Investment Guy

Many people are drawing parallels between this current market selloff and the credit crisis that nearly ended in depression a few years ago.  I don’t see any.

The downgrade of the US AAA rating is nothing like the collapse of Lehman Brothers, Bear Sterns, or any of the other firms that went under.

The credit crisis of 2008 was systemic.  It was the culmination of the housing bubble and the realization that that every bank had been lending gobs of money to absolute idiots in order to fund the purchase of houses they couldn’t afford.  And this had been going on for years.

The entire world suddenly woke up and found that there were bonds rated AAA but comprised of junk quality mortgages.  Nobody knew which investment was quality and what was toxic, and nobody wanted to own anything-  At all.

The market crashed.  Business, and the economy, nearly came to a complete halt .

Corporations laid off 3,000,000 people in 2008-09.      Then came Tarp, QE1, QE2…the economy was on life support.

Flash forward to today: 

If you want to buy a house in 2011 you need to have sparkling credit, 10 years of income history, 20% down, and the ability to lend the bank more money than you are trying to borrow.

Corporate America cut every wasteful expense, reduced inventories, curtailed spending, and today’s companies are lean operating machines.  That is why earnings beat expectations in the first 2 quarters of 2011.

Today we are adding 150,000 jobs per month. True, it will take a long long time to gain 3 million jobs back at that rate, but we are going in the right direction.

Additionally, interest rates are still low and inflation is still relatively tame.

This market selloff/crash is all about fear.  There is no more stimulus- zero – and that is scary.  But zero stimulus is a good thing; now we get to see the economy stand on its own.  Couple the removal of stimulus with several other potential bogey monsters that loom on the horizon (Greece, inflation, rising interest rates) and fear is understandable.

But these monsters are not new. Things are not substantially different than they were 2 weeks ago.  Fear and greed are what make the markets move, and right now fear is winning.  In 6 months this market swoon will be a distant memory.

It was 2 years ago this week (10/16/08) that Warren Buffet wrote his “Buy America, I am.”  Op-ed article in the New York Times.  Buffett encouraged investors to “be fearful when others are greedy, and be greedy when others are fearful.”  In the 2 years since the article was written, the S&P500 has gained +29.1% on a total return basis through the close of trading last Friday (10/8/10).

Buffet is clearly a natural at removing any emotional connection to investing.  In May 2009 I wrote about the risks of investing based on your emotions in Buy Low, Sell High.  Where are we now?, and I still find the chart a valuable resource in analyzing the emotional analysis of where we are in the market any given day.

In my daily conversations, I ask everyone I talk to what they think of the economy and where they think the markets are going.  In summary: There  is not a lot of greed in today’s environment. 

If you ask me, I would point directly between HOPE and RELIEF on the chart.  What do you think?

take the emotions out of investing

The topic of the article is Estate Planning 101.  Check it out for some estate planning tips.

Click the logo below to read the article from ABCnews.com:

Sam the Man

It’s a boy!  My wife gave birth to a boy on September 30^th.  We named him Samuel, and he’s awesome!  He’s just starting to interact, smile and make all kinds of noises. 

Over Thanksgiving weekend I bumped into an old friend from high school at the Verizon store.  It’s been a while since we’ve seen each other and after exchanging pictures of our kids and a few bad jokes, we caught up on each others current lives.  

He gave up on getting discovered in Hollywood, worked his way up to a management position at a technology firm, settled down, and has 2 ‘trouble making rugrats’ (his words, not mine). 

Upon learning that I am an investment advisor, he mentioned his desire to save for college and asked me if there is anything else he should be doing as a parent.  I asked him how much life insurance he had and he just shrugged. 

What!? 2 kids and no Life Insurance?  Seriously?  

The first thing any parent needs to do is to buy life insurance.  PERIOD.  There’s no question that kids are expensive; diapers, clothing, cribs, formula…the list goes on.  For many people, budgets are tight and nobody wants another expense. 

But the most important thing you can do is protect your family, and in case you don’t know, Term Life insurance is pretty cheap.  You might not be able to afford as much as you want, but you must get something.  Anything is better than nothing. 

Alright, enough preaching…There are several important things to determine when buying life insurance.  

Here is the quick life insurance buyers guide to help you decide what is right for you: 

How much to buy? 

The first and most important thing to do is determine your needs.  Do you have a mortgage?  If so, this is the minimum amount of insurance you want to have.  Next think about costs to raise a child.  According to the US Department of Agriculture the average middle income family will spend $291,570 to raise a child through age 17 (as of 2008).  Additionally, many parents want to provide college tuition, which raises the average to $319,270 (assuming a 4 yr. public university). 

