. I added to it another $500 each for us for 2010, with the idea being that I'll add to it until I reach the max, $5,000, per person for the year.

In truth, I wasn't trying to time the market. I just noticed that the market was down, and that it might be a good day to buy.

When is a good day to buy? It's any day that you can set aside money for investing. It's ALWAYS a good day to invest in your 401(k), and especially your Roth IRA. It's always a good time to save. When the market goes south just a bit, it's even better.

Think of the market as having stocks/mutual funds on sale.

Thermometers and screeching monkeys

By Dan Danford
Family Investment Center

What if you had biological monitors hooked to you all day long? Some gadget that tracked your temperature, blood pressure, heart rate, respiration, and perspiration on a continual basis? All day long, every day.

On some level, that might be good. Especially if there were a moment or moments when intervention could improve your health or life. Perhaps you could cut your workout a bit short to avoid injury, or munch a granola bar when your glucose level dips. Maybe you’d carefully avoid that annoying guy from accounting that raises your blood pressure and gives you a tension headache.

Still, I suspect there’s a downside, as well. Most medical measures are stated in normal ranges because they fluctuate during the day. Our blood pressure and pulse respond to things we think and do. Within a healthy range, there’s nothing to be alarmed about when it jumps ten or fifteen percent. In fact, most people endure a fairly broad range each week.


Minute-by-minute reporting could add a dangerous layer of drama. I say dangerous because it might influence behavior in bad ways. Maybe we don’t really need an extra granola bar every afternoon, or we might stop exercising completely when our heart rate jumps! If emotions create a physiological response, maybe we avoid all emotional situations – even good ones.

Add another piece to this hypothetical puzzle. An expert – a genuine, honest-to-God, doctor, nurse, or hospital administrator – maintains a constant voice diatribe about your vital signs. Calm and reasoned when they look good, but urgent or even frantic when they reach either end of the normal range. Maybe the Surgeon General of the United States, herself, commands the microphone now and then. Constant, relentless, detailed, and (screamingly) boring details about every facet of your numerical footprint.

Ridiculous? I think so. You probably do, too. Why, then, do you watch CNBC every day or load a market app on your iPhone? Why listen to Jim Cramer’s theatrics every evening? Does anyone need market statistics minute-by-minute or hour-by-hour? What purpose do these things serve?

You’re going to say that some of it is entertaining, and I get that. Investing is a hobby for some folks, and I understand that, too. But I worry that there’s a downside to all this market drama. And the downside is, well, drama.

It’s popular among economists and investment professionals to discuss “volatility” in the marketplace. Stocks have always been volatile, but the past several years seem more volatile than most. It just feels like the ride from point A to point B includes steeper peaks and valleys than before. I don’t doubt that this is true.

My guess is that these two themes – constant monitoring and market volatility – are related. My guess is that talking heads stir the volatility by stirring the drama. My guess is that Cramer and Orman and Ramsey and (even) Bernanke open the market floodgates whenever they open their authoritative mouths.

We’ve always had fluctuating markets, and we’ve always had recessions, and we’ve always had political pressures to regulate brokers and markets. None of that is new. What is new is the constant, relentless, detailed, and (screamingly) boring details about every facet of the stock market’s numerical footprint.

Spare me the drama. There’s a well-known adage about not seeing the “forest for the trees.” Really. Too much attention to anything creates more potential harm than good. Let’s all take a step back and enjoy the forest. Put down the microscopes and shut off the screeching monkeys. Breathe.

It’s going to be all right.

First Quarter review

It's good to look back, and that's something I always recommend, and endorse. Our own Jason White is offering this great reflection on the first quarter of 2010.

Have a listen and post in the comments what YOU think.

http://www.audioacrobat.com/play/WZM9bCgQ

Modern Portfolio Theory: it still works

By Dr. Jason White
Director of Investments
Family Investment Center

I received a great deal of feedback on the optimism of my last column on investor capitulation. Thanks for taking the time to write and call. I love talking about this finance and economics with pros and novices alike.

On the off-chance that not too many of you subscribe to Financial Advisor magazine, I wanted to share my summary of an important article that appeared in the March 2010 issue entitled: “Markowitz: MPT Holds Up.”
MPT is the acronym for Modern Portfolio Theory, the only time-tested, scientifically-proved and academically-accepted method of managing investments for long-term success. Actually developed in the 1950s, MPT involves the search for optimal investment returns while simultaneously minimizing risk. Harry Markowitz, the creator of this strategy which I use religiously in practice with Family Investment Center, won a long overdue Nobel Prize in Economics in 1990. I recognize that the Nobel Committee is sometimes criticized for awards to candidates that baffle the public, but in this case, the award was absolutely justified.

