Wealth Building Strategies

Inflation is Very Much Alive--Don't be Fooled by the CPI

2011-12-16T15:34:00.000-05:00

According to the Labor Department, the Consumer Price Index (a measure of inflation) was unchanged in November. Additionally, over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

This might seem like a tepid inflation rate, right in line with historical figures. But, dig deeper. Despite the November figure, the index for food costs has risen 5.9 percent over the past year with all six major grocery store food groups up at least 4.4 percent. The gasoline index has increased 19.7 percent, while the household energy index has risen 3.1 percent with the fuel oil index up 25.0 percent.

Most of us live in a universe where food and energy are a staple of our daily survival. I have long complained, to whomever might listen or read my comments, that the CPI index is not an accurate reflection of the true cost of living and anyone planning their financial future should keep that in mind.

When it comes to financial planning, retirement and investing, inflation is a real threat to your security. Under-estimating the true impact of inflation on your purchasing power can mean the difference between achieving your financial objectives or not. So, keep it real.

Puzzling Times for Wealth Managers

2011-11-21T09:59:00.000-05:00

From the dailybusinessreview.com

Even for the comfortably wealthy, it's hard to know which way to turn when investing in a crisis-filled world.

Check out the video.

Balanced Investment Strategies Can Weather Turbulent Markets

2011-11-06T09:24:00.000-05:00

A balanced global investment strategy may help mitigate the longer-term impact of negative events on disciplined investors.

This graph shows performance of a balanced investment strategy following a few historical crises. Each crisis is labeled with the month and year that it occurred or peaked. The subsequent one-, three-, and five-year annualized returns start from the first day of the month following each crisis.

Although a global investment strategy would have suffered losses immediately following most events, the financial markets recovered over time, as indicated by the positive three- and five-year cumulative returns.

Negative events such as these may tempt investors to flee the financial markets. But diversification and a long-term perspective can help investors apply discipline to ride out the storm.

Composition of the Normal Balanced Strategy

* 7.5% S&P 500 Index
* 7.5% Fama/French US Large Cap Value Index
* 7.5% Fama/French US Small Cap Value Index
* 7.5% CRSP 6-10 Index
* 15% Fama/French International Value Index (7/81–12/10)
and MSCI World ex USA Value (1/11–9/11)
* 15% International Small Cap Index
* 40% Merrill Lynch One-Year US Treasury Note Index

Source: Dimensional Fund Advisors

Good news for savers....IRS increases retirement plan limits

2011-10-24T17:25:00.000-04:00

The Internal Revenue Service announced on October 20, 2011, cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

Things to note include:

•The elective deferral (employee contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government's Thrift Savings Plan increased to at $17,000 (up from $16,500).
•The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500. So if you are 50 or older, your max contribution can be $22,500.

The total contribution limit, including employer contributions (ie. Profit Sharing contributions), has increased from $49,000 to $50,000.

IRA contribution annual limits will remain at $5,000 (or $6,000 if age 50 or older).

When it Comes to Estate Planning it Pays to Plan Ahead - Ask Steve Jobs

2011-10-10T20:27:00.002-04:00

As the entire world now knows, Steve Jobs died last week, a sad day indeed. The man was a legend and innovator that truly changed the world and life as we know it. But, apparently his genius transcended the digital world, he was also a great planner (or at least he hired some genius advisors that helped him develop a great plan).

In this blog and on our website (www.cathypareto.com) we have often stressed the importance of financial planning, not just with regard to investments or retirement, but also with regard to estate and end of life planning.

Could this article be true?: Billionaire Steve Jobs Died Tax-Free, Experts Say. I'm sure more will be revealed in time.

Bottom line is, it pays to plan ahead. You don't need to have wealth of Steve Jobs' proportions to ensure your legacy and maximize what you leave to loved ones.

For more on estate planning essentials, check out our Knowledge Center and the tutorial I wrote for Investopedia on estate planning.

Filtering Out the Noise in Investments

2011-08-02T08:00:00.004-04:00

Investors are inundated by an avalanche of daily financial information, whether by mail, email, internet surfing, blogs, RSS feeds, TV....the list goes on. The constant, rapid fire flow of information (particularly the last several weeks) is enough to shake even the most seasoned investor's confidence.

It’s so difficult for the financial consumer to separate the relevant investment or planning information from the financial pornography. My advice is to limit your intake of information to a few credible sources (ie. Wall Street Journal, The Economist, Financial Times, Barron's), and definitely tune out of the incessant financial chatter on channels like CNBC that only exist to create spin and sell ads. When it comes to investment knowledge and strategy, remember—garbage in, garbage out.

