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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
INVESTMENTS AND WEALTH MANAGEMENT There is Never a Time When Performance Matters More Than Safety: Learning again the lessons of the Japanese Bear Market. After watching stock prices rise in 2003 and 2004, investors are once again focusing only on performance with little regard for risk. Even though long term results are what matter in retirement investing, too many investors get caught up in the short-term grass is greener thinking. Prudent investment advisors, who keep a proper balance between safety and performance, may under perform in an up market, but over entire market cycles, their approach is validated with reasonable returns and lower volatility. The lesson of the Japanese bear market makes the point very clearly. From 1989-1992, the Nikkei suffered through a tough cyclical bear market and lost 62%. After the carnage, the Nikkei stood at 14,768. Percentage wise, that was a little less than the NASDAQ lost between 2000 and 2002 in the U.S. Then in August of 1992 through June of 1994, the Nikkei gained more than 45% in a strong cyclical rally. Many market experts declared the bear market was over and there was no need to worry. Focus shifted from protecting assets to performance, a similar message to what investors are hearing in the U.S. today. Unfortunately, the "all clear" bell was premature. Prices on the Nikkei fell from June 1994 through June 1995 with a bottom at 14,507, a few hundred points below the 1992 low. The bear market in Japan was now five years old. From June 1995 to June 1996, the Nikkei had another impressive cyclical bull run. Once again, investors believed (hoped) the worst was finally over. Unfortunately for the poor Japanese buy-and-hold investors, the bear was not finished. From June 1996 to October 1998, prices fell to 12,879, almost 2000 points below the 1992 low. The bear market was now approaching its 10th year. From the October 1998 low, the Nikkei staged another incredible cyclical bull run, gaining almost 62%. But by now you know the story. The "secular" bear market continued. By April 2003, 14 years after the bear market started, the Nikkei hit 7,608, almost 50% below the 1992 low and more than 80% below the 1989 peak. With perfect hindsight, we can see that there was never a time in 14 years when performance mattered more than safety. In the past four years on the U.S. NASDAQ and the first four years (1989-1993) of the Japanese bear market, both had dramatic falls followed by a few good years. We know how the bear market played out in Japan. The larger question is: What does the future hold for the U.S.? In an investment environment where no one can guarantee you that we are not in a secular bear market or guarantee that the worst is over, it is important not to abandon a safety posture for your investments. Don't lose your long-term focus. Pay your advisors to be objective, not emotional. (Charts are available, call Beth Chapman 508-479-1033). PMFM, Inc.
principals are Tim Chapman and Don Beasley, Athens, Georgia. PMFM,
Inc., has $711 million 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, 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, posting positive returns in
each of their investment strategy composites every calendar
year since inception. Senior Living Decisions Will Impact Your Estate Planning: Selling your existing residence or second home may not be the best strategy. Financial options for senior living communities must be carefully evaluated. Well-off seniors are now facing a growing and competitive market when they begin to make decisions about easing their responsibilities of home ownership and housekeeping. A move to a senior living community no longer means signing up where there is an opening. Importantly, senior living communities are NOT assisted living that has come to be associated with personal care availability, on site, 24-hours a day. Today, senior living encompasses many choices, including high-end condos with concierge services and restaurants in what are being marketed as "Over 55" communities, targeting the affluent. Decisions about a senior living community need to be made more carefully than any previous housing decision. The financial arrangements and regulations vary between communities, and the affluent senior's commitments to the community must be evaluated in view of their estate planning. Many communities return up to 85% of the original sale price of the condo when the residents die or move to a nursing home, but the resident's family will receive no appreciation. There are often required extra fees for the country club/restaurant services, which provide a specific number of meals for a specific length of time. Couples thinking about selling a highly appreciated home or second home should always consult with their advisor before they put the home on the market. There are numerous strategies involving the sale of property, that when implemented, can save the family a great deal of capital gains tax on the sale as well as preserving dollars for investment that can benefit a family's beneficiaries for generations. Share your ideas and your information with your financial advisor and estate planning attorney before you sign a purchase and sale contract for a senior living community. The effectiveness of your estate plan depends on it. The Importance of an Investment Policy Statement in Good Investment Management. The most important first step to proper investment management is the creation of a personal investment policy statement or IPS. It is estimated that less than 