Your Budget.   

Know your budget.  DO NOT buy more insurance than you can afford.  If you haven’t created your own budget yet, get on it!  Start here:  Budget

Keep it simple. 

My advice when it comes to insurance is to get as much as you need for as little as possible.  If you are buying life insurance, it should only pay off if you die.  Insurance policies usually offer add-ons called riders that appear to make the policy better.  For example, some term policies have additional options that can return money to you if you don’t die within the term.  You are paying more for this privilege.  

Term or Permanent? 

A term policy will insure your life for a specific period of time.  Term insurance is like renting a home; it’s cheaper than buying and as long as you pay on time, you will have a place to live…but you don’t own the asset.  Typical terms are 10 years, 20 years, 30 years.  This will be the cheaper option, however, you need to get new insurance at the end of your term (i.e. 10 years from now)  You will be 10 years older which makes insurance more expensive, and there is a risk that your health has deteriorated to the point of non-insurability.  

Permanent insurance will not expire, provided you pay your bill on time, every time. Permanent insurance is like buying the home; it will cost you more but have some other additional benefits.  There are different ways to structure this that will allow you to have a variety of different features such as investment components, cash values, or something similar to a term policy for life.  Whatever you decide, my advice is to make sure that it is guaranteed to pay your minimum benefit regardless of any assumptions. 

Evaluate The Insurance Company 

Take a look at the insurance company ratings.  Any quote should show you the company’s financial snapshot, including assets vs. liabilities; their ratings from agencies such as Standard and Poors; and a Comdex score.  Always compare at least 2 insurance companies. 

Justify It 

Your kids depend on you.  Instead of upgrading your flat screen TV this year, take comfort in the fact that you are protecting your family.  Plus, you will score bonus points with your wife when she finds out how responsible you are. 

Personally 

One month before Sammy was born, I applied for a 20 year term policy, without any riders, for an amount that is the amount of my mortgage owed plus the average cost of raising a kid and paying for college (approximate).  I figure that by the time junior is 20 years old he will be able to fend for himself.  If I get hit by a bus before that, Annie won’t have a monthly mortgage bill, and she can pay for daycare too.  I wanted as much as necessary for as little as possible, so I can still afford diapers, and formula, and the college savings account that I just opened…but that’s a conversation for another day. 

As if the tax-free income isn’t enough of a reason, here are 2 more reasons that Tax-Free municipal bonds may become even more attractive in the future.

 1.                 Tax rates are going up [probably]

Tax-free muni bonds have always been an attractive investment for their combination of high quality, low default rates, and Taxable Equivalent Yields (TEY). The TEY represents the amount of yield you need before taxes to realize the equivalent income of a tax-free.  The TEY goes up as your tax bracket increases making tax free income more powerful if you are in a high tax bracket.  The greater your tax bracket is, the more interest you keep when compared to a taxable investment. 

 Therefore if tax rates go up, after tax yields shown above will be going down Read more…

Michael Vick just got a second chance to play in the NFL.  As a dog owner I am disgusted, and as an Eagles fan I am embarassed.  It’s not because I don’t believe in second chances…Vick did his time, and he is out of prison.  He is a free man- free to get a job, enjoy the outdoors, and even work for the humane society to do all the good he can.  However, to be working in the NFL again with a $million+ contract seems like a lot more than a second chance.  To me it seems like he is right back where he was before prison, albeit out a few million dollars.  Both the Eagles’ and Vick’s crisis management team can spin it all they want, to me it is wrong, and all the talking points I’ve heard sound a little too much like talking points.   

But the idea of a second chance is something we have been talking about with our clients a lot lately.  The markets devastated many account values.  If you truly wish that you had sold everything well before the market bottomed, well, now the markets are up some 50% from their lows.  Here is your second chance. 

This is not recommendation to sell everything- I want to be clear.  This is Read more…

We don’t invest only to make money. We invest to accomplish goals. Goals such as retirement, paying for college, leaving your children at least $1million, leaving a bequest to charity. Specific, easy to measure goals.

People often think there is a certain amount of money that a 40, 50, or 60 year old should have set aside in order to retire.   How much?

It’s an interesting question. The answer, much like everything that has to do with investing, will be different for everyone. Mostly it will depend on your lifestyle and your spending habits.

