Build Weath and Discover Financial Freedom

FinancialMentor.com

 

1) Spend Less: Align your values and goals, and track your spending so you can focus on being accountable and staying disciplined.  Consider eliminating wasteful expenditures, repairing instead of replacing, and selling unused items.  Also, avoid using credit cards for bills or to extend purchasing power.

 

2) Earn More: Increase your working value by personal and professional development through education and training.  Seek higher paying jobs or additional income through part-time or freelance work. Consider turning your hobby into an income stream or even starting a side business.

 

3) Invest Wisely: Connect with a credible and knowledgeable investment advisory firm to wisely invest your funds.  Re-evaluate your investments every so often to make sure you are on track.

 

4) Financial Freedom: Enjoy living the life you want and deserve!

Superfunding a 529 College Savings Plan

According to a Reuters article shared by CNBC.com earlier this week "Should You Superfund Your 529 College Savings Plan?", college costs have reached an average of $40,917 a year for a private four-year college and $18,391 for a state school, as researched by the College Board.  These high numbers along with ever-increasing tax rates have affluent families and wealthy grandparents considering strategically "superfunding" a 529 college savings plan as a way to aggressively cover college costs while also saving on taxes.

If you are interested in finding out about the benefits of contributing to a 529 plan, click here to read the full article.

More Money Doesn't Always Bring More Happiness

Yahoo Finance shares a fasinating book, "Happy Money: The Science of Smarter Spending," written by two behavioral scientists: Dr. Elizabeth Dunn and Dr. Michael Norton. Within this book are five ways to make you a happier individual in the long run.

1. Buy more experiences and less material items.
"Research shows experiences provide more happiness than material goods in part because experiences are more likely to make us feel connected to others," Dunn and Norton write. With that being said, before you go buy a brand new iPhone, realize that a dinner with friends could bring you more satisfaction than the phone purchase.

2. Direct your focus on buying more time and less on getting more money.
"Wealthier individuals tend to spend more of their time on activities associated with relatively high levels of tension and stress, such as shopping, working, and commuting." It is important to incorporate things that you enjoy doing into your hectic schedule. You will find yourself being much happier if you better balance your work and personal life.

3. Realizing you can be house rich and happiness poor.
Studies have shown that people that buy a bigger house are happier with their house but not happier with their lives. It may be time to rethink such a large purchase if it doesn't contribute to our overall happiness.

4. Overindulgence can make the good things lose their sparkle.
When you have more financial resources available, why not indulge whenever you want? If you had your favorite ice cream cone every single night after dinner, you might just get sick of it! As with bigger material items, over indulgence can make those purchases lose their sparkle. "This is the sad reality of the human experience: The more we're exposed to something, the more its impact diminishes," Dunn and Norton write.

5. Focus more on others and less on yourself.
You will actually feel happier in the process of helping others. "In [a study] of more than 600 Americans, personal spending accounted for the lion's share of most people's budgets," the authors write. "But the amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The more they invested in others, the happier they were." You might not feel as good as you thought you would after making a monetary donation. The reason is you might not be physically seeing your money be put to use. Make sure to stay in the loop with the organization you are donating to so that you feel more engaged!

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.

How are your money beliefs affecting your net worth?

How are your money beliefs affecting your net worth? We all view money a little differently, and whether we worship money, avoid it, or associate it with status could determine how much of it we have.


Click here to read Dr. Brad Klontz's "Your Money Beliefs Could Be Hurting Your Bottom Line."

How much money would make you feel wealthy?

By Dan Danford

We've often tossed around the word wealthy in our offices, with some of our folks saying we shouldn't use it, because those who are don't like to talk about it, and sometimes, they don't even feel wealthy, even though they may be. And those who aren't wealthy are jealous. It's a tainted word, really, wealthy, and all the various subsets of it - wealth, etc.

So this story caught my eye today, even though it's from a few days ago. CNN Money did an interesting story on how much money it takes for us to feel wealthy, complete with a handy calculator to tell us where we fall for our income and age. It's a fascinating story, and the calculator is particularly intriguing. Plug in your age and annual salary and it will tell you what the median net worth is for your age, and then the median net worth for your salary. Take a look and see where you fall.

