Wealth Building Strategies

2017 Retirement Plan Limits Released

2016-10-28T09:55:00.000-04:00

On October 27, 2016, the IRS announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2017. Here are the highlights.

Presidential Elections and the Stock Market

2016-09-29T14:06:00.000-04:00

We are entering the homestretch to the U.S. election. Anybody nervous yet? Some investors certainly are, judging by the frequency of questions that we are getting these days about the implications of the upcoming U.S. election. Typical question these days, "It's a crazy election, what will the stock market do, and should we do anything?" After staring into my crystal ball for several minutes I respond, "I am so sorry, but my crystal ball is broken and my clairvoyance skills are lacking. My best guess is we just do nothing out of the ordinary."

While the election outcome is unknown, one thing is certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. Notwithstanding that this election cycle has been nothing short of....well....amusing and equally frightening, if history is any guide, election results have had a relatively minimal impact on longer-term U.S. or global equity returns. The election cycle can certainly influence markets in unpredictable ways in the short run. Indeed, volatility typically picks up in the month before a U.S. election. But, then just as with any other major world event, things just settle down into a state of normalcy shortly thereafter.

While no one knows how the market will actually perform in any year, the charts below may offer some historical perspective on election years with S&P 500 data since 1928.

This article produced by MFS offers some additional perspectives regarding politics and market behavior, broken down by party affiliation.

Source: John Hancock Investments

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.

The chart below shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Growth of a Dollar Invested in SP500 January 1926 to June 2016

Making investment decisions based on the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome will likely be the result of random luck. At worst, it can lead to costly mistakes. Whatever the ultimate outcome, I can promise you this, other factors such as the economy, interest rates, and corporate earnings typically have much more relevance for investors than the elections themselves. So, don’t let election year emotions drive your investment decisions. Investors should not let the political environment weigh too heavily on their strategy because stocks have done well during both Republican and Democratic Administrations. While short term volatility may indeed rise, investors should take note that history shows stocks usually rally during presidential elections.

P.S. The S&P 500 is up over 6% this year to date as of this writing, just about one month to go before "D Day". Not too shabby.

David Booth On Investing, Fed Policy

2016-05-31T11:35:00.004-04:00

This is worth a view. Check out Dimensional Fund Advisors Chairman David Booth discusses Fed policy and his investment strategies.

David Booth On Investing, Fed Policy

Are Hedge Funds Worth the Hype?

2016-05-09T16:10:00.001-04:00

Hedge fund managers are among the highest paid in the finance industry, traditionally charging clients an annual 2% of assets as a management fee and taking 20 percent of profits generated. Translation....a helluva lot of money! Comparatively speaking, the average actively managed fund costs somewhere in the neighborhood of 1% per year, while many index funds cost (depending on the asset class) as low as 10 basis points or less (0.10% per year).

But, does paying these higher fees really translate into better outcomes for the investor? Not quite. To borrow from Jim Parker of Dimensional Fund Advisors, "Big money can be made from hedge funds. If you run one, that is."

In his 2011 book The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to BeTrue, Simon Lock (an asset manager who formerly chose hedge funds for major US bank JPMorgan) argues that the 18% return on hedge funds in the nine years to November 2011 was easily beaten by the total 29% gain from the S&P 500 index. The gap was even starker for investment grade corporate bonds, which in the same period gained 77%, as measured by the Dow Jones Corporate bond index.

In the summer of 2013, Bloomberg Businessweek featured quite a (ahem) controversial cover (and story) regarding the hedge fund myth.

Hedge funds have again come under scrutiny in recent weeks, including some recent criticism from none other than the "Oracle of Omaha", Warren Buffet. The $2.9 trillion hedge fund business is having its worst start to a year in terms of returns and client withdrawals since 2009, when financial markets were reeling from the global financial crisis. Managers including Bill Ackman, John Paulson and Crispin Odey posted declines of at least 15% in the first three months in some of their funds. Conversely, many plain vanilla market indices have fared far better.