The 82-year old Markowitz still teaches at the Rady School of Management at the University of California, San Diego. He is also an active financial consultant and is working on a new book.

Some have questioned the effectiveness of MPT during the most recent financial crisis. Yes, in times of panic, all historic correlations between assets tend toward one – meaning for short panic-stricken periods of time, there is no “safe haven” asset to avoid losses.

As the markets first stabilize, and then normalize, the old familiar patterns of risk-and-return emerge just as reliably as springtime in Northwest Missouri.

The patient and properly-advised investor rode the cycle, investing all along as stock prices took a nosedive in 2009. They did not jump ship or believe that this time it was really the end. And they were rewarded. With the Dow knocking on the door of 11,000, those who remained loyal and faithful to the modern implementation Markowitz MPT asset allocation doctrine are in fine shape. Those who chose the parachute, rather than the seatbelt, when the market turbulence hit have now missed nearly two-thirds of the recovery off of the lows from just one-year ago.

One professional I chatted with recently gloated about getting his clients out of the market before it hit the lows, but in the same breath, he lamented the fact that his timing indicators had not signaled a good re-entry point for him and his clients. This sort of story hurts my heart because I know what it means on a human level: a less secure retirement; a longer work life; a second-choice college for the kids.

Modern Portfolio Theory is the one and only one scientifically proven method for long-run investment success. The TV pitchmen, the investment commercial garbage, the book peddlers all claim it possible to “beat the market.” These claims are never proven true when the light of truth is shined on them. That is part of the reason these shows, pitches, and books have a short-shelf life. Good salesmen preying on primal motivating forces of human nature (primarily fear and greed) frame arguments in a believable way, and we bite.

Before you take your next sip of snake oil, check out Modern Portfolio Theory and the use of diversified asset allocation strategy to make these most important money decisions. I promise you over time you will be right!

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.

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!

http://www.fool.com/investing/general/2010/02/01/7-reasons-not-to-worry-this-week.aspx

Principles trump predictions

By Dr. Jason T. White
Director of Investments
Family Investment Center

January is a popular time of year for knowledgeable finance folks to take to the airwaves and print media making prognostications about where the economy may be headed over the next 12-months and at what level the Dow or S&P 500 might end the year. The more outlandish these short-term forecasts, the more attention these traders garner for themselves and the media outlets distributing their projections.

As exciting as it may be to engage in such frivolity, basing one’s investment goals and plan on educated speculation is a fool’s game. If you want to place a bet on the foresight of these handicappers, you might have a much more enjoyable time throwing dice at the craps table on a weekend trip to Vegas or an area floating casino.

While traders may salivate over the latest tip from a screeching ex-hedge fund manager on the tube, true investors tune in to such rants more for the entertainment value of the host than for financial strategy advice.

Were any of these pros even close to presaging the market nadir last February, or the bull market run that followed and continues into the beginning of this new decade? Not even close.

Recognizing the incentive the media pros have for personal financial gain from attracting and retaining audience, I believe that most of these guys have a greater interest in maximizing their book royalties and Nielson ratings than ensuring your financial success. Trying to base a prudent family investment strategy on the minute-by-minute meanderings of the financial press is a sucker’s game. Not only will this inevitably result in the need for acid-reduction potions and the occasional antidepressant prescription, it simply does not work to try and outfox the market. I can’t. You can’t. No one can.

Professional gambler/traders may hit a hot streak from time-to-time, perhaps even lasting a few years, but the only certainty from such short-lived success is that a cold streak is bound to follow. Trading stars may temporarily soar brightly in the evening sky, but the simple law of gravity invariably drives them into meteoric craters sooner or later. Statisticians refer to this as reversion to the mean. In finance, we like to talk about efficient pricing in markets. The long-term results are the same.

So, how does one avoid the heartburn and despair of the trader’s game? Don’t play! Choose principle over prediction.

Investors, stubbornly and properly focused on the long-term, practice their craft with resolute calm and steadfast commitment. Investors recognize that markets are consistently unpredictable over short periods of time, focusing their strategy on decades rather than days, months or even years.

Investors don’t wake up in a cold sweat in the middle of the night wondering how Asian markets opened or worried about the depreciating euro. Investors are plugged in to the events of the day, but investors process economic and political developments with a forest versus trees perspective. Investors have goals and an investment plan they believe in – and they stick to it knowing that market downturn, recessions, currency fluctuations and the like are transitory events. Investors allocate their assets consistent with financial targets: retirement, college education, or income production. Investors diversify to their holdings to reduce risk. Investors are rocks in the hurricane. Investors feel fear and greed but understand that contrarian financial behavior is proven to outperform running with the herd.