The recent S&P downgrade of US sovereign debt, to AAA+ to AA+, sent a shock-wave through the markets yesterday. U.S. stocks tumbled in a rout that sent the Dow Jones Industrial Average down 5.5%, or 634.76 points, to 10809.85 -- plunging below 11000 for the first time since November -- as investors fled from risky assets in the first trading session since Standard & Poor's downgraded the federal government's credit rating. Despite the downgrade by Standard and Poor's, U.S. Treasuries remained a haven for many investors despite the downgrade.

Although many reports may blame this session's precipitous drop on the S&P downgrade, the sell-off really came in response to what the downgrade signified, which is that the US economic outlook isn't as strong as what many had thought (GDP really needs to be higher than current levels). In fact, the Federal Reserve meets today to review potential policy changes (there is buzz about possible QE3). Of course, the threat that the tenuous fiscal and financial conditions of Europe could deteriorate and create contagion have added to concern. The story continues to unfold.

It is our judgment that the biggest impact of the S&P downgrade of U.S. Treasury obligations will be headline risk and its effect on investor and consumer confidence. The downgrade is only a part of the volatility story. Europe's situation is quite serious and it is in our best interest that they can contain their financial problems. But, at the end of the day, it is the fundamental health of the U.S. economy that is adding to this vicious downward cycle (growth, unemployment, fiscal responsibility, etc).

We believe that the markets were way oversold and irrational behaviors have taken center stage. We believe the markets are very reasonably priced at the moment and see buying opportunities for clients willing to accept the current volatility.

Inevitably downward market volatility causes stress, anxiety and in some cases panic. We are, after all, only human (particularly since the challenges of 2008/2009 are still so fresh on our minds). We are telling our clients that now is not a time to lose sight of their long-term goals and time horizon. Short-term volatility is to be expected, and doesn't mean that your portfolio isn't working (especially if you have a well diversified portfolio). While it goes against all of our human instincts, this is the time to remain disciplined and rebalance--it's not the time to panic.

Debt Ceiling Debate - Impact on Your Portfolio?

2011-07-28T11:18:00.000-04:00

The debt ceiling debate rages on in Washington and as we tick closer to the deadline, people are worried. Considering many are still healing from the financial crisis of 2008/2009, and those wounds are still quite fresh, some investors might mistakenly let fear dictate their investment decisions during such an uncomfortable period.

We thought we might address some of the questions we have received regarding this issue.

How do we expect the markets to react to a downgrade -- and how would investors be impacted?

The issues unfolding in Washington are really two separate events: a) raising of the debt limit and b) the downgrade in the credit rating. Truthfully, whether or not the debt limit is raised or not, many advisors fear that the credit rating of the U.S. is already at risk and our standing in the global community has taken a hit. I doubt very much that the credit rating agencies would retain our existing rating, unless they see fundamental changes to our expenditures AND revenue generation.

Frankly, I am surprised that we are this far into the timeline without any clear resolutions from Congress. Unfortunately, while I believe ours is the greatest nation in the world, the political theatrics are being played out on a global stage and this does not bode well for the reputation of the U.S. as a credit safe haven going forward, even if a rating downgrade becomes temporary. No U.S. president in history has ever defaulted on the nation's debt, so we are living in interesting times (to say the least).

What's the worst that could happen? What's more likely to happen?

To some extent, at least as of this writing, the markets seem to be mostly shrugging off the possibility of a default or downgrade. Surprisingly, the S&P 500 is still up 1.37% for the month of July amid the political negotiations and the bond markets have been equally as resilient so far. For government bond investors, a change in credit rating might not mean much since multiple factors really affect bond prices and yields. Furthermore, a rating of AA (which is what the U.S. would likely be downgraded to) is still considered a very strong credit rating. All that said.....

I think the greatest risk is the psychological damage a downgrade would cause. If a default and subsequent downgrade occur, the general impact would be negative for the U.S., which has enjoyed a AAA bond rating from Standard & Poor's for 70 years, nearly as good as cash or gold. We can expect interest rates to up, which raises our cost as a nation to borrow money and finance its national debt. Of course, that would further exacerbate the budget challenges we already face. Further, a downgrade would also increases the cost for consumers and small businesses to borrow money, individuals with adjustable rate loans could quickly face higher interest payments on credit cards or adjustable-rate mortgages and consumer loans (ie. auto, student loans) would also carry higher interest costs.. The value of the dollar would decline and the stock markets would be temporarily disrupted with higher volatility likely. All of these factors will further dampen negative consumer sentiment, which is not good when we are grappling with already high unemployment and a sluggish economic "recovery".

With regard to the stock market, remember that the markets are only as efficient as its participants and investors are often quite irrational in their thinking and their behavior. So, I'd expect, at least in the short term, that nervous investors might abandon or reduce stock holdings out of fear. Any knee jerk reaction would be a mistake on their part. Investors should be positioned for market fluctuations that are appropriate to their personal risk profile and circumstances as part of their long term planning. Assessments like that should be done before market events, not after.

