May
2006
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!
INVESTMENT MANAGEMENT
• Hard Assets Have Always Been Good for a Diversified Portfolio
Can There be Too Much of this Good Thing?
• Managing Your Portfolio Should be the Simple Part of Your Wealth Complexities
• The Increasing Value of the Raw Material in a Penny:
Why investing in industrials makes sense
• Put More Investment Dollars in Your Pocket With Inflation Strategies
RETIREMENT
• Taxes in Retirement Can Create Nasty Surprises
for the Unprepared
PERSONAL FINANCE
• A Solution for Baby Boomers with Early Long Term Care Claims
• Strategies to Help Your Children Buy a Home
• Lessons Around a Child’s Allowance Can
Impact Adult Spending Habits
401(k) STRATEGIES
• Low Utilization of Online Advice Services Drives Plan Sponsors to
Look for One-On-One Advice for 401(k) Participants
INVESTMENT MANAGEMENT
Hard Assets Have Always Been Good for A Diversified Portfolio
Can There be Too Much of this Good Thing?
Hard assets are well known to have a negative correlation with stocks, making them an appropriate part of a diversified portfolio. Despite common misperceptions, a diversified portfolio of stocks and bonds is only the first step in protecting against portfolio losses in a market downturn.
Investors include hard assets in their portfolios as further protection against asset loss. Gold, oil, real estate, lumber, steel, plastics, and raw materials, among others, can diversify a portfolio in ways that stocks and bonds cannot do alone. At the moment, gold and oil are performing exceptionally well, while bonds are down, as expected, as a result of interest rate increases over the last year.
Demand has doubled for many hard assets over the past 20 years. The best choices for diversification are those that hard assets that are in somewhat limited supply, where demand increases interest in the asset and pushes up price levels. Certainly oil fits this criteria.
Increasing demand for oil in the U.S., China and India does not seem likely to abate soon. The U.S. government will soon argue that developing the Alaskan Refuge is important for national security.
Pay attention to macro economic changes as they occur. Portfolio diversification including hard assets is always something to consider and even more so when economic forces are pushing their prices up, resulting in portfolio profits for you.
Michael S. Finer, CPA, CFP, Major League Investments, Salem, Mass., provides family office services to athletes and celebrities. He is one of only 900 National Football League Registered Player Financial Advisors certified to provide full service financial advice to National Football League players. He can be reached at michael.finer@majorleagueinvest.com, or 978-740-1011 x 10.
Managing Your Portfolio Should be the Simple Part
of Your Wealth Complexities
Retirees and pre-retirees get to a point where they may want to relinquish some control of their portfolios. Such "giving away" of personal responsibility for managing a family's portfolio means that the investor must find a money manager they can trust with a solution that works.
Many advisors recommend a simple investing solution that will allow their clients to get on with their lives. It is the same solution that the nation's largest pension plans (IBM, GE, Boeing and United Technologies) all are using -- indexing for a large part of the equity assets under management.
The simplest method of managing money is to create a core portfolio using U.S. Treasuries for the fixed income portion of the portfolio and two exchange traded index funds for the equities portion. For instance, history suggests that 70% in the Total Stock Market Exchange Traded Index Fund with over 3000 stocks and 30% in the Barclays Bank Foreign Exchange Traded Index Fund (EFA) would be the preferred allocation for the equity part of the core solution.
This is the same solution recommended by David Swensen, the manager of the Yale Endowment, clearly outlined in his book "Fundamental Success: A Fundamental approach to Personal Investment."
In 1990, the Nobel Prize was awarded for the research that led to Modern Portfolio Theory. Professor Markowitz, Ph.D., University of Chicago, proved that a portfolio with less volatility will have a greater compounded rate of return. Professor Emeritus William F. Sharpe, of Stanford University, proved that a stock portfolio that included all the stocks in the market has the least volatility. These two academic discoveries led to a breakthrough in investment methodology in 1990, the Modern Portfolio Theory.
In 1975, John Bogle, Magna Cum Laude, Economics, Princeton University, created the first Index Fund, a basket of all the stocks in an investment category that represents the total U.S. Stock Market. Investing in the total U.S. Stock Market Index Fund and the Total Foreign Index Fund, Provides a portfolio with all the stocks, which in turn leads to less volatility and historically, a higher compounded rate of return over time (past performance is no guarantee of future returns).
Experts agree about using stock market index funds.
Harvard Endowment Management CEO, Jack Meyers, says "Most people should simply have index funds so they can keep their fees low and their taxes down. No doubt about."