And you tell us: how much would it take for YOU to feel wealthy?

http://money.cnn.com/2010/08/09/news/economy/wealth/index.htm

Billionaires give back

By Dan Danford

In our society, it's fashionable to villify the wealthy, particularly those who are extremely rich. We tax them more heavily - and few have a problem with that.

But often, those who are wealthy are the ones who help our society the most. They build businesses and provide jobs to those around them, and sometimes to people around the globe. And many of them turn into philanthropists who fund charitable causes, year after year. The Bill and Melinda Gates Foundation is among the best examples of this.

The Wall Street Journal recently reported that Gates and Warren Buffett have challenged fellow billionaires to follow their example and give away the majority of their fortune, and some are following in their footsteps. It's extremely admirable.

Here's an excerpt from the story:

Mr. Buffett and Mr. Gates in June had asked the individuals and families to publicly commit to give away at least half of their wealth within their lifetimes or after their deaths.

The pledge stemmed from a series of dinners the two men held for the nation's billionaires over the past year to discuss the effects of the recession on philanthropy.

Read the full story here:

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704017904575409193790337162.html

Lake Forest stunner: Secret millionaire leaves fortune for Lake Forest College scholarships - chicagotribune.com

By Robyn Davis Sekula

Everyone loves a story about someone who lives frugally and after their death, a huge fortune is discovered and donated to a worthy cause. We love to think about who would get such a fortune if we had it - and how surprising them with the funds would be deliciously satisfying.

But I have a problem with these stories. They don't always reflect the near-abject-poverty that some of these donors choose to live in. They deny themselves every single luxury - including vacations, good food, a better home - to do something after they die, something they'll never see.

We are better served by living somewhat frugally, and yes, saving and investing, as this woman in Lake Forest, Illinois, did. But living that sparsely makes me sad. Our money is designed to give us some pleasure in life.

I wouldn't mind to have a sizable gift go to a cause I love after I die. But I want to live a little, too. I believe that healthy investing means you get to do both.


Lake Forest stunner: Secret millionaire leaves fortune for Lake Forest College scholarships - chicagotribune.com

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Don't spend it all

By Robyn Davis Sekula

I’ve recently experienced something that is thrilling: I’ve had a large surge in my income, mostly due to a new client I signed just a month ago. I got the first check today, in fact.

It has changed the way I work. I don’t have to chase down hourly work anymore, and I reserve two days per week for this new client, who buys hours in advance through a monthly retainer. I love the client, love the work and feel incredibly blessed in a “pinch me this can’t be real” sort of way.

However, I’m quickly seeing something I didn’t expect to experience: a rampant desire to spend, and spend heavy.

I’ve spent most of the year paying down debt, and in fact, we now have two paid-for cars, no credit card debt and we’re saving for my three daughters’ college funds and for our own retirement. I had told myself, rather severely, that I would be banking this extra money, hoping to pile up a significant emergency fund by the end of the year. Perhaps I’d splurge on one item, such as a new television to replace ours, which is 15 years old.

But then, I had other ideas. My mother-in-law is pushing for us to replace our 2002 Camry, which has 126,000 miles. I’ve sufficiently beat back that idea, but it still pops up every now and then. My friend Carmen, who runs a cleaning service, said I should hire a maid. Hey, you’ve got the income now, she says, and your time is valuable – why not?

Then the Coldwater Creek catalog arrived, and I wondered what it would be like to actually order clothes from it instead of paging through it and tossing it, as I usually do so that I can’t give in to temptation. I also want a new gas grill, to replace the rusted out hulk in our back yard, and a carpet shampooer for the downstairs carpet. Oh, and did I mention I’d like to turn the half-bath upstairs into a full bath, and replace a brick sidewalk outside with a new concrete patio?

Then I had this reckless thought: hey, I work hard. What if I spent the whole first check? I could make a major dent in my list. And after all, I’m thrifty – I don’t spend that much. I’ve gone after this work and brought it in. I deserve it. Why not?