What are you telling your clients to do (or not do)?

We have been systematically re-balancing our client portfolios all year (booking profits from strong equity returns the last two years) and realigning portfolios to ensure we retain the clients target risk profiles. We also have been reaching out to clients to assess their financial plans, running stress tests of their existing as well as alternate portfolio strategies as part of their ongoing retirement planning.

Additionally, part of our communications to clients have served to try and keep them informed and let them know we are closely monitoring the events. Here's a snippet from a recent email client memo:

We have already taken steps to adjust some stock weightings through our rebalancing efforts. In some cases, we have maintained some additional exposure to cash or short term bonds, where appropriate for the client. Our stock portfolio is still very broadly diversified across the world with nearly 20,000 stocks represented in our asset mix. We should be reminded that although the capital markets will always face economic cycles and challenges, the long term prospects for profits remain a viable reason to keep a long term exposure to stocks.

Are any of these issues of particular concern to retirees or pre-retirees? Would your advice for that demographic differ from what you would tell younger folks?

Clearly, retirees are most at risk since most depend, at least in part, on their portfolios for income. In fact, many of the calls of concern we have received have been from that specific demographic. However, most retirees are also quite moderately balanced between risky assets and bonds, so to a large extent much of their risks have been contained. Younger folks are more able to withstand market cycles and volatility and should use short term disruptions in the market or any potential pull backs as a chance to buy into the market at lower prices for the long term.

Any thoughts on the continuing rise of gold?

We've owned gold/ metals and commodities for several years as part of a comprehensive investment strategy, and are comfortable with our existing allocation. However, I would not be piling into more of that as a defensive strategy at this point....gold may certainly have more room to run, but at existing price levels, buying more now may carry risks.

Investing Rules to Live By

2011-06-21T21:33:00.000-04:00

One of my favorite clients sent this with me today. It's simply too good to keep to myself, so I'm sharing it with you. Here is the source link and below are the highlights. Forget the reference to "New Year's resolutions", these are words to live by everyday when it comes to money management.

With the average investor’s dismal track record of investing in the stock market, we thought it would be helpful to adopt a set of 10 New Year’s resolutions that may help you succeed where others fail. These resolutions were originally penned by Brad Steiman of Dimensional Fund Advisors.

1. I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.

2. I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.

3. I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.

4. I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).

5. I will stick to my financial plan because it is time in the market—and not timing the market—that matters.

6. I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn't done well recently) and selling some of what has performed well.

7. I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.

8. I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.

9. I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.

10. I will keep my cost of investing reasonable.

The above article was published in the Kitsap Business Journal on March 3, 2011.

Women are Better Investors -study says.

2011-06-20T17:46:00.000-04:00

A new study affirms what I've already suspected--women make better investors than men! Who can argue with that? On the surface this may appear to look biased, after all, I am a woman. But, the proof is in the pudding. A couple reasons why women are more profitable than men when it comes to investing:

-they take fewer risks as investors
-they tend to buy and hold
-they are more thoughtful and methodical in their investing
-they tend avoid risky, anxiety-producing investments
-they refrain from frequent trading
-they are less emotional when it comes to investing (yes, it's true ironic as that sounds)

Why do women exhibit such profitable self control?

According to the study, women behave this way because they are less confident about taking risks than men. Or perhaps men are too confident. The women also don't want to engage in the anxieties of hasty trading, another factor that contributes to their more conservative, and ultimately more successful, investment strategies.

Sorry fellas, girls rule in this case.

"Inside Job" Documentary a Must See

2011-04-20T06:31:00.000-04:00

This documentary is a must-see! Just when you think you couldn't hate greedy Wall Street bankers more (and greedy politicians/economists), this film will thoroughly disgust you. Makes me feel so powerless and insignificant.....and MAD!!!

The Quiet Force in Personal Finance

2011-03-11T16:08:00.000-05:00

Yesterday, a client was kind enough to bring me an article recently featured in Bloomberg BusinessWeek, titled "The Quiet Force in Personal Finance". It essentially highlights the fact that, little by little, Registered Investment Advisors (like me) are chipping away at market share that was once monopolized by traditional brokerage firms (commissioned based brokers, salespeople, etc.) Today, RIA's manage over $1.7 trillion in client assets.

Why the sea change? The article states "The RIA's appeal stems from the idea that their goals are aligned with those of their customers. Unlike stockbrokers, they are bound by a fiduciary duty, meaning they MUST put their clients' interests ahead of their own. Stockbrokers are under no such obligation." Registered Investment Advisors have no incentive to sell someone's product. We represent one group, and one group alone--our clients. At least for this financial advisor, it sure feels great to be on (what I consider) the right side of the industry. Thanks for sharing Mr. M!

