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Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts! INVESTMENTS AND WEALTH MANAGEMENT • Pay Attention to the Cost of Volatility. • How Consumers Can Comfortably Afford Expensive Homes and Build Greater Wealth at the Same Time. • Take Advantage of Summer Doldrums to Strengthen Portfolio Returns. • Retirement Reality: Start Saving and Incrementally Increase Your Savings to Prepare for Retirement. • Reagan’s Long Journey: A Wake Up Call for All Americans. • The Dilemma of Long Distance Elder Care. • How to Protect Yourself from the Growing Crisis of Identity Theft.. • More Banks Agree: It is Important for Bank Investment Representatives to Convert to Fee-Based Business. • Media: Sign Up for Free Subscription to In-Depth, Financial Education Resources.
Pay Attention to the Cost of Volatility Market volatility has an emotional cost. It causes investors to make irrational decisions that are usually based on either fear or greed. Volatility also carries a steeper financial cost than most investors realize. Consider the two investments below in Table 1. The boring investment never hits a home run, but never strikes out either. The exciting investment takes our breath away in both directions, during times when the market moves ahead and when it drops.
Notice how the numbers for both investments work out to a simple annual return for 10%,but please pay attention: Even though the investor taking the volatile ride was able to brag about a 40% up year, at the end of the three year period, the other investor has more money! How can that be. Look at the compounded returns in Table 2 below.
You are in trouble when your investment strategy is great for markets going up, but offers no protection when it goes down. Realize also how tough it is to resist the urge to chase returns. Blind pursuit of a “big year” can destroy a retirement portfolio. Bragging about short-term returns to your friends will never be as important as creating long-term wealth so you can live in a comfortable retirement. PMFM, Inc. principals are Tim Chapman and Don Beasley, near Athens, Georgia. Jud Doherty, CFA, manages the marketing and distribution of 401k Toolbox, a service that provides discretionary management as part of its advice product. PMFM, Inc., has nearly $1 billion in assets under management, and has been named 2004 Advice Provider of the Year by Defined Contribution News, a national trade publication covering the defined contribution industry. 401kToolbox won over Schwab and Financial Engines. The firm provides tactical asset allocation money management services for its own clients, for assets held by 401(k) plan participants, and for other asset managers' clients. PMFM has a lengthy history of good risk-adjusted performance, preserving the value of client accounts in uncertain markets. Tim Chapman, 800-222-7636, timchapman@pmfm.com, www.401ktoolbox.com
How Consumers Can Comfortably Afford Expensive Homes and Build Greater Wealth at the Same Time Financing strategies are the key to affording expensive real estate. One of these strategies is the interest-only adjustable rate mortgage (ARM). In fact, a consumer can buy or build a $675,000 home with an interest-only ARM (even if the interest rate steadily increases over the next 5 years) vs. a $455,000 home with a traditional 30-year mortgage. Not only can the client afford to buy or build a home that is 50% more expensive, but they will also build more equity while making interest only payments on the more expensive home using a 3% rate of home appreciation vs. making traditional principal payments on the less expensive home using the same 3% rate of home appreciation. (For a hypothetical chart illustrating this concept, e-mail beth_chapman@inkair.com, with "Build Equity" in subject line.) This strategy enables the client to comfortably afford a home that is 50% more expensive by focusing on their monthly payment comfort zone and the impact of rising rates on this comfort level. Home buyers and home owners should reject the impulse to focus their attention on shopping for the lowest rate on a 30-year mortgage. Instead, consumers would be better served by shopping for a very knowledgeable and qualified mortgage planner who is plugged into the mortgage and financial markets and can effectively address their monthly payment comfort level and the impact of rising rates on this comfort level Interest-only ARMs will gain greater market share vs. the traditional 30 and 15 yr mortgages as consumers recognize the viability of interest-only mortgages as a tool to enable them to comfortably afford the home of their dreams. We must remember that it was only 15 years ago when leasing a car vs. owning a car seemed like an outrageous idea to most drivers. Today, the situation is totally reversed as many Americans question the wisdom of buying a car outright vs. leasing their cars. Mortgage lenders are making parallels between drivers of the past and homeowners of the present, and are banking on the assumption that interest-only ARMs will be the “next big thing” for home owners and buyers. To illustrate this parallel, leasing a car allows a driver to participate in the benefits of driving an expensive car without the upfront cash and high monthly payments. Furthermore, if the driver is a business owner and the car is used for business purposes, the lease payments are typically tax deductible. Likewise, interest-only ARMs allow homeowners to participate in the benefits of owning an expensive home - the use and enjoyment of the home as well as the home appreciation - without a hefty down payment and high monthly payments. Furthermore, the full monthly payment is, in many cases, tax deductible as home mortgage interest. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a full service mortgage lender and broker in Ann Arbor, MI. Phone: 888-608-9800 Email: Gibran@NicholasCity.com Web Site: NicholasCity.com
