June 2007
A Monthly Newsletter Source of Financial Sources
Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts!
INVESTMENTS
• A Portfolio Strategy for the Engaged Investors Who Want to Beat the Pros:
Give Yourself Over TO BOB
PERSONAL FINANCE
• Housing Decisions at Retirement or Divorce – Look Carefully at the Numbers; Often Keeping the Marital Property is Not a Good Bet
ESTATE PLANNING & RETIREMENT
• Big Windfalls Take Careful Planning: The Decisions Made in the First Seven Days are Critical
• Aging Trends Merge that Support Growth of Family Reverse Mortgages
PRACTICE MANAGEMENT
• HealthView Tools Now Provide Financial Representatives with Accurate Out-of-pocket Medical Expense Projections Matched with Product Recommendations to Fund Projected Health Care Expenses.
INVESTMENTS
A Portfolio Strategy for Engaged Investors Who Want to Beat the Pros: Give Yourself Over TO BOB:
Many investors can improve their portfolio results as well as beat the pros on Wall Street, says Bob Markman, Portfolio Manager of the successful Markman Core Growth Fund (MTRPX). The key is to embrace the ‘TO BOB’ approach, an ironic coincidence of name, but not a recommendation to simply give your money to him!
TO BOB is an acronym for Trade Opportunistically the Best Of Breed. Markman believes that the ‘home version’ of his strategy is easily adaptable for the average investor. The strategy has two parts: First identify ‘Best of Breed’ companies. Then proactively ‘manage’ the positions, taking advantage of short-to-intermediate term stock price volatility to increase or decrease positions.
Best of Breed, is not just shorthand for a very good company. There are several specific criteria that go into determining best of breed, the most important of which are:
• Unique and durable branding (if branding is a factor)
• Market segment domination
• A corporate culture that encourages ongoing innovation
• A high degree of ‘Destiny Control.’
Using this template, you’ll soon come to two conclusions: First, that it is difficult to fit many popular technology companies into this framework. The need for market segment domination, along with sustainability and high destiny control is a high bar that most tech companies do not reach. Second, most of your selections will tend to be large caps. While there are certainly exceptions, most companies that have established durable brands, dominate their market and have sustainable advantages will, by virtue of those characteristics, have already grown into a large company.
Some examples of best of breed stocks in a range of industries are Proctor and Gamble, Apple, Toyota, Goldman Sachs, McDonalds, Altria, Boeing and Valero. While others choices may vary, in most cases this approach will result in a portfolio of some of the best known, most followed names on Wall Street. This is a good thing. It means that, from a research standpoint, investors are on a level playing field with even the highest muckety-mucks on Wall Street. Particularly since Sarbanes Oxley, 99.99% of what there is to know—factually—about large companies is already well disseminated on the Street, readily available to any investor. Of course, the conclusions one draws from that information may be correct or incorrect, but it doesn’t change the important reality that even a manager at Fidelity is not likely to have more actionable information on Apple than the typical investor can dig up.
It is important to note that the Best of Breed investment strategy does not require an investor to waste limited time and financial resources in two areas often touted by professional money managers: getting to know management and pouring over financials statements. Companies that meet the four main criteria have, almost by definition, top management and healthy financials. And while there will always be exceptions, they are so few and far between as to not merit significant effort.
The BOB strategy is solid common sense approach-- nothing particularly innovative. That is where the Trade Opportunistically portion of the strategy kicks in. The small, engaged investor has a significant and often untapped advantage. This advantage is in how you manage the positions you’ve acquired through the best of breed approach.
In the upcoming July “Trends from Ink&Air”, Bob Markman will offer Part II of the TO BOB strategy and explain how an engaged investor can make short term hay out of long term Best of Breed holdings.
Robert Markman, -- ortfolio Manager has used this approach to guide the Markman Core Growth Fund (MTRPX) to five star status for the trailing three and five year periods ending 5/21/07. The fund is a dynamic and responsive large cap growth, no-load mutual fund with a portfolio strategy developed to adapt to the changing investment environments
www.markman.com 952-920-4848.
PERSONAL FINANCE
Housing Decisions at Retirement or Divorce – Look Carefully at the Numbers; Often Keeping the Marital Property is Not a Good Bet
Planning for retirement, or going through a divorce is a time when you will be required to make many financial decisions about housing that will affect your financial security. Be wary of overspending on housing in retirement, or accepting the wrong assets, such as the marital home, as a result of division of your family’s wealth during a divorce.
“Use assets” and “liquid or “income generating assets” are important terms. Common use assets include your home and automobile. While it is necessary to have a place to live, your home won’t generate income to live on, even if you don’t have a mortgage.
The scenarios below are relevant whether you are planning retirement or planning for the finances of divorce.
Mary announced to her financial advisor that she was getting a divorce. She wanted to know if she was going to be financially stable after the divorce. The couple’s total net worth was approximately $2 million and splitting all of the property 50/50 would result in net assets of approximately $1 million. However, since half of the net worth was equity in the home, one of the spouses could have easily accepted the home as their share of the divorce. Mary still worked, but her earnings were not significant. Because she needed assets that would generate income, she readily agreed that it would not be in her best interest to keep the home.
