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Archive for August, 2011


If you pick individual stocks, look for more than dividends.

Recently the media has been advocating the selection of stocks that pay dividends.  Dividend paying stocks may only be appropriate for part of your portfolio, if at all.  There are many factors that will determine what portion of your portfolio should be dividend-paying stocks.  You may use the dividends in evaluating individual stocks. 
When selecting stocks, you must look deeper than it dividends. The dividends should only be one factor in selecting investments. 
When looking at the dividends look at more than the yield (dividend divided by stock price).  Consider the percentage of the earnings paid out as dividends.  If the payout ratio is too high, it may handicap the corporation’s sustainability and growth.  Compare the payout ratio to that of its competitors.  Determine what the company’s history of its payouts has been.  See if the payouts have been consistent.  Examine the stability of the dividend payout.  You want to know the companies’ dividend policy.  Be aware of how the dividend payout fluctuates with it annual income.  Another factor is how much of the dividends are regular dividends versus special dividends. 
The above inquiries will help you understand the strength of the company and the reliability of it dividends.  You should not ignore these factors.  You should balance the dividend with your expectation of the future value of the stock.  This is not intended as a complete discussion of how to pick stocks.  The point is that you should not ignore all the other factors.
A related discussion for another time is whether you should be using mutual funds and or exchange traded funds rather than investing in individual securities.   

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Investor Knowledge Quiz

The Financial Industry Regulatory Authority, Inc (FINRA) has an
Investor Knowledge Quiz for consumers.  
Try it at their website:  at

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Insured cash deposits

Many people are moving funds to banks and credit unions as a result of the recent market volatility and increasing questions about money market accounts.
A primary reason is that their deposits are insured by The Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government.  Some banks are currently offering interest rate higher than some money market funds.
FDIC insures all deposit accounts, but not other products that are offered and banks.  Stocks, bonds, mutual funds, life insurance policies, annuities are examples of financial products that are not covered by the FDIC and are sold at many banks  
The standard insurance amount is $250,000 per depositor, per bank, for each account ownership category.
A couple could each have $250,000 in an individual account, and an IRA account (to the extent of deposit accounts in the IRA account).  Deposit accounts in revocable trust accounts depend on the number of named beneficiaries.  Generally if there are five or fewer beneficiaries, the coverage is $250,000 per owner per beneficiary.
The National Credit Union Administration (NCUA) insures deposit accounts for federal credit unions and qualified state chartered credit unions.
Additional coverage for deposit accounts can be obtained through the Certificate of Deposit Registry Service (CDARS).  This service will split a large amount of cash among several banks in its network.
Planning for deposit accounts includes: determining the ownership of the accounts, documentation for retirement and trust accounts, anticipating future interest earned on the accounts, accounting for future deposits and withdrawals, and determining if the financial institution is FDIC or NCUA insured.

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Life Events

My posting relating to financial planning frequently refer to anticipated and unanticipatedevents.  Your planning must consider all aspects of financial planning.  All elements of financial planning must be woven together to increase the likelihood that you will achieve your financial needs, wants and wishes.  We all know there are “life events”, but we do not know when they will occur or what the consequences will be. 
What events do you include in “life events”?  Possibly the the first ones you think of include: birth, marriage/civil unions, divorce/separation and death.  Some events relate to employment, such as: first job, new job, lost job or down sizing.  Some relating to to health include: hospitalization, prolonged illness, physical disability/impairment, mental disability/impairment, and aging.  Events relating to finances include: inheritance, awards/prizes, bankruptcy, recession, fraud/embezzlement and lawsuits.  Still other events include; remarriage, adoption, and childrens’ success and failures.  You can think of many more “life events”.
Although “life events” are not predictable, they demonstrate the need for flexibility in your planning.  They also are examples of when cash reserves as well as savings and investments will be needed.  How your assets are owned, how you designate your beneficiaries and how your estate documents are worded are all part of the financial planning process. 
Winston Churchill said “He who fails to plan is planning to fail”.

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Target-date fund do not eliminate the need for planning.

One of the topics discussed in Morningstar’s 2011 research paper on target date funds relate to the period used in determining the asset allocation.  Some use the period “to” the retirement date and others are designed to take the investor “through” retirement.  The paper did not reach a conclusion as to which “glide path” was better.  Rather it highlighted the need for investors to know which “glide path” was being used.
Knowing what the investment categories used and when the categories change is also important for the investor to know.  Of equal importance is portion of the investments allocated to each category and when they change. 
Each investor needs to evaluate if the target-date fund they are using fits their individual needs.  All investors have different financial goals and different time horizons to achieve those goals.  The priority of the goals also varies.  As each persons’ situation is unique, including the need for income or capital preservation, the investment mix will not be the same for everyone. 
If the mix of investments is not completely appropriate for you, you need to determine the steps to take to improve the likelihood that your goals will be met.  Among the information you will need to determine what actions to take are: your financial goals, the relative importance of each goal (priority), when you want to meet the goal.  That is, you cannot avoid planning by the use of target-date funds. 