Take Advantage of Summer Doldrums to Strengthen Portfolio Returns It’s summer again and, the hand-off in Iraq and Alan Greenspan’s June rate hike notwithstanding, the market is settling into its seasonal doldrums. Combine lower-than-average trading volumes, prices that move in a reasonably narrow range, and a host of players exiting to the Hamptons, and you’ve got the perfect recipe for sleepwalking through your portfolio for the summer months. Right? Wrong! Here’s how to take advantage of the Memorial-through-Labor Day market ennui to strengthen your portfolio:
That’s the recipe for investors who want no grass growing under their feet during the market’s summer recess. Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies.pchauncey@etrellc.com. Retirement Reality: Start Saving and Incrementally Increase Your Savings to Prepare for Retirement. Investment advice and asset allocation will not support you in retirement unless you save more every year you are employed. Saving more with each year of employment, in fact, using birthdates or raises as triggers for increasing your contribution to your 401(k) plan, is essential if you plan on a comfortable retirement. Studies show that most employees want to save, but just do not begin. Commonly used "gap analysis" calculators can help employees figure out how far they are from a secure retirement. For many, it seems, the projected total required for a "satisfactory" retirement is so unrealistic as to be overwhelming. Saving for retirement is a war of increments. How much you save is important, but the first, most important step is to start saving . At a certain point, employees see their savings build up in their 401(k) plan accounts and become engaged in managing their assets. This happens at different levels for different people. Only when employees becomes engaged in managing their savings will they likely use available education materials and planning tools. The more you save by deferring salary to your 401(k) plan, the greater the tax savings to your bottom line. Begin with whatever deferral amount you can manage and determine to increase that amount periodically. Only by saving more and investing wisely will employees stay on the path to a secure retirement. ABN AMRO Asset Management has a "Smart Portfolio" option for 401(k) plan participants who want assistance with how to invest their savings. ABN AMRO Asset Management an enviable and long history in investment management in the U.S. since 1887. Formerly known as Chicago Trust, ABN AMRO Retirement Services has managed retirement assets since 1947 and has been active in the defined contribution business for 21 years. Mark Metz, Director, Sales & Marketing, Retirement Plan Services Group, ABN AMRO - 312-884-2578. Mark.Metz@abnamroUSA.com
Reagan’s Long Journey: A Wake Up Call for All Americans. President Reagan’s death after a 10 year battle with Alzheimer’s disease is notable for many reasons. The former president had a healthy active lifestyle which included golf, horseback riding, ranch work and swimming. When in 1994 he announced that he was ill, he looked like the picture of health. It was hard to reconcile this robust man with the slow, degenerative death Alzheimer’s brings to millions of victims. As Reagan wrote in a letter to his fellow Americans dated November 5, 1994… “Unfortunately, as Alzheimer’s disease progresses, the family often bears a heavy burden. I only wish there was some way I could spare Nancy from this painful experience.” Only 11 years earlier, Reagan decreed November National Alzheimer’s Disease Month. Alzheimer’s and other types of cognitive impairment are the leading cause of needing long-term care. Insurance companies report that about half of long-term care insurance claimants suffer from cognitive impairment. The burden on family members when any type of long-term care is needed can be tremendous. And this burden is multifaceted: emotional, physical, and financial because most long-term care is not covered by Medicare or other health insurance. Ronald Reagan was able to stay in his own home until the day he died. That’s the life that most of us would want, if faced with a debilitating illness and need for long-term care. However, many Americans who live in nursing homes end up there for one reason: they could not afford to bring the level of care needed into their own home. All Americans should take this opportunity to consider their own long-term care plan, and how to pay for this plan. It’s clear that the government has no intention of providing a plan that will pay for long-term care, in the same way that Medicare pays retiree medical expenses. It’s also clear that saving for long term care expenses is difficult, even assuming a good rate of return. Furthermore, relying on Medicaid to fund long term care needs would require spending down assets and giving up choice. In response to concerns about funding future care costs, Congress passed The Long-Term Care Security Act of 2000. This act created a voluntary, payroll-deduction long-term care insurance program for Federal employees, annuitants, and other members of the Federal family, such as spouses and surviving spouses. More than 200,000 persons are now enrolled, including many members and former members of Congress. If you are among the approximately 20 million people eligible for the Federal LTC Program, go to www.LTCFEDS.com now (or call 1-800-582-3337) and look into this coverage. If you are not eligible for the Federal Program, call your insurance agent and find out if LTC insurance makes sense for you. Marilee Driscoll, President, Long Term Care Learning Institute, (508) 641-9393, Plymouth, Mass., www.ltc123.com, author of "The Complete Idiot's Guide to Long Term Care Planning," is the nation's leading consumer authority on strategies to pay for long term care. She is President of the Long Term Care Learning Institute.