Check out this recent CFA Institute blog post on the subject. Some highlights:

"The dramatic underperformance of hedge funds is pretty amazing considering the survivorship and backfill biases in the index data that skew hedge fund returns upwards by 3% to 5% per year."
"The allure of hedge funds revolves around an ever-changing narrative that plays off investors’ emotions and fears but always centers on uncorrelated profits with minimal downside risk.
"Hedge fund exposure fails to deliver for investors due to exorbitant fees, high competition, the ineffectiveness of active management, and a general misunderstanding of the underlying exposures and correlations,"

In short, when it comes to hedge funds, it's better to run one than to own one.

Retirement Planning: Taking Out the Guesswork

2014-07-08T09:34:00.001-04:00

Have questions about retirement? Check out this video from a Google
Hangout we recently participated in. It's about 40 minutes long....so,
pour yourself a cup of coffee and sit back. I think there is good stuff here.

Bad Timing Costs Investors 2.5% a Year

2014-06-16T14:11:00.001-04:00

As we have been preaching for years, data shows that an investor is better served by sticking to a strategic asset allocation plan and filtering out the noise of the market. Don't believe us, ask Morningstar. Check out their recent video:

Bad Timing Costs Investors 2.5% a Year

We do not believe that anyone can consistently outsmart the market. This belief is backed by research that suggests that market timing only accounts for 2% of a portfolio’s returns. For more on the power of the markets, watch this.

Remember, successful portfolios are based on research and reasonable expectations, not intuition. Illogical investors attempt to guess which manager, stock or asset class will have tomorrow’s best performance.That’s why so many have consistently failed. Successful, rational investors excel because of a clear methodology and, of course, discipline.

What type of investor are you? What type of investor do you want to be?

2014 Retirement Plan Contribution Limits Announced by IRS

2013-12-02T12:39:00.002-05:00

Retirement is an expensive endeavor to fund. So, every dollar counts as you work toward building your retirement "stash". If you are not currently maxing out your contributions, cash flow permitting, consider bumping up your deferrals now. Here's an update on the latest plan limits for 2014.

Each year the Internal Revenue Service sets the maximum amount of contributions a person can make toward their retirement plans. This year, the IRS announced that the contribution limit for 401k plan deferrals (the amount the employee puts in) will remain unchanged for 2014. The maximum contribution amount will continue to be $17,500 (across all 401k plans). The catch up contribution for people over 50 years old will also remain at $5,500 in 2014, so annual limit for those over 50 is still $23,000 in elective deferrals. The same holds true for Roth 401K’s, 457 plans, and 403b plans.

Plan limits for Simple IRA plans remains unchanged at $12,000.

The limits for IRA contributions also remains at $5,500, and the $1,000 "catch up" contribution for individuals over age 50. For those wanting to contribute to Roth IRA's, the AGI (adjusted gross income) limitation for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000. The AGI limit for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Those limits, unlike the deferrals, were increased slightly for 2014.Effective January 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $205,000 to $210,000. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000. For example, this would cap one's 401k AND profit sharing contribution to $52k max per year. The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.

Eugene Fama Awarded Nobel Prize in Economics

2013-10-18T12:14:00.000-04:00

It's been years in the making, but this past Monday (10/14/13) it finally happened. Eugene Fama was been awarded the Nobel Prize in Economics. Professor Fama's groundbreaking work on asset pricing and markets inspired the founding of Dimensional Funds (which our firm proudly incorporates as part of its fund line up).

The Royal Swedish Academy of Sciences honored Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University, citing their complementary but independent breakthroughs on "empirical analysis of asset prices."

Eugene F. Fama is widely recognized as the "father of modern finance, and is best known for his research on the stock market, particularly in regards to the random walk theory and the efficient market hypothesis.

I had the distinct pleasure of personally meeting Professor Fama several years ago during a lecture he gave at the DFA headquarters. He's a brilliant and charming man! This honor is well deserved. Advisors and investors alike owe him a debt of gratitude for his groundbreaking work regarding the capital markets.