That little voice, my friends, is the one that plagues us and keeps us from achieving true wealth. I define wealth in this way: you have enough money that when something breaks, you are able to fix it without panicking. You feel prepared for life’s near-certainties (retirement, children’s college). You do not spend everything you make. It’s not necessarily that you make great money, but that you’ve done well with what you’ve got. Wealth is about how you prepare for life’s events, and how you feel when you think about the money you have. Having significant savings would make me feel secure. And if I do in fact ramp up my spending to the level that it sucks up all of my extra income, yes, I’ll enjoy a few things, but when the contract ends six months from now, I won’t feel secure.

The problem with making a good income is we tend to spend it, all of it. And in the end, that grill rusts, just like the old one. The new TV isn’t watched, and isn’t enjoyed nearly as much as we thought we would. The clothes stain. The car transports us, just like the other car. In other words, NONE of these things that we thought would be transforming truly change our lives.

What changes lives? Paying down debt, saving money and investing wisely with thehelp of a good advisor who studies options and can make solid recommendations. Security, and the ability to sleep at night, changes your life, and that’s what you’re buying with savings.

Think of it this way. Let’s say you have a problem. Money will fix the problem. Therefore, you have no problem anymore. That’s appealing, isn’t it?

Giving house to children isn't a wise move

On Mondays, we post a question from a reader and answer in this space. If you have a question you'd like to see us answer, please post it in the comments.

QUESTION: I am in my 70s, and I’d like to put my house in the name of my children so that, if I ever have to go into a nursing home, I won’t be forced to sell it to pay for my care. I have friends who have done this. Does this work? Are there any drawbacks to it?

ANSWER FROM DAN DANFORD: I'm always distrustful about advice from friends in this realm. I hear this stuff all the time and it's the absolute worst place to get information. The times I've tried to confirm this type of stuff have always ended with disappointing results.

Here's the thing. The "nursing home" payment plan is Medicaid, a state-operated plan that provides medical services to indigent people. It kicks in and pays when you've "depleted" your other assets. There are rules about what qualifies as an asset and when the program starts paying. There are "look back" periods for precisely this reason; Medicaid wants to be sure you are really indigent before starting to pay. And they want to be sure that you didn't give everything away just to qualify. So they look at your financial history and may demand assets that were given away to family and friends (or delay paying).

Medicaid is administered on a state-by-state basis, so there are slight variations depending on where you live. Also, amounts allowed to a spouse or the length of look back periods might differ also. Last, and this is a huge factor in my experience, the Medicaid caseworker has some "interpretive" leeway for each situation. So, even within a state, the answers may be different when the circumstances are different.

So, the best thing to do is to establish a "regular pattern of giving" to your family. That way, there are no one-oime massive gifts to raise a red flag for the caseworker. Also, remember that the reason you worked hard and saved all these years is precisely to take care of you when you need it. Another way of saying this is that you likely need the money (or house) more then you children.

Which brings up one last caution. What if you give the house to your kids and they become embroiled in a lawsuit or - heaven forbid - a nasty divorce? Under this "worst case scenario" the house or other asset could end up being unavailable to either you or your children! Careful, careful, careful.

Really, don't listen to your friends for this. Consult a reputable estate planning attorney in your city. A few hundred dollars in fees could accomplish what you want without the guesswork.

Twenty questions to ask the elderly

Robyn Davis Sekula is a public relations and marketing consultant who assists us with many things here at the Family Investment Center. She offered to write about her own experience gathering information from her elderly parents and her thoughts are posted below. Tell us about your own experiences with managing the finances of elderly parents in the comments section.

By Robyn Davis Sekula

During December 2005, I was home in Virginia visiting my parents when my Uncle Bob died unexpectedly. Bob was only a year older than my father, and it sent a bit of a chill through the house. Dad looked at me that afternoon and gave me a wonderful gift. He said, “Let’s go downstairs.” We went into an area that he had used as an office, and he began to tell me everything.