1% of affluent households have a written statement and the less affluent the individuals less than 1/10th of 1% have heard of an IPS. Yet most people do not die without a will, or build a home with out blueprints and yet these very same people entrust their financial well being to a broker or advisor who may or may not have the skill sets , integrity or service mentality to effectively lead their clients to an appropriate portfolio. The IPS solves many, though not all, investing issues. The IPS is your financial blueprint for your financial home. Most importantly, it puts in writing your risk tolerance. An IPS will discuss not only your ability to take risk, but also your willingness to do so, two entirely different issues that are crucial when there is a disagreement post investment results. It is important for your advisor to know how many years you have before retirement. Your advisor must know your needs for present and future cash flow. It is essential for your advisor to know what you will need to withdraw from your portfolio, in addition to what might be available through social security, or pension benefits. Your tax sensitivities must be discussed. Are you in a high bracket, or low? Will the bracket be expected to change when you retire? Common wisdom is that your tax bracket will go down at retirement. Common experience for many high net worth families is that it does not. Family specific issues must be discussed and planned. Are there special needs children, a grown child's alcohol problem, a difficult in-law? When the appropriate questions are asked, the document puts itself together. The “forms” received from the traditional advisor network (wire house etc) are woefully inadequate and do not protect the investor nearly enough. A segment broadcast on CNBC last year spoke about a retired factory worker who, while employed, lived a simple but happy life never worrying about money. When he retired, he was referred to a Lehman Brothers broker who subsequently lost $600,000 out of a $750,000 retirement next egg in just over six months. He sued and Lehman countered saying he signed all the forms and knew what he was getting into. An IPS would not have necessarily stopped this from occurring, but it would have placed Lehman in an untenable position to argue that the client “knew the risks. An IPS should be delivered to all individuals managing money for the client, and a return receipt signature should be requested so there is confirmation that the manager has received the investment policy statement. Risk is unavoidable, but it is manageable. Create of an investment policy statement, with the help of a financial planner, so your portfolio will reflect your unique circumstances and all of your money managers will stay on the same page. Gary K. Hager, CFP, Founder and President, Integrated Wealth Management, Edison, New Jersey, a full service wealth advisory firm, serves as the primary financial resource for affluent families and closely-held business owners, providing state of the art planning solutions which effectively integrate the disciplines of Wealth Accumulation and Wealth Preservation. Contact: ghager@iwmco.com, 732-510-1611. Stock Options Require a Careful Strategy. Stock options offer the financial planner an opportunity to guide a client through a maze of planning and taxation issues. Mistakes can cost the option holder in either missed opportunities or additional taxation. A stock option grants you the right to buy a fixed number of shares of stock at a predetermined price during a specific time period. The price at which you can purchase shares with the option is called the grant price. The price of the stock when you exercise the option is called the exercise price. There are two types of stock options (non-qualified and incentive) each with their own tax considerations. A non-qualified stock option (NSO) is the more common type. When you exercise an NSO, you owe ordinary income tax on the difference between the grant price and the exercise price. A client may want to postpone exercising a stock option until a year in which they expect to have less income. A n incentive stock option (ISO) is more restrictive than an NSO. Although a client must hold onto stocks purchased with ISOs for at least a year, the client does not incur any income tax from exercising ISOs. Improper usage of the ISO will cause the ISO to lose its tax-favored status, changing it into an NSO. While ISOs do have a tax-favored status, they are subject to the alternative minimum tax. Prior to exercising ISOs, the client must understand the potential AMT impact of the options. When advising a client on the proper handling of stock options, the financial adviser must be aware of not only the rules relating to stock options, but also the tax implications. The adviser should involve the client’s tax-preparer in the decision process if the adviser does not offer tax advice. It is also important to point out to the client that the insider trading rules apply to stock options. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfshim@usinternet.com. Diversifying a Portfolio Beyond Typical Asset Classes, Including Commodities, May Help Stay Ahead of Inflation. Most economists and analysts believe that future stock returns will be in the 7% to 9% per year range on average. Bond and fixed income funds are expected to average in the 4% to 5% range annually. If inflation eats up even a modest 2.5% to 3% of these returns, investors are facing a future of significantly diminished expectations when it comes to their portfolio returns. Diversifying a portfolio beyond the typical asset classes may help investors who want to stay ahead of inflation. Investors know that a well-diversified portfolio is key to portfolio performance. By putting a portion of a portfolio in each of the major asset classes (stocks, fixed income, and cash), investors can maximize overall performance. The fact that these asset classes are poorly correlated - one may have a good year, while another has an off year - means that the good performance of one class tends to offset poor performance in another asset class in any given year. Historically, this has helped to provide better (and less volatile) portfolio returns overall. But with diminished expectations of returns for stocks and fixed income in the future, investors are looking for creative ways to improve overall portfolio performance. One way to do that is to add small doses of additional asset classes to a portfolio. Many professional investment managers already allocate 5-10% of a portfolio to real estate (usually via real estate investment trusts, or REITs.) Commodities are another asset class which can diversify a portfolio. Commodities are bulk goods - wheat, gold, oil, etc. - that are traded on an exchange. Generally, they make for risky and volatile investments. However, a few mutual funds are available that provide exposure to commodities while using sophisticated techniques to manage risk. One such fund is the PIMCO Commodity Real Return Strategy Fund. This fund uses derivatives linked to commodities such as oil, natural gas, grains, livestock, coffee, and metals. It also invests in Treasury Inflation Protected Securities (TIPS) that serve as collateral for the derivatives. This fund (and others like it, such as Oppenhemier Real Asset Fund) is likely to be much more volatile than stocks and fixed income. A measured exposure to this asset class - perhaps 3% to 5% of a portfolio - may be a good way to help investors in their quest to stay ahead of inflation. Susan Moore, CFP®, Moore Financial Advisors, Ltd., Watertown, MA, provides fee-only financial planning and investment management services for individuals and families. She specializes in services for non-traditional families as well as individuals in all stages of divorce. She can be reached at moore@mooreadvisors.com or 617-393-9999. Consumers Can Invest in Local
Real Estate Without Being Landlords.
In summary, this strategy gives investors a maintenance-free opportunity to make a reasonable return on their money by investing in their local real estate market. However, investors most familiar with investing in stocks, bonds and mutual funds who have little or no education at all about real estate investments should find an appropriate real estate education course that covers these issues in a clear way with all the pros and cons spelled out. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a mortgage lender and broker based in Ann Arbor, MI. Gibran has developed the Wealth Equity educational course to help investors avoid the common pitfalls of real estate investing while learning about real estate taxation, finance, cash flows, and how to properly calculate and compare risks and rate3s of return on various real estate investments. www.WealthEquity.com, 734-531-0180, gibran@nicholascity.com. Collecting Important Financial Documents: A Low Cost Employee Benefit With Huge Impact. Employers always struggle with their employees' benefit packages. They want to remain competitive, but they must keep costs under control. Retirement, disability, and life insurance are important and some firms even offer college planning services to help employees with college admissions and planning for college. The plain fact is, however, that employers have never offered their employees a structure for organizing their important financial documents, or a plan for dealing with financial realities when parents can no longer care for themselves, or a spouse doesn't wake up in the morning. The chaos caused by the need to admit a parent to a nursing home or the death of a parent, spouse, or child, for instance, can derail the employee for extended periods of time, a costly experience for the employer. There are dire consequences when a family has not gathered important documents in one file, in one location, that is readily accessible. Incomplete documents and incomplete information, outdated documents, and missing documents complicate life for those employees stepping up to the plate to be responsible in trying times. Here is a list of steps employers can offer to employees to prevent an important document crisis in difficult times:
Many employers feel that they can have very little impact on the personal lives of their employees, but that thinking does not hold up under scrutiny. Employers can offer guidelines for good organization of many important documents. Aiding the transfer of important documents from one spouse to the other, or one generation to the next, is a thoughtful employee benefit that reaps rewards in the speedy return of an employee to his job after a family dilemma has been solved quickly because all of the needed documents were readily available. Mark Kaizerman, CPA, CFP, is the author of "Beneficiary Directory: Your Personal System to Organize Your Important Documents and Guide Your Beneficiaries, a step-by-step to putting the most significant documents in your life in order. Quantity discounts for employee groups are available. Go to www.beneficiarydirectory.com. Kaizerman can be reached at 508-647-0830 x 13,. Media may receive a copy of the book by contacting the author at mark@beneficiarydirectory.com. Contrary to Popular Political
Opinion: Outsourcing is Terrific.