Here is a great video (produced by DFA) regarding his contributions to the world of finance. Enjoy!

Link: http://www.dfaus.com/2013/10/eugene-fama-awarded-nobel-prize-in-economics.html

Planning for Same Sex Couples in a Post DOMA World

2013-07-09T11:36:00.000-04:00

Last month's Supreme Court decision, which ruled the Defense of Marriage Act as unconstitutional (Windsor case), was an historic day for gay couples. Yet, while this marks ground breaking progress in the pursuit of equality, the fight is not yet over for same-sex partners. Why? Because in the case of Hollinsworth v. Perry, the Supreme Court restored marriage equality in the state of California, but the justices did not address the broader legal argument that gay people have a fundamental right to marriage. This creates a myriad of planning complications for same-sex couples.

Gay marriage is legal today in 12 states — Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington — and the District of Columbia. Most other states prohibit it in their constitutions or have passed laws against it. Married gay couples who live in these states will be now afforded the same rights as any "traditional" married couple (ie. think Social Security benefits, pensions, health benefits, and nearly 1100 federal statutory provisions in the US code that are continent on marital status). However, for same-sex couples who married in states where it is legal, but later moved or went home to a state where gay marriage is not recognized (ie. FL, TX) things are more complicated.

Legally married same-sex couples living in a state that does not respect their marriages may right away have access to some federal rights and benefits, but not to many others (at least for the time being). Under Federal law, the treatment of such situations varies, depending on whether the Federal provisions look to the "state of residence" to determine marital status, or the "place of celebration". Some federal programs determine eligibility one state of residence and others may consider state of celebration. Confused yet?

Same sex couples should be aware that if they marry in one state where it's legal (ie. "Yay---we have federal rights and benefits"), then go home to the state in which their marriage is not recognized (ie. Florida---"Boo, we have no rights again") they will lose their marital status for most Federal benefits and protections upon returning home. Wait, it gets further complicated. If their home state does not recognize the same-sex marriage, it may also be impossible for that couple to get divorced.

Bottom line is this, the SCOTUS decisions were HUGE. But, they've also created what an attorney friend of mine calls a "patchwork quilt" of rules. I suspect that in the coming years, laws will be adopted to help resolve these ambiguities. But, they will remain significant planning challenges and concerns for same-sex couples for the foreseeable future.

For more information about planning for same-sex couples, visit our page here. You may also check out one of our previously written planning articles here.

Charitable IRA's and RMD's

2013-03-14T10:04:00.002-04:00

Earlier this year, legislation was passed extending the Charitable IRA which allowed individuals who are 70 and a half years and older to transfer up to $100,000 per year from their IRA to a charity, without incurring federal income taxes today or estate and income taxes in the future. For married couples, each spouse can transfer up to $100,000 from his or her IRA. This opportunity is available until December 31, 2013.

As financial advisors. we help our clients consider many factors as you make significant financial, estate and charitable decisions. This Charitable IRA opportunity may be of interest if you:

Have excess retirement savings.
Are subject to a 50 percent of income charitable deduction limitation.
Take the standard deduction on your tax return.
Accept minimum distributions from an IRA and have alternative sources of income.
Are planning to leave a charitable legacy through an estate plan.
Have designated a favorite charity as beneficiary of retirement assets.
Care about the community and want to know your gifts will make a difference.

This is a great way to save on taxes and also give back to the world (a fine combination)!

The Top Ten Money Excuses

2012-10-18T17:06:00.000-04:00

While investment decisions should be driven by rational factors (ie. fundamental analysis, asset class considerations, risk adjusted returns, personal risk profile, financial goals, etc), often times investor behavior overrides judicious decision making. For individual investors, the costs to one's personal wealth can be quite detrimental.