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Dilemma of Long Distance Elder Care. If you move to care for an elderly person, you may have to resign your job or retire. Are you prepared for those financial realities? Will your entire family move? Are you prepared for the costs of separate living accommodations and travel expenses for the duration of the elder care period if the husband and wife both do not move? If you move the elderly person to your home, here is a list of issue you will face:
Many people are facing the necessity for making decisions about how much or how little elder care they can or will provide to relatives. Before you make any decision, talk to your financial advisor. Money may certainly not be the determining factor, but it certainly allows a decision to be made with more awareness of its likely financial impact. Debra Neiman, CFP®, Neiman & Associates Financial Services, LLC., Watertown, Mass., provides financial planning and investment management services individuals and families, both traditional and non-traditional. 617-744-1816 deb@neimanonline.com.
How to Protect Yourself from the Growing Crisis of Identity Theft. Identity theft is experiencing explosive growth. Sophisticated thieves acquire your personal information, and use it to access your accounts or to set up new ones in your name. This information is readily available, or easily stolen from unsecured mail boxes. Your credit rating can be destroyed quickly. Actual losses are seldom recoverable and often pale in comparison to the hassle factor. Fraudulent requests to have you verify e-mail addresses and passwords for Internet shopping may make it impossible for you to shop online. Stolen drivers licenses may implicate you in accidents you did not have. The average victim of a stolen credit card will see about $17,000 in excessive charges, with red flags on a credit report that must be corrected. The U.S. Postal Inspection Service recommends that consumers do the following at a minimum: • Secure your mail by obtaining and installing a secure mailbox (if your mail is not put through a slot in a locked house or garage door), or re-route your mail to a P.O. Box. •. Use a paper shredder for all personal documents before throwing them away. Pay particular attention to how carefully you destroy pre-approved junk credit card mail or blank checks from your credit card company. To stop pre-approved credit offers coming to your home, call 1-888-5OPTOUT. • Remove yourself from marketing lists by contacting the Mail Preference Section, Direct Marketing Association, P.O. Box 9008, Farmingdale, N.Y. 11735 or call 212-768-7277, or go to http://www.dmaconsumerhelp.org). • Regularly check your credit report at one of the three major credit agencies: Donald W. Nicholson, Donald W. Nicholson & Associates, Ltd., Wilmington, Delaware, is a fee-based financial planning firm serving the retirement and wealth management needs of professionals and business owners for almost 30 years. His son, Donald W. Nicholson, Jr., is a partner in the business. Contact them at 302-529-1500. E-mail dwnicholson@unitedplanners.com -- http://www.nicholson-associates.com.
More Banks Agree: It is Important for Bank Reps to Convert to Fee-Based Business Managed account assets under management are growing and these accounts are gaining the trust of both the investor and the bank investment representative. The landscape has changed for investors. Commission-based products are perceived to be a conflict of interest. One in four investors do not trust a financial advisor and eighty percent of investors cite commissions and loads as the reason for their lack of trust, according to the Securities Industry Association. The landscape has changed for bank investment representatives. They recognize the need to position themselves as consultants. Managed accounts require that the bank representative provide periodic reviews of the account for the client. These face-to-face meetings create relationships. The structure of managed accounts develops predictable recurring income. Most mutual fund managed accounts are over $200,000 – nearly four times the average mutual fund ticket, and most managed accounts are long-term money, with investments “sticking” for at least ten years, according to a study by Cerulli Associates.. In addition, managed accounts allow the advisor to access well-known mutual funds for their clients with no transaction cost. Account consolidation is likely, resulting in a larger amount of a client’s assets being rolled into a managed account. Long-term relationships build referrals, the key source of new clients for most bank representatives. As American workers face their retirement realities, they are seeking the help of an investment consultant. In turn, investment consultants are increasing services that they hope to offer. The top five investment services that consultants want to provide their clients include charitable giving consulting, elder care consulting, trust and estate planning, business planning and private banking, says a Cerulli report. Managed accounts allow bank representatives to leverage existing client relationships and align their own interests with those of their clients. Satisfied bank customers who consolidate their investments in managed accounts boost the profit margin at a bank. It is a win/win for banks to convert to fee-based business. To reach Ron Mastrogiovanni, FundQuest, Boston, call Sarah Anderson at 617-526-7391. FundQuest is the leading provider of customized Web-based managed account platforms for financial institutions interested in moving their representatives from commission-based to fee-based product sales. Sarah_Anderson@fundquest.com.
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