One year later, after the divorce had been settled, Mary returned to her advisor. Her marital home had been sold (her husband did not want it either) and after selling costs and legal costs to settle the divorce, she had approximately $900,000, split evenly between taxable assets and retirement accounts.
She had determined that she needed approximately $20,000 a year to supplement her salary and wanted to know if she should invest the money in a portfolio consisting of stocks and bonds, or use the money to purchase a condominium.
She was paying $1,500 per month for rent for a one-bedroom apartment, but was concerned that the rent would continue to go up and wondered if she would be better off if she bought a condominium. After driving around the neighborhoods where she would like to live, she felt confident that she could find a condominium for $600,000.
Scenario 1
It was assumed she would stay in her condominium for the remainder of her life. The rent calculation assumed an annual increase of 2%. Based on her family’s longevity, Mary was projected to live to age 98. Based on these assumptions, projections showed that at the age of 98, Mary’s annual rent would be approximately $40,000.
Prior to retirement Mary needed to withdraw $20,000 annually from her portfolio to supplement her salary. After retirement, Mary would have approximately $50,000 a year to live on, after she paid her rent and income taxes.
Scenario 2
In this scenario, Mary can purchase a home for $600,000 and that she would withdraw $125,000 from her portfolio for the down payment and related costs. This would allow her to acquire a mortgage for $480,000 at a 7% fixed interest rate for 30 years. Based on these assumptions, it was possible to forecast that her annual expenses, including mortgage, taxes, insurance and homeowners association dues, would be approximately $45,000. For Mary, because her taxable income was so low, the income tax deductions for interest and property taxes made little difference.
Based on this forecasted expense, the first key conclusion was that even in the final year of her life, the annual rental expense would be less than the mortgage and other related costs.
It would again also be necessary to withdraw money from her portfolio to supplement her salary, but the amount of withdrawals would increase from $20,000 annually to approximately $45,000 annually.
Because Mary would be withdrawing so much money from her portfolio for the down payment and to supplement her income, during retirement she would only have approximately $24,000 a year to live on, after mortgage and the related expenses and income taxes (approximately 1/2 of the amount she would have to live on if she just rented).
Scenario 3
It is possible to quickly conclude that for Mary, renting was a better scenario. However, what about the value of building up equity in a home?
To answer this question, the same assumptions about the purchase of the condominium as in Scenario 2 were used. However, it was assumed Mary sold the house in 15 years and then would rent for the remainder of her life. We assumed that she would net approximately $270,000 from the sale of the home in 15 years, which would then be added back to her portfolio and generate income for the remainder of her life.
This scenario would give Mary approximately $50,000 a year to live on during retirement, which was basically the same amount she would have if she rented for the remainder of her life. Based on this conclusion, one might be compelled to buy the house and sell it at some future point. However, since there was no guaranteed advantage, Mary’s conclusion was that she was better off not purchasing a home.
Obviously, this conclusion does not apply to everyone. Individual circumstances vary. However, it does point out that just as accepting the home as your share of a divorce settlement may not be the wisest decision, it may not make sense to buy a home after a divorce, or as you enter retirement for that matter, for the same reasons.
Barry Taylor , CFP, is a portfolio manager with Bingham, Osborn & Scarborough LLC (BOS), a San Francisco and Menlo Park, California-based registered investment advisor with approximately $1.5 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. Barry's long experience as a retail small business owner informs his commitment to protecting capital and planning for asset growth. Barry Taylor -- barry.taylor@bosinvest.com 415-781-8535.
ESTATE PLANNING & RETIREMENT
Big Windfalls Take Careful Planning: The Decisions Made in the First Seven Days are Critical
Whether you win the lottery or receive a large benefit payment from an insurance claim, what you do with your windfall can be very indicative of how you will spend your retirement. Money is emotional and managing money well is a discipline. You can make decisions to carefully invest your windfall that results in comfort and security in retirement, or you can spend the windfall now -- a plight of many lottery winners -- and be required to work until you are 75 years old and then live marginally on social security.
With large sums, such as lottery winnings, the first decision, often made within the first seven days, is whether you will take your winnings as a lump sum or take them as an annuity payment every month or year for the rest of your life. This decision has to be made to access any of the money you are due, so often it is made in haste without looking at the options.
A lump sum amount is alluring, because it is so much money. Accepting a lump sum without having a plan for that money can be devastating to the individual, the group of workers, or family who have the winning numbers. Finding a financial advisor to run "what-if" scenarios is an imperative. An advisor can show you the difference between your choices:
• Taking a lump sum to an investment advisor to invest it conservatively, in a moderate, balanced portfolio that you can expect to deliver a reasonable rate of return between 5 to 7% a year over the next 20 years;
• Spending the lump sum in a year or two making no plans to invest any part of it;
• Taking annuitized payment that will deliver a fixed rate of return for 20 years (losing 3-5% a year of spending power of those payments because of inflation) and spending the entire annuity payment every year for 20 years making no plans to save any of it.
• Taking the annuitized payment, talking with a financial advisor, and investing a specific portion of that annuity payment every year for 20 years to help with retirement costs.