Having spent most of my life as a reporter, I took notes. I’m an only child, and my parents are in their 70s and live nine hours away. My mother knew very little about the finances of the home at that time, and I’m very much the practical soul of the family, so I knew I would have to be the one to have the information. He started with the basics: where the original of his will was located, who has power of attorney (mom) and life insurance. Then, I worked my way into a series of questions on everything I could think of since he seemed receptive to answering questions.

I’ve accumulated this list here for you to use with your own elderly relatives. If you live far away, all of these questions are especially crucial and things you need to know. They may sound small, but every piece of information that you have handy will save you a step or two in the future.

Don’t assume that you know everything, either. Your parents may have inherited something that they never mentioned to you or have purchased something that they’ve never discussed. Ask it all. You will no doubt find a surprise or two.

Here’s the list of questions I’d use in such a conversation:

1. Where is your will? Not a copy, but the original. My grandfather's estate could not be settled until his original will could be located. Guess who had it? His ex-wife, who could have easily destroyed it, since it was not in her favor and she was not friendly with the rest of the family. That could have been a disaster.
2. Who prepared your will? Be sure to get contact information, too.

3. Who is your life insurance policy with? What is the payout? Is it term or whole life? Where is the policy paperwork?

4. Do you have a financial advisor who you work with?

5. Where do you have money? Need names of banks, credit unions and investments.

6. Where are your safe deposit boxes? Need names of banks, address of branch and location of keys.

7. Do you have a safe? Where is it? What is the combination?

8. Are there any other secure places where you store important paperwork and documents?

9. Where do you receive income from? Cover both retirement and investments.

10. What do you own? Go over house, car, land, and location of titles and paperwork of each.

11. What debt do you have and who owns that debt? Cover mortgage (first, second, reverse, lines of credit), car loans, credit cards, consumer goods, old student loans.

12. What do you believe are your most valuable assets and what do you believe these items are worth? Use this question for significant antiques, works of art, and other items not covered anywhere else on this list.

13. What bills do you pay each month? Get the names of each utility paid and how much the bills typically are so you’ll know if there is a sudden jump.

14. Are there any issues with your home or any property that you own that need to be addressed? Does the roof or basement leak? Are there plumbing problems or electrical issues?

15. Who holds the policy for your homeowners and car insurance?

16. Do you own a burial plot or have thoughts on where you would like to be buried?

17. Do you feel you have adequate income for your situation?

18. Does anything financial keep you up at night? Are you worried about anything that I can help you with?

19. Who has power of attorney in the event you are incapacitated? What about the spouse?

20. What else do I need to know? What did I forget to ask you?

Believe me, these aren’t easy questions to ask. But turn your mind off of the emotional part of this conversation, if you can, and just put yourself in the mindset of someone who needs information. Take good notes. Store them where you know you can find them. Make a copy and place it in your safe deposit box. Even leave a copy at your relatives' home should you be called there in an emergency. And whatever you do, don’t put this off. Time sometimes steals someone far ahead of when you anticipate, and the more information you have on hand, the better off you’ll be.

Find a way to talk finances with elderly parents

This week on Twitter, we're posting financial tips on how to handle finances concerning elderly parents @family_finances. We got a question from Matt_SF about how to start the conversation on finances. This is a terrific question, and I'm happy to answer it here. Twitter doesn't provide quite enough space. If you have thoughts on this, please share in the comments section.

One of the toughest conversations you'll ever have with your parents will likely be about finances. Most of us value our independence, and that's a real issue with aging parents. The taboo isn't money so much as it is death or disability. Those are the great big elephant in the room that no one wants to acknowledge! But he can't be ignored forever and - like it or not - children are left dealing with a crisis when it comes along. So, truthfully, it's in everybody's best interest to have this conversation.
The key issues, as I see it, are information and preferences. First, where can we find the things we'll need when something happens? Checkbook, bank accounts, insurance policies (health and life), and deeds to property or investments? These are things we'll need to take care of you. Also, your estate plans, trust documents, powers of attorney, or living will documents. If we are to help you, we need to know in advance what you have and what you want. Take notes, and put them in a safe place. You can't rely on memory in times of crisis.
If you just can't bring it up out of the blue and it doesn't seem critical, let something else raise the issue. When they mention a friend or relative who is sick or having trouble, ask what they'd want you to do in similar circumstances. Bring them an article or send them a link to this post. It doesn't have to be heavy or sad, just an acknowledgement that you need information to help them when the time comes. Hopefully, many years from now!