The Current Aftershock

2011-03-10T13:42:00.000-05:00

Using an illustrated timeline, David Booth (co-founder of Dimensional Fund Advisors) chronicles US stock market performance in four periods since World War II. His review suggests prevailing market sentiment is often wrong and that investors must stay disciplined through all market environments to pursue their long-term goals.

More Evidence to Support Passive Investing Strategies

2011-03-05T07:46:00.000-05:00

Released semiannually, the SPIVA Scorecard weighs in on the passive versus active debate by providing performance comparisons of active funds and their associated benchmarks. The 2010 year-end Scorecard indicates that most U.S funds underperformed their benchmarks in nearly every category. Results are more favorable for international equity funds.

Investor Behavior Can Be Detrimental to Your Wealth

2011-03-02T22:54:00.000-05:00

Here's a video worth sharing.

Research indicates that humans are not naturally wired for prudent, long-term investing. Scott Bosworth, Vice President and Regional Director of Dimensional Fund Advisors, describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

Important Tax Updates You Need to Know

2010-12-14T11:48:00.000-05:00

One of my business associates passed this great info along to me....thought it was worth sharing with you. Click on link for a more extensive read.

The tax “compromise” brokered by the White House and Senate Republicans has been reduced to legislative language in a bill entitled “Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010.” The bill extends - for an additional two years, through 2012 - most of the provisions of two major bills that were scheduled to expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (known collectively as the “Bush tax cuts”). It also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act (the Obama “stimulus” bill). The compromise is scheduled for vote in the Senate within the next few days and, if eventually enacted into law, as expected, is estimated to cost approximately $850 billion.

Source: : AALU Washington Report

Your Taxes: Forgiveness or Cancellation of Debt

2010-12-02T10:31:00.001-05:00

As a Certified Financial Planning practitioner, I often get questions from readers about the tax treatment of debt forgiveness, particularly since the economy tanked in 2008. While I can provide some general advice with regard to tax planning, I defer technical subjects like this to tax professionals who specialize in tax compliance and planning. Here's an interesting little blurb from a business associate that's worth sharing.

Author: Marila Hurtado, Ocariz, Gitlin & Zomerfeld, LLP (a respected Coral Gables, FL CPA firm)

The unstable conditions of the economy during the past few years have financially affected most of us. Many individuals have become unemployed; consequently, defaulting on loans and losing their homes.

Lenders have to forgive these debts and are required to issue
Form 1099 C for the cancellation of the debt. The amount reported on these forms may be taxable to the individuals on their tax returns.

Certain situations listed below may allow for the exclusion of cancellation of debt income:

• Qualified principal residence indebtedness
• Bankruptcy: debt canceled in a title 11 bankruptcy case is not taxable
• Insolvency: if insolvent immediately before the cancellation
• Qualified Farm Indebtedness
• Qualified Real Property Business Indebtedness

Although these items may not be taxable, taxpayers are still required to report information regarding the cancellation of debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Form 982 must be attached to the federal tax return.

The exclusion of the qualified principal residence applies to debt used to buy, build, improve, or refinance a principal residence and is limited to $2,000,000 when the filing status is married filing jointly. In cases where the home mortgage loan is simply modified and the individual retains ownership of the residence, the basis in the property may have to be reduced.

The tax implications of forgiveness of debt can be quite complicated and vary depending on the taxpayer's circumstances. More information on canceled debt may be found in Publication 4681 or you may contact Ocariz, Gitlin & Zomerfeld, LLP at 305-444-8288 begin_of_the_skype_highlighting 305-444-8288 end_of_the_skype_highlighting.

Retirement Account Owners Over 70 1/2 Don't Forget Your Minimum Distributions!

2010-11-18T22:55:00.001-05:00

Retirement account owners (ie. Traditional or Rollover IRA's, 401k's, 403b, Profit Sharing, etc.) who are over 70 1/2 years old must remember to take their required minimum distributions (RMD) before year-end. Failure to take the correct withdrawal amount before December 31st will lead to a stiff penalty! This requirement was temporarily lifted in 2009, but is back in force this year.

As a refresher, you must take your first RMD by April 1 of the year after you turn 70 1/2. If you wait until April 1 of the year after you turn 70 1/2 (rather than taking your first RMD that same year), you'll have to take another RMD by December 31 of that same year. After that, you'll be required to take your RMDs by December 31 of each following year. If you don't take your distribution by year-end, you are subject to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount that was actually withdrawn. To calculate your RMD, your total account balance as of the preceding year is divided by your life expectancy (found in IRS Publication 590). Distributions are not required from Roth IRAs, which grow tax free forever.