Principles trump predictions – always.

Straight stock not a good idea for most investors

One day each week, we post a question and answer on the blog. Got a question for us? Post it in the comments section or e-mail it to robynsekula@sbcglobal.net.

QUESTION: I have about $420,000 put away so far for retirement. I’m 45 years old. I’d like to put some of that in stocks to diversify. Right now, it’s divided between four mutual funds. Are there any guidelines for how much money I should invest in straight stocks and how much in some type of secure investment?

ANSWER FROM DAN DANFORD: You may be asking the wrong guy. We manage a number of million-dollar IRA portfolios, and almost always use mutual funds. The key is to use funds with different investment strategies and market sectors to achieve diversification. Done properly, you get the benefits of owning stocks but without the "company-related" risk associated with a particular corporation.

The problem with individual stocks is that each company carries risk that can't be erased. No matter how good the company is - and we can all name dozens of good companies - there's a chance that some event might doom the company. A massive lawsuit, maybe, or some competitive or natural disaster. In brief order, the company can go from stable to bankruptcy. Shareholders can lose it all. Not likely, perhaps, but possible. The only way to reduce this risk is to buy other company stocks. Each additional stock in the portfolio reduces this company-specific risk.

That's where mutual funds come in. Most funds have a rule that no individual stock can comprise over five percent of the portfolio. Hence, they've already achieved a level of diversification beyond what's necessary to reduce the company-specific risk. Picking stocks requires a lot of time and effort, and watching a portfolio of 20 is ridiculous for most amateurs!

It's important to note that other types of risk don't go away with mutual funds. Market risk and Inflation risk and Political risk can still move markets up and down, and mutual funds will move up and down with them (so would individual stocks, for that matter). To reduce (but not eliminate) those risks, carefully choose funds with different investment strategies and market sectors. That should temper some of the fluctuations while preserving the performance potential of stocks.

Mutual fund critics point to the cost as a shortfall of this strategy. And I agree that it can be. Another key part of the strategy is to focus on funds with low internal management fees. There is a direct reverse correlation between the rate of mutual funds fees and their performance for shareholders. Do like we do; choose known funds, with good performance, and low fees. Diversify across sectors and management styles. Watch the mangers you select with care, but not too closely. Over time, your nest egg will grow nicely. At your age, and with this amount of capital, you should have a very nice retirement. If you ever want professional attention, give us a call!

Steer away from company stock

Every Monday, we answer a question from a reader on our blog. This week, we're answering a question from a connection on Facebook. If you'd like to pose a question to us, post it in the comments section or DM us on Twitter. We're @family_finances.

QUESTION: How often should we rebalance the investments in our 401(k)? I wrangle with this a lot and I know many people who just dump everything into their company stock and sit back. (Good luck.) What's the right strategy?

ANSWER from Dan Danford: Company stock is a terrible choice. I once worked at a bank where almost everyone "directed" their profit sharing balances into bank stock. Long-time regional banking group, with a decades-old record of paying "rising dividends." Eighteen months after I started there, the bank failed (no fault of mine, though!) and employees I know lost their entire retirement savings. Sounds like Enron, right? This nasty scenario repeats itself every few years, and employees, managers, regulators, and legislators all scream in anguish!

But in every case, a brief discussion with any competent advisor would have navigated those portfolios into a diversified model. There are just too many variables beyond your control to hitch your entire retirement savings to one company's wagon. Five to 10 percent in company stock would be the max I'd recommend.

Instead, build a diversified portfolio using index or other low-cost funds, and keep buying no matter the current market environment. Most investment performance comes from the mix of investments in a portfolio. So, most advisors advocate asset targets tailored to an investor's situation - say, 80 percent stocks and 20 percent bonds for an aggressive long-term portfolio. However, that exact mix changes daily as the markets fluctuate and new deferrals are added. So, it pays to re-visit the portfolio occasionally and re-balance if desirable. Some 401(K) plans have the technical ability to do this automatically each month, quarter, or year. Occasional re-balancing makes good sense, and we typically do it with our client portfolios on an ongoing basis (as an advisor judgment, though, without any "automatic" feature).

Strip away the jargon and re-balancing is actually a shift of assets away from the best-performing sectors into the worst. Not everyone wants that, and there is powerful debate within the professional community about the proper frequency and benefit. If a plan offers it, some employees will probably use it. It might even be beneficial during certain periods. For larger balances, though, I prefer some human input into those decisions.