Investing in gold is not a solid idea

On Mondays, we answer questions from readers. If you have a question, post it in the comments section.

QUESTION: With the recent downturn in the stock market, I’m looking at investing in gold or other precious metals. What do you think of this strategy?

ANSWER: I always try to be diplomatic, but this is dumb, dumb, dumb. There are always a group of folks selling this stuff and they rise to new levels anytime a general panic occurs. The theory is that gold (or any of this stuff) has "intrinsic" value - that is, when the world goes to hell and people stop using paper money, you'll be able to swap your gold for groceries. C'mon. If our currency collapses, do you really think that the corner gas station or Wal-Mart is going to set up a "precious metals desk" at the check-up lane?

Even with the recent run-up in prices, gold has been a poor long-term investment. The price per ounce can (and has) stagnated for decades at a time. I guess it's okay to note that prices jumped hundreds of percent in short order, but it's also important to realize that they sat silent for years before that. In my opinion, this is a classic case of opportunistic marketing. Economic things look rough, so we'll scare people into buying gold.

At best, gold or other precious metals - even other commodities - could be a tiny part of a diversified investment portfolio. There are times when price increases in hard assets might - I said might - offset losses in other securities. But larger stakes in something as emotional as gold are really just a gambler's bet. And the people selling it are making an emotional appeal at your most vulnerable moment. Stick to mainstream investments and your opportunities for long-term success increase.

T. Boone Pickens puts his money where his mouth is

I attended a financial symposium at the University of Missouri/Columbia on April 22 and one of the highlights was an appearance by T. Boone Pickens. Mr. Pickens was speaking at a state energy summit and our symposium group was invited to attend. Most readers will recognize the name, but for the uninitiated, T. Boone Pickens is a billionaire businessman and one of America’s top philanthropists.

I was very impressed by both his energy and passion. He has undertaken a personal agenda to reduce America's dependence on foreign oil. As a 40-year veteran of the oil industry, he has unique insight into this challenge. He revealed that we still purchase immense quantities of oil from “people who are our enemies,” and until we fix that “our country and economy are vulnerable.”

He will be 81 years old in a few weeks. I hope I am that sharp when I reach his age. He explained why he felt buying foreign oil was such a problem, and how he intends to fix it. Specifically, he feels that natural gas is the “bridge” fuel until more reliable and powerful batteries or technologies. Right now, batteries are incapable of powering an 18-wheeler, and he says that's a major part of our challenge. Over-the-road trucks (6.5 million in use today) burn a tremendous amount of diesel fuel and that's a significant portion of our reliance on foreign oil.

Mr. Pickens addressed questions from the audience. People asked about hybrid cars and/or battery operated cars. “I'm in favor of anything that's American," he said. However, hybrid or fuel cell cars will not in themselves solve the problem at this point.

Most impressively, Mr. Pickens has put $55 million of his own money into this campaign. He says his years of politics are now over, and his campaign is designed as a bipartisan project on a grass roots level. He suggested that everybody in the audience visit his website www.PickensPlan.com and register as a supporter. Millions have done so already, and this is the principal vehicle to promote change both in Washington, D.C. and among the American population.

It was a rare treat to see someone with such success and passion in advancing age. I've always liked people who “put their money where their mouth is" and Mr. Pickens is surely doing that on this issue. It was a fun and rewarding hour.

You need professional help, part 2

By Jason T. White, ph.D

Jason is a principal and director of investments for the Family Investment Center. As many families attempt to cut expenses, we’ve seen some question why the help of a professional advisor Is necessary. Jason had some thoughts on this that he wanted to share with our readers. He has a Ph.D. in Economics and Political Science from University of Missouri in Kansas City.
This is the second of a two-part series on why you need professional help. Keep reading below this entry for more.