An advisor can help you assess life expectancy and health issues. Older retirees or younger winners with health issues may need to access the lump sum to achieve specific goals and because their longevity is limited. Those with longer longevity expectations need to plan ahead working with professional advisors so that they make the correct decision in choosing between a lump sum or annuity payments, and so that an investment portfolio with a portion of their winnings can grow until their retirement.
Here is an interesting case study. Workers in an Ohio company held a winning ticket for an $8 million lottery payout. There were six workers. Five of the workers took a lump sum payment and spent all of their winnings almost immediately. Joe, the sixth worker, age 40, selected the annuity payment and then asked relatives for a referral to a financial advisor. The financial advisor set up an investment portfolio into which Joe puts a portion of every annuity payment on an annual basis.
His annuity payment is $ 220,000 after taxes. Starting in year one, Joe and his wife elected to invest $120,000 every year. Over 20 years, their contributions, earning 7% a year, will grow to a little over $5 million at the time of Joe's retirement at age 60. Or, with savings like this, he can even elect to retire early. Clearly, the annuity payment, carefully handled for twenty years, will protect Joe from spending his winnings down to zero as his colleagues have done, and will greatly enhance his retirement.
Windfalls can open the possibility of great opportunity and future choice, or they can plunge families into despair after the assets are spent and nothing is left for retirement. Make good decisions about your windfalls and if any of your friends, family or colleagues tell you they are coming into a large amount of money, suggest they see a financial advisor and tax accountant before they accept their winnings or insurance benefit.
Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers.
Aging Trends Merge that Support Growth of Family Reverse Mortgages
Family reverse mortgages are, predictably, going to become a major part of estate planning in the near future.
Think about this scenario that is repeated over and over again in every state and community. Mom and Dad own an attractive, second home or primary residence in a resort community. There is more than one child in the picture and Mom and Dad are living on a relatively modest retirement income in comparison to the value of their home. Further complications are the very real expectations of the cost of health care and long term care in the retirement years (for a couple from $400,000 to $800,000 during retirement) and the low number of retirees who own long term care insurance policies. Add to this scenario the recent estimate that shortly, at least 1/3rd of those living longer than 85 years, will have Alzheimer’s disease requiring expensive in-home care or expensive institutional care.
In an environment where one or both of the spouses are likely to live a life span of nearly 90 years, the cost of uninsured healthcare and long term care will have to come from somewhere. Fortunately, some of those retirees have children who are doing well. have created investment portfolios, and are interested in keeping the family resort home in their possession.
Family reverse mortgages, increasingly, will be used to solve this family dilemma. Just as anyone can create a legal loan, any family can create a legal family reverse mortgage. It is a legal document, structured exactly as a bank would structure it, including interest paid to the mortgage holder, that allows the child wishing to invest in the parents’ home to support the living expenses of parents through the reverse mortgage. Each month, the child (or children) wishing to invest in ownership of the parental home can make payments to their parents who can then use this money to cover their health care costs and for needed maintenance on the home.
The family reverse mortgage discussion will bring out the inability of some of the family’s children to buy out the others. Given the high appreciation experienced in resort communities over the last six to eight years, it is almost always the case that one child can afford to buy out the others, and as difficult as this is for the less wealthy children, it becomes an issue of who can support Mom and Dad during their retirement and making arrangements so that child receivs at least the value of the reverse mortgage and related interest as a reward .
When no child can afford to buy out siblings or buy the house direct to support Mom and Dad, a bank reverse mortgage may be considered. The market is demanding newer reverse mortgage products. Put off getting a reverse mortgage as long as possible and you may be surprised by the changes in this industry.
Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net.
PRACTICE MANAGEMENT
HealthView Tools Now Provide Financial Representatives with Accurate Out-of-pocket Medical Expense Projections Matched with Product Recommendations to Fund Projected Health Care Expenses.
Understanding out-of-pocket medical expenses is only half the retirement planning solution. Now, financial representatives and their investors can now use WorldCare North America's HealthView system, integrated web-based planning tools, to predict accurate out-of-pocket medical expense projections based on the investor's current health, lifestyle and medical history.
Understanding the amount of money needed to cover one's medical costs in retirement is valuable information. The complete solution to retirement planning, though, is developing an investment strategy with appropriate investment products that help an investor prepare to fund medical costs in retirement .
WorldCare North America's HealthView software may be offered as an additional service, customized to support the recommendation of a product or integrated into a proprietary financial planning tool. The Personal HealthView Reports are the tools financial representatives need to help their clients understand the financial implications of their health and lifestyle as well as plan for future medical expenses. Ron Mastrogiovanni is the president of WorldCare North America, a provider of medical advisory services including Web-delivered health assessmen programs that offer personalized health risk tools and analyses. The company also offers independent medical consultation services through some of the nation's leading research institutions, including Brigham and Women's Hospital, Dana-Farber Cancer Care, Duke University Health System, Massachusetts General Hospital, and UCLA School of Medicine. WCNA's platform of services is provided to consumers through financial institutions, affinity programs and employers. To reach Ron Mastrogiovanni, call Joanna Flynn, WorldCare North America – 617-250-5167.
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