Behavioral finance is a field of study that seeks to explain what occurs when emotional responses are involved in decisions that impact the market and one's personal finances. I have long been fascinated by this area of economic studies, particularly as I witness so many investors fall prey to the deception of their own emotions and their own fears. Part of my job as financial adviser is to save my clients from poor financial decisions--to be the voice of reason when the going gets tough, and to maintain a sense of discipline when chaos becomes counterproductive.

In my quest for knowledge on this subject, I came across the following article (written by Jim Parker) on the Dimensional Fund Advisors website that's worth sharing. It perfectly captures some of the most common things I hear in my Miami Registered Investment Advisory firm.

Enjoy and absorb!

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The Top Ten Money Excuses by Jim Parker

Human beings have an astounding facility for self-deception when it comes to our own money.
We tend to rationalize our own fears. So instead of just recognizing how we feel and reflecting on the thoughts that creates, we cut out the middle man and construct the façade of a logical-sounding argument over a vague feeling.

These arguments are often elaborate, short-term excuses that we use to justify behavior that runs counter to our own long-term interests.

Here are ten of these excuses:

1) "I just want to wait till things become clearer."
It's understandable to feel unnerved by volatile markets. But waiting for volatility to "clear" before investing often results in missing the return that can accompany the risk.

2) "I just can't take the risk anymore."
By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds for retirement. Avoiding risk can also mean missing an upside.

3) "I want to live today. Tomorrow can look after itself."
Often used to justify a reckless purchase, it's not either-or. You can live today and mind your savings. You just need to keep to your budget.

4) "I don't care about capital gain. I just need the income."
Income is fine. But making income your sole focus can lead you down a dangerous road. Just ask anyone who recently invested in collateralized debt obligations.

5) "I want to get some of those losses back."
It's human nature to be emotionally attached to past bets, even losing ones. But, as the song says, you have to know when to fold 'em.

6) "But this stock/fund/strategy has been good to me."
We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

7) "But the newspaper said…"
Investing by the headlines is like dressing based on yesterday's weather report. The news might be accurate, but the market usually has reacted already and moved on to worrying about something else.

8) "The guy at the bar/my uncle/my boss told me…"
The world is full of experts, many who recycle stuff they've heard elsewhere. But even if their tips are right, this kind of advice rarely takes your circumstances into account.

9) "I just want certainty."
Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. While it cannot guard against every risk or possible outcome, it's cheaper to diversify your investments.

10) "I'm too busy to think about this."
We often try to control things we can't change—like market and media noise—and neglect areas where our actions can make a difference—like the costs of investments. That's worth the effort.

Given how easy it is to pull the wool over our own eyes, it can pay to seek independent advice from someone who understands your needs and circumstances and who holds you to the promises you made to yourself in your most lucid moments.

Call it the "no more excuses" strategy.

Why it Makes Sense to Rollover Old 401k's

2012-08-04T22:34:00.000-04:00

At some point or another in our lives, we have left a job to move on to another company. But too often, we forget to pack one our most important personal items in our moving box, our 401k! It’s easy to do really, given the comfort that someone, somewhere is taking care of our money for us, right? Not quite. The truth is, nobody cares more about your money than you do. Leaving your money in your old 401k plan is wrought with challenges and pitfalls. In most cases, your best bet is to rollover the assets into a rollover IRA. Here’s why.

Few investments are more important than your retirement plan. Unfortunately, many Americans are regrettably “stuck” in outdated, high cost plans that offer little if any diversification opportunities to grow their account successfully. Historically, company retirement plans (this includes 401k/403b/457 plans) are plagued with many challenges that might dampen the growth of your assets: high cost products, proprietary funds, hidden fees, lack of fiduciary oversight and limited investment categories.