GOOOOOOOLLLLLDDDD!

Some have sought the “safety and protection” of precious metals like gold. Actually, many investment advisors don’t mind using a dab of gold as a hedge against price inflation. However, traders gripped by the twin demons of fear and mania often take gold ownership to extremes. Unfortunately, adjusted for inflation, gold currently sells for approximately the same price it did in 1980. Professional advice can help you build a properly diversified long-run portfolio with much better outcomes.

Political headwinds

Politics is a philosophical, emotional and important discipline to many, including us. Invariably, there will be highs and lows as your candidates/party wins and loses elections, and the political pendulum swings right to left to right… you get the idea. Navigating uncertain political times is an important role of a professional advisor. Our job involves taking a dispassionate view of the political landscape and guiding investors in a prudent course of action. For the record, we are not currently recommending stockpiling guns and gold, but profit opportunities abound in many financial sectors that are quite different from the “sweet spots” we found during the Bush years.

The Resurgence of Lord Keynes

So, what is an investor to do when confronted with $9 trillion dollars in expected federal budget deficit spending over the next few years? In a word: hedge. And what has historically proven to be the best hedge pockets for prospering in an expected future inflationary environment – stocks and real estate. Your home likely accounts for a significant percentage of your net worth, so it is our view that when it comes to investment strategy, you should keep a reasonable portion of your investment portfolio in stock mutual funds. The stock price volatility of the past 16 months has made this a particularly gut-wrenching decision for many to stick to, but that is exactly why you need a professional financial advisor to coach you through this period of uncertainty.

Zigging when others zag

Traders are moving in and out of the market on daily, even hourly, news and data releases. This is not what professional investors do. While changing one’s overall asset allocation between stocks and bonds may be appropriate in your individual financial situation, and Family Investment Center exists to help you figure that out, jumping in and out of the market or radically altering your long-term asset allocation based on short-run “noise” is not a prudent strategy. In fact, this may be the single biggest impediment to long-term investment success. FIC will help you stay the course in these trying times.

Staying the course

During the period 1990 to 2007, which included two recessions, the return of the S&P 500 stocks averaged 9.5 percent per year. According to Advanced Equities Wealth Management, a fellow advisory firm like us, being out of the market for the 10 best days each year would have reduced this historical gain to an 11.5 percent average annual LOSS. It is axiomatic that the stock market will be volatile in the short-run, but it is the long-run steady players that find the pot of gold at the end of the rainbow.

Manage debt with prudence

We are in an era of consumer retrenching and deleveraging. The national savings rate among consumers has risen from none to 5 percent nationally in just a few calendar quarters. We strongly believe that our clients should work had to pay down high interest credit cards and other consumer debt. But given the choice of paying down principal on a 4 percent, 15-or-30 year home mortgage versus investing in the market, which sports the potential for twice the annual return over long-run, the advice from a professional investment advisor should be not to abandon a well thought out investment strategy in the face of short-term transitory challenges to the market. Market returns will return to their mean in time.

Media Doom and Gloom

Are we embroiled in the worst economy since the early 80’s, the mid 70’s or (gasp!) the Great Depression? We think not. In a predominately capitalist system, business cycle theory teaches that periods of bubble and bust are a normal part of long-term economic growth and stock market appreciation. Think of the fable of the tortoise and the hare. You can imagine all the little pink-nosed bunny traders lying panting on the side of the race track as they acquire positions and sell them minutes, hours or days later in an effort to capture a bit of appreciation from volatility. Family Investment Center advisors avoid that trap by adopting the behavior of the wise old tortoise; properly allocating assets for individual and institutional investors, plodding steadily forward in the face of short-run adversity, adjusting the portfolio on the basis of principal, not emotion, and emerging at the finish line happier, healthier and wealthier, and VICTORIOUS!