We typically find that the answer to this question is determined by working backwards. Start by determining your NEEDS.   What is the bare minimum of income you absolutely need every month to get by?   Hopefully you have a written budget by now; if not add up your mortgage, health insurance, utilities, etc- all of the necessities of life.  Think about your annual expenses, long term care premium, real estate taxes.  Figure out exactly what you need on an annual basis, and find a way to generate that from your investments using fixed income investments. If you can achieve this using guaranteed investments, that will be your best place to start. 

Once you have satisfied your needs, then you should think about your WANTS.  Things like vacations, hobbies, and luxury purchases.  You can figure this number into the equation. 

If possible, you should account for the UNKNOWN, such as accidents or inflation.  Living on a fixed income is a beautiful thing, until unexpected expenses, like a new roof, force you to dip into principle.  If you have less principle, you will earn less interest and hence, you will have less income.  Also, be sure to consider the eroding effect that inflation can have on your income. 

Another good rule of thumb is to keep 3 months of needs in a emergency fund of cash, no matter what stage of life you are in.

Priority #1 is to make sure you can satisfy your needs. Otherwise you’ll be back to work in no time.

My gift to you:  Your very own crystal ball. 

Every quarter we review portfolios and performance with our clients.  Over the past year and a half, the markets are so volatile on a weekly basis that by the time a quarterly report is being reviewed things have changed significantly and the report is old news.  Reviewing a portfolio is, and will continue to be an important exercise, but the most valuable part of our conversations are always about preparing for tomorrow. 

Most people spend too much time worrying about yesterday instead of preparing for tomorrow.  This often happens in the world of investments.  Too much time is spent looking at past performance. 

People tend to chase performance by selecting investments that outperformed over the last 1,3, and 5 years.  How likely is it that the same investments that beat the markets yesterday are going to perform tomorrow?  Slim to none.

The best thing you can do for your current portfolio is to look at what you own today, and decide if its what you want to own tomorrow.  Think about your future…

Look into your own crystal ball and ask yourself these 2 questions:

1. What investments do you want to own in the next 1,3, and 5 years? 
2. What are you concerned about for the next 1,3, and 5 years? 

Alternative Energy? ♦ Muncipal Bonds? ♦ Gold? ♦ Social Security going bust? ♦ Inflation running rampant? ♦ Deflation? ♦ Oil? ♦ Taxes going up?  ♦ Monthly income? ♦ The dollar?

There are investments that you can position in your portfolio that will make money under any of these circumstances. 

This list will change frequently, and will be different for everyone.  If you’re not talking about the next 1,3, and 5 years you will always be chasing yesterday’s winners, and missing out on tomorrow’s.

This is ‘A lesson in what not to do’ my client said to me.  He asked me to share it with others to hopefully prevent anyone else dealing with the mess that you are about to read.

In May 2009, his father-in-law passed away at the age of 91.  He was a widower, in good health, and still drove at 91.  He lived a simple life, as most depression era children do.  Most of his expenses were on food.  His needs were little and his assets far exceeded anything he would be able to spend.  Sadly, he was involved in a car accident that lead to his hospitalization, and a subsequently a quick deterioration in his health.  He died in a matter of days.

For the past 3 weeks, my client and his wife have been on a scavenger hunt tracking down each of his $100,000 CD’s at various banks to maintain FDIC protection.  With each of 4 IRA’s they have located to date, they discovered that his wife, who died long ago, was named beneficiary.  He assumed that his will and his trust would flow the money as he desired to his 2 daughters.    So far they located total assets of approximately $700,000.  We’re waiting to see what new statements appear in next month’s mail.

Records were not properly kept and beneficiaries were not updated on several IRAs at various banks.  Now the process is delayed in probate.  The importance of reviewing and updating your will and/or beneficiaries is difficult to ignore, yet time and again people do.

Without properly named beneficiaries, wealth that you intended to give to loved ones may be subject to the delays, expenses, and public scrutiny associated with probate. In addition, the assets may not go to the right person, in the right amount, at the right time, which means you could potentially disinherit your heirs. With improper beneficiary designations, you also run the risk of allowing creditors access to your money.

Certainly you can take the time to make sure your IRA beneficiaries have been updated to reflect the proper distributions.  Each year, take an hour to:

• Update your beneficiaries upon the following life changes
  • Marriage, Birth, Divorce, Remarriage
• Name contingent beneficiaries, in case your primary beneficiary predeceases you
• Review your Will

It is surprising how often this happens and how easy to avoid.  Every year, we make sure to address this with all of our clientele, and every year at least one of our clients needs to address this.  Do yourself a favor, and ask yourself:

If you die tomorrow, will your assets go to the right people?