Many 401(K) plans offer "lifestyle" or "target date" portfolios. This is a simple auto-pilot choice where the fund is automatically adjusted for your age and risk tolerance. I recommend them, especially in early years where balances aren't too large. Let professionals adjust the asset targets for you.

Be aggressive, and stick to it. Most people, given their own choices, are too conservative with retirement investments. These accounts are long-term in nature, and aggressive investing is rewarded over lengthy periods. Make aggressive choices, stick to them through thick and thin, avoid tinkering, and conduct a thorough review every two to three years. You'll be amazed how much you can accumulate effortlessly.

Dow tops 10,000 for first time in one year

By Dan Danford

Anyone in the financial industry had cause to smile today as they watched the Dow Jones Industrial Average climb over 10,000 for the first time in a year. What a wild ride it's been.

If you want to read all about it, start here: http://finance.yahoo.com/

We are excited to see the markets above 10,000 again. It surely demonstrates that investors are regaining confidence in the system, and that some sense of normalcy seems to be returning. Some companies are starting to see profitability again, and that's reflected in their rising stock prices. Of course, we have to also note that the recent past has seen highs on the Dow of 14,000, and lows of 6400. This has been a period of ridiculous volatility and we're hopeful - emphasize hopeful - that further good times lie ahead. No matter what, this is an encouraging sign, and we're pleased for Family Investment Center clients and other investors around the world.

When is it time to sell?

On Mondays, we post a question and a response relating to finances. This week, we’re tackling a question that a great number of investors are pondering.

How do you know when it is time to divest of a particular stock or mutual fund and put your money in something else?

Make a change when something else offers genuinely better prospects. That's not an easy thing to know, especially for an amateur. With some 25,000 mutual funds or share classes, there is always something that might look better at a single point in time. People always flock to "safe" investments in a bear market, because they look good against the alternatives. But that's the wrong choice. The critical question isn't what looks better right now. The critical question is what looks better going forward. And Treasury Bills or bank certificates never compare better as we look forward to the next five to 10 years.

Others throw money at the hottest stocks or funds (as featured on the cover of Money magazine), but that rarely works, either. In truth, a fund or stock is called hot because it's recent performance is good. The best time to buy something is before it becomes hot. This is also true of much historical performance - things always look good after they've done well. Research shows that there is little evidence that past performance indicates much about the future (language the Securities and Exchange Commission requires in prospectus documents). Even the best funds in the world suffer occasional bad years. Is that necessarily a reason to change?

Everyone hates taking losses, but that's a bad reason to hold on to something. If you always take profits on your good things, and hold onto the bad to avoid losses, eventually you'll have an entire portfolio of bad investments. Focus on the future, not the past. Keep or buy things with good prospects, and dump the ones without. Take your losses like a grown-up, and move on.

Remember , too, that much investment news we encounter was crafted by public relations or sales professionals. So those great ideas we see were usually planted by someone. I've always rejected the notion that individual investors - including the typical stockbroker - can "outthink" the pros at Fidelity or Vanguard or American Century, with their legions of analysts. Did you know that 80 percent of trades on the NYSE are placed by institutional investors? That means that when you buy or sell something, the trade's other side is taken by a professional. Let that sink in for a minute. This is one of the best arguments for using mutual funds, and why so many professional advisors choose that approach.

This is another reason why we use Morningstar or other independent research firms in building client portfolios. We take responsibility for our decisions, and work on behalf of our clients. No one is going to "talk us into" making a trade or exchanging one investment for another. We'll make those decisions when - and only when - they make sense for clients. It's a huge benefit.

Dan Danford appears on KMBC-9

This morning, I appeared on KMBC-9 to discuss financial matters. I am really pleased to appear there from time to time and happy to answer questions from viewers as well as their own staff. If you have something you'd like to see me address in one of these future appearances, let me know and I'll be glad to do it.

http://tinyurl.com/oxlbs2

Come learn more about investing in small caps

By Dan Danford

At the Family Investment Center, we believe strongly in investor education. We hold periodic free events for our clients, friends and members of the public. Next Thursday, May 28, we will host Jason Votruba, CFA, who will present “A Winning Strategy for Investing in Smaller Capitalization Equities.” Jason has served as a Portfolio Manager for the UMB Scout Small Cap Fund since 2002 and has more than 10 years of investment management experience.

The presentation will be held in the East Hills Library's basement auditorium in St. Joseph, Mo., beginning with refreshments at 6:30 p.m. and the presentation at 7 p.m.

At FIC, we believe that a properly diversified portfolio should own a variety of asset classes and sizes. UMB Scout Small Cap is one of the funds we've been using for client portfolios. This is a great opportunity to meet the fund manager, and get a face-to-face report on the strategies and stocks that make them so successful.