Surviving a bad economy

I have a weekly podcast on financial matters on Dad's Divorce, www.dadsdivorce.com. My latest commentary was posted today. This week's podcast discussed how to survive a bad economy. You can listen to it here:

http://www.dadsdivorce.com/blog/tags/Dan-Danford/

Financial planning fees explained

On Mondays, we post questions from our readers, followed by an answer from Dan Danford. Feel free to post your own questions in our comments or @ reply to us on Twitter @family_finances.

QUESTION: I need some financial help and I understand the need to shop around. I read some articles about choosing an advisor, but I’m very confused about fees. How do you compare fees from one advisor to another? How important is that?

ANSWER: Since you asked, I’m going to share my best thinking on the subject. This will take a few minutes, but the subject requires some explanation and depth. I started Family Investment Center as an alternative to conventional fee structures, so I’ve given this subject a lot of thought.
And it is important. The investment world is extremely competitive. There is a stockbroker on almost every corner. There is a bank - with a discount broker in the lobby and a trust department upstairs - at almost every major intersection. Add in insurance agents and financial planners, and it all begins to run together with alarming sameness.
But it’s not really the same.

Some consumers focus on fees because it seems an easy (and important) thing to compare. If you are so inclined, you can visit a number of potential managers and collect their published fee schedule. You’d need to collect schedules from banks, brokers, investment advisors, financial planners, and (in some cases) insurance agents. By studying these documents, you’d probably arrive at a pyramid of fees.
This would be a great approach except for one thing. All options aren’t equal. We aren’t talking about a loaf of bread here, or two dealers offering identical cars. Instead, we are considering a field where there are thousands of products, and widely varying degrees of professional competence. We’re also working in the realm of horrendously complex cost structures amid an ocean of hidden fees.
Take that bank trust department, for instance. Fees shown on their schedule might omit profits they earn from their own family of mutual funds. It’s also likely that very small print discloses other administrative fees earned from outside mutual funds. They probably get income from clients plus income from selected investment options.

This isn’t illegal or necessarily unethical, but it helps disguise the total fees you pay. Looking at the published fee schedule, it’s unlikely that you’ll come away with a helpful understanding of total costs.
Similarly, just try to decipher the fees you’ll pay in an insurance product or brokerage account. It seems so simple, but I guarantee that you’ll go nuts trying to find a “bottom line” on these costs. Trying to compare costs within one industry is hard enough, across industries (insurance versus banking, for instance) is nearly impossible! It takes a carefully trained eye.
Second, and this is very important, all these options aren’t equal anyway. Since when does a broker equal an insurance agent equal a bank? Doesn’t quality of products or management mean anything?
Are all stockbrokers equal? Does the newest broker, fresh from a 12-week training course, offer similar value as the experienced professional in the corner office? Which offers better value, a fifteen-year insurance agent or a brand new trust officer? If you’re getting ready to invest $100,000, which should you trust more?

There’s a fair chance that the bank’s trust officer never passed a securities examination (trust departments are specifically exempted from the routine exams required of brokers, insurance professionals, and investment advisors). In fact, a discount broker in the bank’s lobby (where licenses are required) is potentially better tested than the trust investment officer! Does that affect your view of their investment advice?
None of this discussion is meant to slander good professionals working in the investment arena. However, it does reveal some difficulty in evaluating investment services, especially on the sole basis of fees.

It’s important to realize that I created Family Investment Center after spending 15 years in the trust/investment industry. I specialized in employee benefits and large IRAs, which offered unique insight into investment services and fees. You could say that I developed some expertise about industry costs and fees.
Here are some important lessons that I learned.
Commissions distort investment advice. They lead investment salespeople to recommend one option over others that might do a better job or cost less. In fact, the sales commission alone virtually assures that a product costs more than other options in the marketplace.
I often hear professionals say that they aren’t personally influenced by sales commissions. Consider this: Would brokerage firms, insurance companies, or banks (experts in generating income) use them if they didn’t work? Come on.
Similarly, “in-house” investments (banks or brokers offering their own mutual funds, for example) create a related distortion. The need for profits compels the organization to favor these over other choices. Of course, there’s also a built-in (and largely hidden) fee for consumers. Some groups offer a fee “discount” if you choose their products or funds – more illusion than reality.
Note also that in-house options rarely match performance offered through outside funds and managers. This may seem a small point, but it’s not. If a firm recommends inferior mutual funds, then they are – in essence – placing organizational profit motives above client needs.
Hidden fees are higher fees. I once reviewed a company pension plan offered through a national trade group. My client insisted that it was free. Buried deep in the fine print, dozens of pages into the plan prospectus, I found a disclosure of nine different charges taken against the account. Nine different and expensive fees!
In most of the investment business, sales skills are more important than investment skills. In a commissioned environment, survival requires sales. Products offered in this environment cater to consumer whims, not investment quality.