More Who Render Investment Advice Would be Fiduciaries Under Proposed Regs

2010-10-24T16:56:00.000-04:00

This is a good thing for everyone, except traditional brokers and insurance agents that is. The regulators are finally trying to level the playing field in the financial industry by imposing fiduciary standards across investment professionals, at least i the retirement plan space. Imagine that, all people that call themselves “financial advisors” will have to place their client’s interest ahead of their own….novel idea! Wait....wasn't that already understood?? Any business owner or retirement plan participant should continue reading....

Source: Pension & Benefits Updates on Checkpoint Newsstand tab 10/22/2010

DOL's Employee Benefits Security Administration (EBSA) has proposed changes to the regulatory definition of a fiduciary under ERISA by broadly defining the circumstances under which a person is considered to be a “fiduciary” by reason of giving investment advice to an employee benefit plan or a plan's participants.

Current definition. Under ERISA, plan fiduciaries are personally liable for plan losses resulting from a violation of a number of duties, including a duty of undivided loyalty, a duty to act for the exclusive purposes of providing plan benefits and defraying reasonable expenses of administering the plan, and a “prudent man standard” duty of care. According to ERISA § 3(20)(A)(ii) , a person is a fiduciary to the extent he, among other things, “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.” However, existing DOL regs narrow the statutory definition of “investment advice,” so that for advice to constitute “investment advice,” a person (who does not have discretionary authority or control with respect to the purchase or sale of securities or other property for the plan) must:

(1) render the advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
(2) on a regular basis,
(3) pursuant to a mutual agreement, arrangement, or understanding, with the plan or a plan fiduciary, that–
(4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that–
(5) the advice will be individualized based on the particular needs of the plan. (Labor Reg. 2510.3-21(c))
In addition, in ERISA Op Letter No 76-65A, 1976, EBSA further limited the term “investment advice,” concluding that a valuation of closely held employer securities that an employee stock ownership plan (ESOP) would rely on in purchasing the securities does not constitute investment advice.

Proposed definition. EBSA noted that while the definition of who is a fiduciary has not changed in 35 years, both the retirement plan community (with a shift from defined benefit plans to defined contribution plans) and the financial marketplace (with the types and complexity of investment products and services available to plans increasing) have changed significantly. Therefore, EBSA believes there is a need to re-examine the types of advisory relationships that should give rise to fiduciary duties on the part of those providing advisory services. In particular, EBSA stated that its enforcement efforts are finding a variety of circumstances, outside those described in the regs, under which plan fiduciaries seek out impartial assistance and expertise of persons, and these persons significantly influence the decisions of plan fiduciaries, and have a considerable impact on plan investments.

Accordingly, in order to better protect the interests of plans and their participants and beneficiaries, EBSA has proposed to update the “investment advice” definition. Under the proposed definition, subject to certain conditions, two requirements would have to be met for a person to render “investment advice” for a fee or other compensation, direct or indirect, to an employee benefit plan, and thus be considered a plan fiduciary.

First, a person would have to be doing any of the following on behalf of not just a plan or plan fiduciary, but also a plan participant or beneficiary:

(1) provide advice, or an appraisal or fairness opinion, concerning the value of securities or other property;
(2) make recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property; or
(3) provide advice or makes recommendations as to the management of securities or other property. (Prop Labor Reg 2510.3-21(c)(1)(i))

Second, a person would have to meet at least one of the following conditions, either directly or indirectly (such as through or together with any affiliate):

(a) represent or acknowledge that it is acting as a fiduciary within the meaning of ERISA with respect to providing advice or making recommendations described above;
(b) be a plan fiduciary within the meaning of the other provisions of ERISA § 3(21) (that is, by exercising any discretionary authority or control with respect to plan management, or having any discretionary authority or responsibility in plan administration);
(c) be an investment adviser within the meaning of §202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); or
(d) provide advice or make recommendations as described above under an agreement, arrangement, or understanding, written or otherwise, between such person and the plan, a plan fiduciary, or a plan participant or beneficiary that such advice may be considered in connection with making investment or management decisions with respect to plan assets, and will be individualized to the needs of the plan, a plan fiduciary, or a participant or beneficiary. (Prop Labor Reg 2510.3-21(c)(1)(ii))
The proposed regs would include a series of limitations to prevent certain persons from being considered fiduciaries under this definition. These limitations would exclude persons selling investments to a plan, so that the plan should know that no independent advice is being proffered; persons providing investment education information and materials; and various service providers under participant-directed defined contribution plans. (Prop Labor Reg 2510.3-21(c)(2))