"The chances of identifying the very few managers who will beat the market are close to nil," says Professor of Economics at Princeton University, author of "A Random Walk Down Wall Street, Burton G. Malkiel.
Too often, money managers want clients to think that managing money is a difficult, complex endeavor. It is not. The complexities of wealth management occur when the client's needs and desires require paying attention to wealth transfer, health care, real estate, death taxes, income taxes, and legal documents. Look for an advisor who offers a simple investing strategy and is prepared to help you maneuver the wealth management complexities of the rest of the story.
Pearson Financial Services, Dennis, MA, is the author of "The 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
The Increasing Value of the Raw Material in a Penny:
Why investing in industrials makes sense
The historical value of the “Raw Material Penny Index” (a weighted average of the zinc and copper prices that make up a penny) has changed from less than 40% of the value of a penny last summer to just over 100% in May of 2006. This price appreciation may want to make you think twice about depositing your extra pennies in the cup people use to make change at the local Starbucks. This price appreciation in a basic material, a key mining industry output, and a material essential to many manufacturing processes, makes the case that the industrial side of the economy and the market are likely to see positive out-performance going forward compared to the consumer/retail side. The penny needs only a bit more price appreciation and it soon will be time to raid the penny cup at your local Starbucks.
From zinc and copper to construction tires ($40,000 per tire for the biggest mining machinery), seal pelts (up over 50% from last year for the highest quality) and heating oil, industrial raw materials prices have seen large escalations over the last twelve months. Fueled by a synchronized global economic rebound and inflation in the developed world intensified by demand increases from China, India and the former Soviet block countries and jolted by a recent surge in speculative activity, the so-called “demand pull” inflation may stick around for awhile. Profits in these industries are often driven by pricing power.
One of the biggest price increases of all over the last two years has been the cost of money. The going price of money is, of course, denominated in percentage interest charged per year. Since 2003, the Federal Reserve has raised rates from 1% to 4.75% and seems unlikely to stop until rates are north of 5%. The cost of mortgages, credit cards, auto loans and student loans has risen substantively. Each of these (and others) directly affects the American consumer. As a nation of spenders and debtors rather than savers, higher rates dig deeply into discretionary spending, slowing housing and demand for other consumer items, both large and small.
Another drag on the consumer has come from the global confluence pushing the price of energy up yet again to record highs. In the “Best Economic Headline” competition, the winner this spring is easily Dr. Ed Yardeni in a piece entitled “America's Road Warriors Collide with Nigeria's Rebel Warriors.” With Nigerian oil output crimped by 25% due to rebel violence, tensions building over Iran's nuclear objectives, continued demand increases from China, India and G8 Countries, OPEC output at maximum levels and Americans about to enter the peak driving season, some economists suggest that gasoline prices may reach $4/gallon this summer. It continues to appear that long-term energy holdings remain an excellent investment and should provide a significant hedge to weakness in the consumer area.
Mike Vogelzang is President and Chief Investment Officer of Boston Advisors, LLC., a Boston-based, employee-owned investment advisory firm with $2.3 billion in assets under management for both private advisory clients and institutional endowments, foundations, and municipal pension plans. Mike can be reached through Beverly Flaxington, Chief Operating Officer, by email: Beverly.Flaxington@bostonadvisors.com, or 617-348-3102.
Put More Investment Dollars in Your Pocket With Inflation Strategies
How can you put more investment dollars in your pocket? By addressing one of the more insidious threats to your investment dollar — inflation. In 2005, a large cap, equity portfolio, as measured by the S&P 500 Index, returned 4.91%. Thus, an investor with $500,000 in this portfolio earned $24,550, before taxes, for the year. Or did he?
Inflation, as measured by the Consumer Price Index for Urban Consumers, clocked in at 3.40%, which means that of the $24,550 (4.91%) earned by our investor, $17,000 (3.40%) quietly disappeared at the stroke of midnight on December 31, 2005.Thus, our investor actually pocketed only $7,550 (1.51%) for all his hard work during the year. Alas, even less when you consider that Uncle Sam and the investment advisor lined up for their fair share of the gains as well.
Why? Inflation. A threat capable of turning $24,550 into $7,550 in a single blow — i.e., in a single year. Never mind the ravages of inflation over the multiple years of an investor’s long-term investment horizon.