Investment Costs

Retirement plan participants often give up more than 2% per year in returns to cover fund expenses and they don’t even know it! Compare that to a cost of less than 0.25% for an index fund. For every dollar you save on expenses or administrative costs, that’s an extra dollar (plus compounding) in your nest egg. According to the Department of Labor, fees can diminish your lifetime 401k/403b accumulations by as much as 30%.
Let’s put this statistic to the test. After 30 years worth of saving $500 a month into a plan, a participant with a rate of return of 8% over the period will have accumulated $745,179. Using the same scenario, but factoring in 2% of fund fees will only generate $502,257; that’s a 32% reduction. Lesson learned: every penny counts.

Investment Choices

I’ve seen this time after time as I review clients’ portfolios. 401k plan choices tend to limit your available investment universe to only a few U.S. based, large or mid cap mutual funds. If you’re lucky, you might get the choice of a small cap or even an international fund, but not much else. That limitation of choices is a huge impediment on your wealth.

My point is, often times, the investment offering within a 401k plan is pretty abysmal and limited. As an active employee, you have no choice but to stay within the confines of that plan. However, as a departed employee (retired or otherwise), you have the right to liberate yourself from those constraints by rolling the assets into a self directed or managed IRA rollover. You are free to buy virtually any security in that IRA, as long as you keep it on a platform that allows that (i.e. at a discount brokerage firm like Schwab, E*TRADE, etc). After all, diversification and asset allocation is what will drive your investments returns. So, shouldn’t you want to optimize what you already have?

Orphan 401k’s and Investment Strategy

A key to your financial success is to make sure that your asset allocation strategy is appropriately implemented across all your various investment accounts. Casual investors tend to have multiple accounts, managing each in isolation of other accounts they might own. This can invite investment overlap, portfolio concentration and poor diversification. What type of investment strategy could you possibly have if you have accounts scattered around everywhere? From an investment strategy perspective, all of those accounts really ought to be tied together with an investment strategy for maximum efficiency.

Think of the following scenario, Maria is 56 and has changed jobs frequently throughout her career. As a result, she has numerous ‘orphan’ 401K accounts. The paper statements are unread, user names and passwords forgotten, and there has been no rebalancing for years. In fact, with so many accounts, she does not even know what the overall investment allocations are of her retirement funds.

Rollover Process

A rollover can be done one of two ways. At your request, the former employer will typically redeem the securities held in your account. Then they may distribute a check of the proceeds directly to you, for deposit to your new IRA Rollover. You then have 60 days to deposit those proceeds into your new IRA without taxes or penalty. Unfortunately, this method leaves too much room for human error. What if (oops) you forgot you only had a 60 day window to do this and deposit the check too late. Or, you could easily misplace the check in your pile of unopened mail.

The most efficient way conduct a rollover is to request that your plan administrator initiate a “direct rollover” or “trustee to trustee transfer” as to avoid the chance of incurring an unforeseen tax or penalty. This means the check for the balances of the old 401Ks will be payable to and sent directly to the trustee of the new account. You don’t ever see or touch the money—probably a good thing. Obviously, you then receive account statements from your new IRA provider.

Advantages and Disadvantages of 401k and IRA’s

Where you decide to keep your retirement funds is really a personal choice. Armed with information on the advantages and disadvantages of both 401k’s and IRA’s you should be able to make a more informed decision. Here are a few to consider:

A traditional IRA can offer almost unlimited investment options; a 401(k) plan limits you to the investment options offered by the plan
A traditional IRA offers easier access to retirement funds than a 401(k)
A traditional IRA can be converted to a Roth IRA
A 401(k) offers the highest level of protection from creditors (the protection afforded to IRA funds depends on state law). Note: Florida state law does allow IRA creditor protection, so this is a non-issue.
An IRA may provide more flexible distribution rules, but individuals taking early retirement (before age 59 1/2) may want to consider keeping assets in 401k to avoid early distribution penalties.

So, whether you’re changing jobs or retiring, it’s important that you make the right decision regarding your old 401 (k) or 403(b) plan. As you see, the process is quite simple. Keeping your assets in your old employer’s plan may or may not be the most optimal solution for you. In either case, consider your options and the impact of your decision, or lack of decision. But, remember, you gain incredible control and flexibility once you unlock your old plan. Consult with your financial professional to ensure which choice is right for you.