It is an indisputable fact that outsourcing
is terrific. It has no downside. It helps companies grow. It
is good for the U.S. economy as well as individuals. But this
statement certainly does not match the noisy political rhetoric from
politicians promoting a “jobs protection act” of some
kind.
Just think back to good old Honda Motor Company and how we all
felt about it in the 80's. Did Japan really destroy the economy
of America? Are we all working for them now? Is the Ford Motor
Company out of business? These are surely silly questions today,
but they were front page articles then, predicting doom for us
all.
Here are seven facts about why outsourcing rocks:
1. Corporate savings mean lower prices for you
Are you glad your new computer did not cost $10,000? When the
PC was first rolling into American homes, it could have cost that
much. Global sourcing of components has reduced the cost of hardware
by 30% since 1995 alone. 2. India is an investment that pays a 14% Return
- what an ROI! For every dollar US companies spend in India we have $1.14 spent
here. All those folks doing outsourcing work are using computers
and software that comes from the U.S. creating net value for the
US economy. 3. Outsourcing means sick people get better medical
care The cost of medical care is astounding, and the technology is
advancing so fast that even “affluent” Americans have
trouble paying the bill. If it costs 30% less to have an
MRI because the technician reading the scan is overseas, more people
who need them can have MRIs. Driving the cost of medical care down
makes it accessible to more people. Who is more important; the
one temporarily unemployed MRI technician or the numerous people
who may receive a life saving scan? 4. Job Churning. Job churning is sad it is
not terminal for anyone There are no buggy whip manufacturers left in Massachusetts and
you don't have to travel far to find a mill town that is no longer
making textiles. Cell phones have existed for about 25 years and
have been common for less than 10 - more than 200,000 people are
employed by cell phone companies today. No one is entitled
to a job, but many computer programmers have a sense of entitlement
that is just offensive. They knew the day they took their last
job that it was doomed. Our industry moves at lightening speed,
and the person who is hired as an expert in a particular programming
language today surely knows that ten years later no one will even
be using that language. 5. Would you like to be promoted? Code writers are the bottom of the food chain in IT. When
old geeks (yes, I qualify at 31) sit around and share a latte,
we all remember “putting in our time” writing code
and moan about the hours and the stress – back in the days
before we got promoted. Overseas programmers have US supervisors – who
are paid more and who like the work better. 6. Three million jobs is a very small number The most dire predictions about outsourcing say that the US may “lose” as
many as 3.3 million jobs by 2015. Wow, that sounds like a
lot doesn't it? There are about 150 million people employed in
the US and about 2 million of them change jobs every month. That's
right , 2 million every month – a fogire that puts that 3.3
million by 2015 number right into proper perspective. 7. Even Arnold the Governator knows outsourcing
is good Arnold Schwarzenegger’s politics
do not improve my opinion of his movies, but this year the Governator
did something pretty smart: he vetoed Assembly Bill 1829. (an
anti-outsourcing bill) His letter to the assembly included this
thought: “While this bill purports to be about saving jobs,
it would actually be detrimental to our economy and the creation
of new jobs in this state.” Bingo! Gold star for Arnold.Good
business in a good economy requires change. Outsourcing
requires that our economy change, which has always led to better
things for Americans. KISS Computing is full-service web
strategy firm, providing design, implementation, long term
evaluation, and action steps for change that keep web site
profitability above $5000 a month for small and mid-size companies. Ross
Lasley, KISS Computing, Eastham, Mass., 508-255-9550
x401, ross@kisscomputing.com |