There is much talk of inflation in the headlines today and no shortage of debate on whether the weak dollar and rising oil prices represent short-term anomalies or environmental conditions that are laying the foundation for future inflation. Don’t wait for the debate to be settled. Inflation-proof your portfolio with instruments such as Treasury Inflation-Protected Securities (TIPS), Real Estate Investment Trusts (REITS), and other vehicles that ensure that $24,550 on December 31 will remain $24,550 on January 1 of the following year.
It’s one of the smartest investment moves you can make.
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
Taxes in Retirement Can Create Nasty Surprises
for the Unprepared
Far more people in retirement have to pay estimated taxes than is commonly
understood. A combination of pension payments, investment income and IRA distributions create income streams that may not have the necessary federal withholding. To avoid nasty tax surprises, a person must establish lines of communications between an investment manager and a tax preparer.
Recently, an investor received an upsetting notice from the IRS stating that
he owed the federal government an additional $33,000 in taxes. His investments had generated a large amount of short term gains that his tax adviser was unaware of until he began preparing the tax return after the end of the year.
The basic rule regarding estimated taxes is that you must pay at least 90% of your total tax bill or at least 100% of the previous year's tax bill. To avoid running afoul of the IRS in this important area, an investor must keep abreast of his investments in taxable particularly if those accounts are generating income and communicate this knowledge to the tax preparer. Income generated in this area can fluctuate greatly from year to year.
With regard to IRA distributions, many people have federal withholding automatically deducted at the time of distribution. The amount withheld, however, may not be sufficient to cover the entire tax due. This can be a problem particularly if a person takes a large, one-time distribution from a qualified plan. The additional income could launch the person into a higher tax bracket.
Investors must understand the nature of their investments and the likelihood that they can generate unexpected taxable events. This means understanding the investment style implemented by your investment advisor, the taxable impact of that style, and the necessity of informing your tax preparer of this information.
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. pfs@usinternet.com
PERSONAL FINANCE
Strategies to Help Your Children Buy a Home
In many major metropolitan areas, where starter home prices begin at $700,000 and much higher, young people in their mid-20s to mid-30s see buying a home as a distant dream. So it is no surprise that more and more young adults are turning to mom and dad for help. The level of parental financial support in these high-priced purchases should raise questions as to the best financial planning strategies for the parents – strategies that will not jeopardize their own financial goals. Here are several strategies for parents to consider:
Co-Signing a Loan
If your children cannot qualify for a large enough loan, one option is to co-sign their loan application. While this is still an acceptable practice with lenders, it is not always a good idea. All parties to the loan are liable for the full indebtedness. Thus, if your children can’t pay, you will be responsible for the debt. Your children’s debt payments will be blended into your debt-to-income ratio making your ratio too high for some lenders to approve. Seeking lenders that use only the children’s debt-to-income ratio will likely result in a better rate.
Gifting the Down Payment
In 2006, parents can give up to $12,000 each year to each of their children without having to file a gift tax return. Thus, a married couple could give a total of $24,000 to each child or $48,000 to their child and spouse. If your children need more than $48,000, you might consider gifting the annual maximum over two calendar years by gifting $48,000 in December and $48,000 again in January.
Private Loan
If structured properly, a private loan from you to your children can be very attractive. You can set an interest rate for the loan that may be far less than going market rates resulting in lower payments (and lower total interest paid) for your children, and a higher interest rate than you might receive on a bank or money market account. It is very important to set a rate that is at least as high as the minimum rate set by the IRS, called the Applicable Federal Rate (AFR). Otherwise you can be taxed for the imputed interest. The AFR is still usually well below most banks’ best mortgage rates. Moreover, the note can be secured by the property, offering additional protection to you.
To benefit your kids, you can also elect at your discretion to forgive interest and/or principal payments, paying attention to the same annual gift limits.
Co-Ownership Agreements
Co-ownership agreements, often called equity sharing agreements, are a formal way for you to share ownership of a home with your kids. You provide the down payment while your child assumes a mortgage for the remainder. He or she deduct the mortgage interest and receive the capital gain exemption of $250,000 for individuals or $500,000 for married couples when the home is sold (so long as the children have lived in the property for at least two of the last five years). However, when the home is sold, you get back your original deposit plus some predetermined share of the profits (which is specified in the agreement). Moreover, you may be able to deduct the ongoing property expenses and depreciation.
Planning Ahead and Your Kids’ Credit Rating
Encourage your kids to save and discuss their credit ratings with them. If they do not know their credit ratings, send them to http://www.myfico.com to find out. Most young adults do not understand how much of an impediment poor credit can be to the mortgage application process. Make sure your kids understand that they must have a several year history of few to no late payments, several sources of credit and experience with both revolving credit card debt and installment debt, such as car loans, each handled appropriately, before you are willing to even begin discussions of home ownership.