The proposed regs provide that a “fee or other compensation” means any fee or compensation for the advice received by the person from any source and any fee or compensation incident to the transaction in which the investment advice has been rendered or will be rendered. For example, this includes, but is not limited to, brokerage, mutual fund sales, and insurance sales commissions. Also included are fees and commissions based on multiple transactions involving different parties. (Prop Labor Reg 2510.3-21(c)(3))

EBSA noted that its proposed definition does not depart from its existing interpretation that, as a general matter, a recommendation to a plan participant to take an otherwise permissible plan distribution does not constitute investment advice, even when that advice is combined with a recommendation as to how the distribution should be invested. However, EBSA is requesting comments on whether and to what extent the final regs should define the provision of investment advice to encompass recommendations related to taking a plan distribution. In particular, EBSA is interested in information on other laws that apply to the provision of these types of recommendations, whether and how those laws safeguard the interests of plan participants, and the costs and benefits associated with extending the regs to these types of recommendations.

Roth Conversions Now Allowed in Employer Plans

2010-10-03T22:19:00.000-04:00

One of the best wealth building tools of our time is the Roth IRA or Roth 401k/403b. As a refresher, traditional IRAs/401k's are funded with pre-tax dollars and defer taxes on investment gains until the day you withdraw the funds. When funds are withdrawn from the traditional IRA/401k, they are taxed as ordinary income (your highest tax bracket). Conversely, Roth's, are funded with post-tax dollars but all of the investment earnings grow tax free and avoid taxes when they are withdrawn (assuming it’s a qualified distribution).

It used to be that even if your employer retirement plan (401k/403b) allowed Roth contributions, existing plan balances could not be converted to a Roth until you left the company and rolled over your money. That is no longer the case.

As of September 27, 2010, employees with 401k or 403b accounts can do a Roth conversion without taking money out of the plan — but only if the employer takes steps necessary to permit these conversions. Click here to learn more about this.

How Retirement Planning Shortchanges Women

2010-09-16T21:48:00.000-04:00

I've been writing about women and money related issues for several years now. Here's a recent Wall Street Journal article on the subject that's worth sharing. Some highlights:

*Analysts say the industry sometimes shoehorns women into retirement-savings formulas meant for men. But two important variables, income and life expectancy, are very different for women -- generally, they earn less and live longer. Many advisers specializing in women's finances say that means women should invest more aggressively in their younger years. In practice, women tend to be more conservative, keeping a higher percentage of their money in low-risk investments such as cash than men do, according to Cogent Research.

*Financial planners say it's common for married women to assume that their spouse's savings will do the heavy lifting. But in practice, women are more likely than men to spend part of their retirement alone, making it even more important for them to have their own plan.

*Conflicting styles of communication may have a lot to do with why women feel ill-served. Experts generally agree that women prefer advisers who address their needs holistically, educating them about their choices and explaining how they can reach long-term goals.

For more info on financial issues for women, check out this article on my website www.cathypareto.com

Today is National 401(k) Day....what's the state of affairs in your plan or account?

2010-09-10T17:31:00.000-04:00

401(k) Day is an annual celebration spotlighting the importance of employer-sponsored profit sharing and 401(k) plans. A good 401(k) plan can boost your chances of a secure retirement and, perhaps even allow you to retire sooner—if you take advantage of it. Employer contributions and the benefits of tax deferral can be a welcome boost to your bottom line in retirement.

So, when is the last time you took a look at your employer's 401k plan? How often do you re-balance your investments? Do you even know what you are investing in? Are you maxing out your contributions?

Why not make every day 401(k) Day?-- here's how:

* Enroll in your company's 401(k) plan
* Increase your contribution to the 401(k) plan with every pay raise
* Take control of your savings
* Ensure your 401(k) investments are on target to get you where you need to be
* Shift your asset mix as needed to stay on course
* Prepare for detours on your journey toward retirement
* Learn about available investment options from your plan sponsor, if they
aren't helpful then take the initiative to learn on your own
* Check your account balance at least quarterly, reallocate funds as needed
* Work with your 401(k) plan administrator or an independent (fiduciary)
financial advisor
* Retirement is more expensive than you think, so make sure you are prepared
to reach your retirement destination

Finally, if you change jobs, don't forget to rollover your old plan into an IRA Rollover that gives you greater flexibility and fund choices. Read here to learn more.

Are ADR's or Mutual Funds Better for Global Diversification?

2010-08-18T14:24:00.000-04:00

The benefits of international investing cannot be denied. There have been countless articles and papers written on the subject already that are beyond the scope of this article. But what exactly is the best method of gaining international exposure in your portfolio? Should you consider exposure to foreign companies via American Depository Receipts or are mutual funds a more optimal solution?