How Not to Be "Madoffed"

2012-05-20T21:39:00.000-04:00

On Wall Street, there’s no such thing as easy money or risk-less investments. If something sounds too good to be true, it probably is. As the CFA Institute reveals, one of the red flags in the Madoff affair is that reported performance was too consistently good. Other popular, Internet based investment scams purport to use ultra-safe “prime bank” financial instruments from the world’s largest banks. Rewards without clear risk simply do not exist. Here are some other clues that should have sent investors running the other direction: *The advisor who gave the investment advice and executed trades also held custody of the account (more will follow in the next paragraph on why this is important). *Madoff’s website described a sophisticated system for trading securities, but did not describe a process for managing client assets. *Paying fines without admitting guilt are an unusual characteristic of the financial services industry (Madoff). *Multiple complaints by regulatory agencies have been filed. *Account information is not transparent or difficult to obtain (ie. No online access). *Statements appear doctored or printed in-house without the ability to audit account positions from an independent party. Safety Tips As a financial advisor, please heed my suggestion-never do business with a financial professional who does not separate the brokerage custody function from the advice function. More importantly, if you do not know what the advisor is buying on your behalf, find out. This lack of transparency, or “black box model” of investing is one my biggest reservations about investing in hedge funds. I suspect that many investors are going to start asking many more questions of their managers and might be much less tolerant of black box managers in the future. The first tip in safeguarding your assets is to do your due diligence by visiting the websites of the regulatory agencies that govern the advisor’s business. Investors should get in the habit of visiting both the FINRA and SEC websites to review the firm’s and the advisor’s compliance history. Next, understand the investment strategy. If you don’t know what you are buying, then don’t buy it. The nature of the risks involved can vary widely and should be well understood. Buying investments for the sake of their perceived complexity may sound sexy or alluring, but may not be a wise use of your dollars. If it sounds too good to be true, it probably is. One of the red flags in the Madoff affair is that reported performance was too consistently good. Perfect positive returns simply do not exist. Returns will vary year to year, some by drastic variations. Also, be sure to match investment strategy to reported performance. In the case of Stanford, CD rates being offered were paying obscenely high rates. Risk and reward are directly related. By definition, CD’s are on the low risk to (almost) no-risk side of the spectrum. Something just did not jive there. Be wary of “sure things”. Legitimate investment professionals do not promise sure bets. Financial scams often begin with the allure of inviting only a “select group of people” to participate in such “crafty investment opportunities”. Do your homework about what, if any, regulatory oversight exists with regard to the investment products being suggested to you. For example, mutual funds, stocks and exchange traded funds are heavily regulated, while hedge funds and certain offshore investments are significantly less regulated.

2012-03-14T22:37:00.000-04:00

The Randomness of Returns

2012-03-12T21:59:00.000-04:00

Investors need portfolios that reflect their different financial goals, time horizons, and risk preferences. Although there is no "perfect" portfolio, many investors will find that a sensible approach incorporates diversification across multiple sources of risk and return.

How is this accomplished? Portfolio diversification is attained by investing across various global asset classes. Although asset classes around the world do not behave consistently or predictably, combining them in diversified balanced strategies can eliminate much of this randomness.

This example features annual performance of major asset classes in the US, international, and emerging markets over a fifteen-year period.

* The top chart ranks the annual returns (from highest to lowest) using the colors that correspond to the asset classes.
* The bottom chart displays annual performance by asset class.

In both US and non-US markets, there is little predictability in asset class performance from one year to the next. Studying the annual data in the chart reveals no obvious pattern in returns that can be exploited for excess profits, strengthening the case for broad diversification across many asset classes.

Asset class returns vary considerably from year to year, and past returns offer little insight into future performance.

Bottom line: own everything!

Thanks to Dimensional Fund Advisors for the data.

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!!!