When helping your kids buy a home in today’s still very expensive housing market, it is extremely important to understand the impact of each strategy on your overall finances. The numerous tax, estate planning, and other financial planning implications to consider make it very important for parents to seek competent advice from professionals such as a Certified Financial Planner™, accountant, attorney and loan consultant.
Kevin Dorwin, CFP®, MBA 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. BOS has eight principals plus eighteen team members working on behalf of their clients, including seven credentialed portfolio managers with direct client contact and eleven operations, administration, finance, compliance, and systems staff with responsibilities related to client accounts. Kevin.Dorwin @bosinvest.com or 415-781-8535.
A Solution for Baby Boomers with Early Long Term Care Claims
New insurance product allows Baby Boomers to potentially have access to 400% more benefits at a reasonable price. The Maximum Lifetime Benefit Acceleration Rider (hereby called the "Value Rider”), available from the Loyal American Life Insurance Company® Security Advantage™ LTC insurance product, helps Baby Boomers by increasing their long term care pool of money for use during early claims.
In the past, when a Baby Boomer under age 65 bought a policy, they were not expecting to see the benefits until their eighties. For example, someone age 56 bought a policy worth $365,000 in total benefits. They were not expecting to use the benefits until they reached their 80s.
But health and longevity are unpredictable. Just ask someone who either has a stroke, is diagnosed with multiple sclerosis, or early-onset Alzheimer's while they are in mid-career. Consider this example: a policyholder buys LTC insurance at age 56. That year, he suffers a stroke as a complication to elective knee surgery. He has a legitimate claim against his LTC insurance policy and would use up his benefits at a much younger age than intended --- $365,000 divided by $73,000 ($200 dollars a day benefit) in five years.
With the Value Rider in the Security Advantage™ product, the policy's pool of money increases, from $365,000 to $1.4 million, (the value his policy would be worth at age 85, after inflation benefits compounded over the years.) The rider is structured to provide full accessibility to the greatest amount of benefit that the policy is structured to provide regardless of when the need arises.
The typical 57-year-old has not yet finished saving for retirement, is in his or her greatest income-producing years, and may have children in college. LTC payments from the Value Rider will allow him to stay at home This can give a spouse the option to continue working or to return to work, instead of being the primary caregiver.
Everyone agrees that including a lifetime benefit on an LTC insurance policy is optimal, but many consumers cannot afford such a policy. Lifetime benefit period policies are, of course, much more expensive than a typical limited benefit period policy; for example, with a two year benefit period or a five-year benefit period. The Value Rider gives Baby Boomer customers buying limited benefit (less than lifetime) policies the peace of mind that, should an early claim arise, they will receive up to four times what an ordinary LTC insurance policy would provide.
For Costs and Complete Details of Coverage:
Product is not available in all states. Limitations and exclusions apply. Underwritten by Loyal American Life Insurance Company®
Agents may call Ron Hagelman, Republic Marketing Group, New Braunfels, Texas, Ron@rmgltci.com or 830-620-4066, or Barry Fisher, Barry@rmgltci.com or 818-489-1839
Lessons Around a Child’s Allowance Can
Impact Adult Spending Habits
There are three components in structuring a child's allowance:
1. The age at which he will first receive it.
2. How much allowance he gets.
3. What restrictions there are on how he may spend it.
How the allowance evolves and how you discuss it and the purchases your child makes with it can be some of the most valuable financial educational tools you have.
There are many right approaches to determining how much a child gets for an allowance. One rule of thumb is that a child can be responsible for $1 per week for every year of their age. This rule can change depending on what the child will need to spend money.
It is perfectly sound parenting to help your child decide what he may spend his allowance on and create a range of choices. It is likely that he will ask if he can buy something (or simply go out and buy it) that never occurred to you to exclude from your list of acceptable purchases. However, the time to think through the "allowable" purchases and the "don't you dare" purchases is important.
For example: toys, candy, a treat at the school cafeteria, or a meal at the mall rather than waiting to eat at home may all fall under allowable uses. He needs to understand, though, that you will never allow him to spend money on something dangerous or to have or do something he knows you don't want done, such as tattoos, piercings, music with profane lyrics, or whatever falls into your perception of inappropriate.
Or you can create more general parameters. Anything that falls away from family values that is purchased will be taken away, so he will have lost the money expended.