Admittedly, I consider investment fees from a different perspective than most consumers. That’s unavoidable since I have professional knowledge and experience in evaluating costs and fees. With the prior explanations as background, here’s why I’m glad you asked about fees:
Family Investment Center was created using a very simple concept. No hidden fees. Clients know right up front how much they’ll pay for our service. They know we provide honest evaluation, unbiased research, and friendly, local service. We scan the universe for quality managers and we don’t sell any “house” funds or investments.
In fact, we employ a variety of methods to control total investment costs. We charge fair and reasonable fees for the services we provide. In fact, total fees are actually lower than most other options in the marketplace.
We aren’t unique. There are hundreds of advisory firms nationwide operating in a “fee-only” environment. I prefer the term commission-Free because it’s a better description of what we do and how we operate. Again, there are hundreds of us.

Take away the commissions, and false expertise disappears, too. Education, skills, experience, and knowledge are where significant value is added.
The crucial point is that it takes judgment, skill, and experience to properly engage this knowledge for your benefit. Of thirty similar mutual funds, which one (or ones) is the best choice for your situation? Which one (or ones) fit best with other securities to meld a quality-diversified portfolio? Which one (or ones) offers the best tax efficiency for a family in your circumstances?
You may be able to find a cheaper alternative (or something that looks cheaper). Just like you can find a cheaper lawyer or a low-cost doctor. Truth is, every lawyer belongs to the bar association and every doctor holds a medical license. Chances are good, though, that you’ll look beyond price in choosing the right one for your situation. Cost, while a factor, isn’t the only factor.
Fees are only part of the picture. You have to consider everything else to arrive at value. Commission-free investing offers top value for most families. That’s why I love to talk about fees.

Financial Lessons from the Wealthy

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 1983, and I’ve noticed some important gaps in the typical family’s financial knowledge. Simply put, 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 single stock is risky. Buying many stocks, though, is prudent.

Millionaires own stocks, but they aren’t frequent traders. When Dr. Tom Stanley and Dr. 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, more than 40 percent hadn’t traded a single stock in the year prior to interview. Clearly, millionaires are 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 a mind at ease.

Not all debt is bad. “Neither a borrower or lender be,” Ben Franklin advised. It’s become a sort of holy middle-class mantra. Despite Ben’s advice, there are different kinds of debt, and not all debt is bad. Borrowing for consumer goods such as furniture is almost always bad. Borrowing to buy a nice house in a nice neighborhood is almost always good, so long as the terms of the loan are reasonable. We all know by now that sub-prime mortgages, interest only loans and 50-year mortgages are bad debts.

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 their residence 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 aren’t always in a big hurry to pay off their mortgage.

Do-it-yourself isn’t the best choice. Wealthy people know where they excel. Many own a business that relates to their strongest skill.

They also know their weaknesses. They probably don’t try to save money by fixing their own cars because they know a mechanic can do it better, and in the end, they’ll save money by hiring an expert the first time around, rather than to repair mistakes.

When it comes time for a new roof on their home, they pay someone to do it for them, so that they won’t spend their time cleaning up leaks.

And you’d better believe when it comes time for surgery, these are not folks picking up instructions off of the Internet to replace their own knees.

The point is, hiring professionals is often the best path. Consider this the next time you’re looking over your retirement fund or other investments.