American depository receipts (or ADR’s) are securities created by a U.S. bank that represent shares in foreign companies that are held at the bank. An ADR may represent a portion of a foreign share, one share or a bundle of shares. ADR’s themselves are not stocks, but certificates held by U.S. banks. Like U.S. common stock, ADR’s trade on U.S. stock exchanges and pay dividends (subject to U.S. taxation).

ADR’s, like most foreign mutual funds, are denominated in dollars, but they do not eliminate the potential currency risk associated with investing in foreign markets. So, when the dollar is weak, investment returns in foreign positions are usually more robust. Inversely, when the dollar rallies against foreign currencies, ADR’s from those countries will fall more than if shares were held by direct investors in the company.

Unfortunately, if your objective is to achieve global diversification in your portfolio, ADR’s are quite limiting. When you buy an ADR, you are gaining representation in one foreign company, a concentrated risk by most prudent standards. Furthermore, most ADR’s are limited to mid to large capitalization companies. So, even if an investor owned every traded ADR on the exchange, he/she would end up owning something similar to an EAFE index, but at a much higher acquisition cost.

We can all agree that the purpose of including foreign stocks in a portfolio is to control risk and maximize return. However, these dual objectives cannot be obtained solely with international large cap exposure (which is all that the ADR would provide). In order to accomplish your goal you should also include foreign value, foreign small, foreign small value and emerging markets. These simply cannot be attained with ADR’s.

So, for access to foreign markets, international mutual funds are a better alternative. They have the ability to provide broad global representation while spreading risk across hundreds of companies, sectors, and countries around the world. The aforementioned asset classes like foreign small, foreign small value et al are all available to investors.

It should be noted that because international stocks are more costly to trade, foreign funds typically carry higher expense ratios than their domestic counterparts. Furthermore, the dividends of international stocks are subject to foreign taxation—even when the recipients are tax-exempt in the US (like a pension plan). Taxable investors, however, can receive credits for foreign taxes paid. Of course, cost conscious investors should consider global index funds or exchange traded funds to keep costs to a minimum.

Yet despite the potential cost and foreign tax implications, international mutual funds (unlike ADR’s) allow investors to capture a broad array foreign exposure. When soundly combined with other domestic asset classes, international exposure is an essential building block in any optimal portfolio, and mutual funds (not ADR’s) provide you with the best tools to achieve that goal.

Keep Tabs on Your Credit Report--for free!

2010-07-22T14:40:00.000-04:00

Everyone knows how important it is to maintain good credit. You need good credit for many things nowadays, ranging from buying a home, renting an apartment, buying/leasing cars and even landing certain jobs.

It used to be that monitoring your credit was not very transparent and obtaining your credit information was a tedious process. But, that's no longer true today. Consumers can now see their credit reports and every detail on them. Knowing what's on their reports, people can dispute errors and see how they can improve their scores. They can even spot identity theft much sooner.

So, why don't more people monitor their credit, especially when you can do it for free?

Did you know....Americans are entitled to a free credit report every 12 months from each of the three credit bureaus (Equifax, Experian and TransUnion). However, there is no law about getting your credit score (which is based on information in your credit report) for free. You can get your credit report from AnnualCreditReport.com. It is a good idea to request a report from each of the companies and check each one.

Word to the wise....be smart about where you sign up to get a credit score. Many companies are only looking to sell you their credit monitoring services and products (think of that annoying T.V. commercial with the catchy songs and the singing dorks). Other sites don't necessarily provide your FICO score, which is the most commonly used credit information.

How the Expiring Bush Tax Cuts Affect You

2010-07-08T08:21:00.000-04:00

Here's one worth sharing from SmartMoney.com. Higher tax rates are coming, make no mistake about it. After all, someone has to pay for the mountain of debt that keeps growing in the U.S., right?

Read on to see how the Bush tax cuts will affect you.

Higher Tax Rates for All

You may have been led to believe that only individuals in the top two brackets will face higher federal income taxes when the Bush cuts go bye-bye. Not true! Unless Congress takes action and President Obama goes along, rates will go up for everyone -- not just a sliver of the wealthiest Americans

You should consult with your financial advisor and/or tax professional now to see what, if any, strategies you should consider in preparation for higher taxes.

Deciding Between Stocks and Bonds

2010-06-04T15:20:00.000-04:00

Choosing a basic stock-bond mix is an important first step in portfolio design. Although the decision may appear simple, it can have a profound impact on your wealth.

Portfolio theory explains the value of making a deliberate, strategic decision about the proportion of stocks versus bonds to hold in a portfolio. The basic premise in structuring a portfolio is that all investors face two important decisions: (1) deciding how much risk to take, and then (2) forming a portfolio of “risky” assets (equities) and “less risky” assets (fixed income) to achieve this risk exposure.

Your stock-bond decision implements this risk position.