Accept that your child will make decisions greatly different than you would have made for him. This is all part of helping him make responsible decisions around money. Whether he buys a red shirt (your choice) or a green one (his choice) this decision is a far cry from his coming home with a shirt with a profanity across the chest, which of course, he will forfeit.
As your child matures, both the allowance and its uses can be expanded. Many people disagree about whether or not allowances should be tied to household chores. Some people feel chores are part of being in a family and should be done regardless of whether or not an allowance is involved. Others feel that an allowance for chores introduces the concept of earning money as well as responsibility at home. Valid arguments can be made either way. If you tie allowances to chores, be consistent. In fact, consistency in the consequences of your child's decisions around spending his allowance is one of the greatest teaching points you will have regarding money. Expect mistakes, but make certain that the underlying lessons are not lost. It is far easier to make really bad purchases at the allowance level than at the adult level. Don't rescue the bad decisions. Feeling the consequences of those decisions is what brings about maturity in your child regarding money.
Linda Leitz, CFP, Pinnacle Financial Concepts, Inc., Colorado Springs, Colorado, is author of “The Ultimate Parenting Map to Money Smart Kids,” as a book or as a CD. She specializes in helping families and individuals meet their long- term financial goals. She also helps those in the midst of divorce resolve financial issues through her company Divorce Solutions, Inc. She can be reached at 719-260-9800 or Linda@brightleitz.com
401(K) STRATEGIES
Low Utilization of Online Advice Services Drives Plan Sponsors to Look for One-On-One Advice for 401(k) Participants Thoughtful benefits directors of organizations both large and small have no confidence that their employees are using the very robust and interactive retirement planning tools most 401(k) plan providers make available to plan participants.
“The utilization rate of online planning tools is very low,” says Emily Talley, Tanner Health System, Carrolton, Georgia, an organization made up of three hospitals and two multi-physician practices, with an employee group that is largely female. Tanner signs up employees automatically with a 2% deferral to their 401(k) plan. Talley frequently hears from employees who admit they have been meaning to increase their deferrals, but simply have not gotten it done.
“We had been looking for someone to come in and speak one-on-one with our employees for a long time. However, in the past, objectivity was hard to find – most firms offering one-on-one wanted to speak with our doctors, not our nursing staff, for instance,” she says. “We did not want to unleash product sales people on our employees.”
As a result of the low utilization of online planning tools, benefits directors like Talley are now looking for one-on-one financial advisor/plan participant meeting options from an advice provider in the hopes that a personal meeting will knock their employees out of complacency about their retirement savings.
Talley recently chose 401(k) Toolbox as the objective advice provider for her company.
401k Toolbox offers two levels of service,
• "Manage-it-for-Me" allows employees to become discretionary clients of an investment management firm (PMFM, Inc., founder of 401k Toolbox) offering conservative active and passive asset allocation.
• “Do-it-Yourself” service provides the more investment savvy do-it-yourselfers with a regularly updated review of the markets, and an independent review of the investment options available in the plan utilizing 401k Toolbox’s proprietary ranking system, as well as strategic asset allocation portfolios.
In the one-on-one meetings, the financial advisor uses a proprietary, interactive, web-based planning tool that allows the employee to offer as much information about their financial situation as they wish. The advisor can very quickly tell them if they are, or are not, on track for a secure retirement. “Even if our employees do not choose to have their assets managed for them, they can sign up for the one-on-one meeting,” says Talley.
She plans to set up a benefits staff table outside the one-on-one meeting rooms so that employees can go online immediately to increase their deferrals.
“The ability of an advice provider to deliver one-on-one meetings that change the way plan participants save for retirement will become the most important differentiating factor in serving the needs of plan sponsors in the near future,” says Tim McCabe, Vice President for Marketing, PMFM, Inc., Plan sponsors know they are going to be held accountable for the success of their 401(k) plans. Recognition of Low participation rates and low utilization of advice tools by employees will fuel the growth of one-on-one meetings. Firms such as 401k Toolbox who can deliver objective advice will at the forefront in providing services that 401(k) plan participants have always needed.
PMFM, Inc. manages $800 million as of April 30, 2006. The firm has increased its assets under management by nearly 40% in each of the last three years. Principals Tim Chapman and Don Beasley, experienced investment advisors with offices just outside Athens, Georgia, have worked with thousands of clients and now offer their services to plan sponsors through 401k Toolbox. Jud Doherty, CFA, is the chief financial officer for the firm, and Tim McCabe is VP Marketing. Tim McCabe -- 800-222-7636 or Tim.McCabe@pmfm.com
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