The Rationale

All investors who are willing to take stock risk should begin with a diversified market portfolio. Each investor then can dial down total risk in the portfolio by adding fixed income to the mix. The greater the bond allocation relative to stocks, the less risky the portfolio and the lower the total expected return; the greater the stock allocation relative to bonds, the higher the portfolio’s expected return and risk.

Investors who want to take even more risk than the market can increase exposure through borrowing on margin and/or tilting the stock portfolio toward asset groups that offer higher expected returns for higher risk.

So, how does one confidently allocate between stocks and bonds? A common method is to evaluate model portfolios along the risk-return spectrum. A riskier portfolio holds 100% stocks, and the least volatile portfolio holds 100% bonds. Between these extremes lie standard stock-bond allocations, such as 80%-20%, 60%-40%, 40%-60%, and 20%-80%.2 Then you compare the average annualized return and volatility (standard deviation) of each model portfolio for different periods, such as one, three, five, ten, and twenty years. Volatility is one of several risk measures investors may want to consider. With this in mind, the analysis should feature average returns, as well as best- and worst-case returns for the various periods.

While this technique relies on historical performance that may not repeat in the future, and does not consider various investment costs, it may help you think about the risk-return tradeoff and visualize the range of potential outcomes based on the aggressiveness of your strategy.

Refining Your Stock Allocation

After establishing the basic stock-bond mix, investors turn their attention to refining the stock allocation, which is where the best opportunities to refine the risk-return tradeoff are found. Investors who are comfortable with higher doses of equity risk can overweight or “tilt” their allocation toward riskier asset classes that have a history of offering average returns above the market. Research published by Eugene Fama and Kenneth French found that small cap stocks have had higher average returns than large cap stocks, and value stocks have had higher average returns than growth stocks. By holding a larger portion of small cap and value stocks in a portfolio, an investor increases the potential to earn higher returns for the additional risk taken.

The final step in refining the stock component is to diversify globally. By holding an array of equity asset classes across domestic and international markets, investors can reduce the impact of underperformance in a single market or region of the world. Although the markets may experience varying levels of return correlation, this diversification can further reduce volatility in a portfolio, which translates into higher compounded returns over time (but not always in the short run).

Fixed Income Strategies

Research shows that two risk factors—maturity and credit quality—account for most of the average return differences in diversified bond portfolios. Long-term bonds and lower-quality corporate bonds typically offer higher average yields to compensate investors for taking more risk. But keep in mind that these premiums are considerably lower than the market, size, and value premiums documented in the equity world.

Investors generally hold fixed income to either (1) reduce overall portfolio volatility, or (2) generate a reliable income stream. These objectives typically lead to different investment decisions. The first approach, volatility reduction, is an application of separation theorem (i.e., hold equities for higher return and use fixed income to temper portfolio volatility). Rather than increasing risk to maximize yield, these investors want to hold fixed income securities that are lower risk. Certain fixed income asset groups are better suited for this strategy.

With this in mind, some long-term investors may seek to earn higher expected returns by shifting risk to the equity side of their portfolio. With an eye to minimize maturity and credit risk, they hold short-term, high-quality debt instruments that have historically offered lower yields with much lower volatility.

The second purpose for holding bonds is to generate reliable cash flow. Income-oriented investors, including retirees, pension plans, and endowments, may not worry as much about short-term volatility in their bond portfolio. Their priority is to meet a specific funding obligation in the future. Consequently, they design a portfolio around bonds and accept more volatility in hope of earning higher yields, which they pursue by holding bonds with longer maturities and/or lower credit quality.

Whether investing for total long-term return or for income, a portfolio should be diversified across issues and global markets to avoid uncompensated risk from specific issuers and to capture differences in yield curves around the world.

Summary

The stock-bond decision drives a large part of your portfolio’s long-term performance. During portfolio design, evaluating different stock-bond combinations can help you visualize the risk-return tradeoff as you consider the range of potential outcomes over time. Once you determine a mix, it can guide more detailed choices of asset classes to hold in the portfolio. And as your appetite for risk shifts over time, you can revisit the mix to estimate how shifting your portfolio mix may impact your wealth accumulation goals in the future.

Endnotes
1 James Tobin, “Liquidity Preference as Behavior Towards Risk,” The Review of Economic Studies 25, no. 2 (February 1958): 65-86.

2 The basic stock component may be reflected by the S&P 500 Index, or preferably, by a broader market proxy, such as the CRSP 1-10 Index. The CRSP 1-10 Index is a market capitalization weighted index of all stocks listed on the NYSE, Amex, NASDAQ, and NYSE Arca exchanges. The S&P 500 Index offers a proxy of the large cap US equities market. The fixed income component may be represented by an index of short-term US government securities or government and corporate bonds.