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Do you know what you should be doing during volitale markets?

The recent volatility in the markets creates uncertainty for most people.  It is not a time to just react.  It is a time to review and reflect on your investment portfolio.  Ask yourself if you understand your holdings and how they fit together.  If you cannot answer yes to both, you need to determine the answer to both.
Next you should compare your allocation to the allocation you have been using.  The allocation of investment assets is very important in determining your investment returns.  Many believe it is the most important factor.  Your allocation should reflect a diversified portfolio.  The allocation that you establish is your target allocation.
When you established your allocation it should have been constructed with a view toward your financial goals.  Review the financial goals to see if any have changed.  If they have, you should modify your target allocation toward the current goals.
Compare your current allocation to your target allocation.  If the difference is insignificant you may not need to make any changes.  If it seems appropriate to make changes, you need to determine how and when to make the changes. 
Your professional financial advisor can help you determine if you plan and target allocation is appropriate for you and when and how to make any changes that may be needed.         
Market Volatility

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Are these the times to be fearful and sell or be greedy and buy?

There are many ways to describe Thursday’s drop.  Some terms being used to describe the drop were: dramatic, scary, painful, troubling.  You have to ask yourself if there is a reason to do anything?  There are many factors to consider.  Nothing you do today will change the past.  There is no way to know the future. 
One question to ask yourself is whether you are an investor or a trader?  That is, are you looking at the short-term as opposed to the long-term.  This will help you evaluate the alternatives that apply to your situation.  Look at your financial goals, determine the timing for those goals and prioritize your goals.  Reflect on whether the likelihood of meeting them has changed.  Are your cash reserves adequate for the next 3 months, 9 months, 24 months?  The higher your cash reserves and/or your short-term certificates of deposit and short term bonds the less need you have to do anything today.  This is also a good time to reflect on how you react to the changes in the financial markets.  Note the difference in your feelings when the markets go up compared to when they go down. 
Now look at the make up of your portfolio.  Are there any reasons to change it?  It is important that you balance your financial needs with your tolerance for market volatility and your tolerance for losses.  Generally the alternatives with higher returns have higher risks.
These are not the time to just react.  These are the times to monitor, measure, evaluate and analyze before doing anything.  Be careful not to become paralyzed.  More importantly do not overreact.   
The last paragraph of Dave Kansas’ column in the wall street Journal reads: “so, as the markets crater around you, keep a cool head and look for opportunities that make sense.  As Warren Buffett says: ‘Be fearful when others are greedy, and be greedy  when others are fearful.’  No shortage of fear out there Thursday.”

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The Debt Deal

There is a lot of commentary about the debt deal.  The more I read and hear about the debt deal, the more obvious it is that there is not enough known about the deal to act.  This results in more uncertainty.  That makes planning more important and difficult.
The situation in the rest of the world has an increasing impact on us.  Geopolitical and financial problems exist around the world.  This adds to the uncertainty and further complicates our plannings.
Before doing anything, review your situation.  You should look beyond your income sources, expenditures, assets and liabilities.  You also need to review your financial goals and prioritize them.  Beyond that you should consider other factors  including; your health, expected longevity and your realization of how much risk you can tolerate.  When thinking of risk, take note not only how much loss you can stand.  Also reflect on how you react to fluctuations in the stock market, interest rates, etc. 
This is not the time for knee-jerk reactions.  You must consider how the different aspects of your plan can be impacted by any action you take. 
A recent Smart Money article provies a summary of some of the areas you need to consider.   READ MORE  

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Financial Planning is a lasting gift

When my wife’s niece’s husband died no one knew what to do first.  He was young, about 37, apparently in excellent health, with 2 young children.  They did not have wills, living trusts, Powers of Attorney and other elements of a financial plan .  If they had a financial plan the financial stress could have been substantially reduced.  It is difficult enough to deal with emotional stress without adding financial stress at such times.
Many people postpone financial planning thinking it isn’t time yet.  They may consider themselves to be too young, are in excellent health, are organized, or they are just procrastinators.  Sometimes parents cannot agree on a guardian for their children or couples cannot agree on a trustee.  If they do not name someone, the decision will be made without their input.  
With out planning, including updating beneficiaries, excess taxes (income and/or estate) may be payable or assets may go to people that do not have the capacity to mange the assets.  There have been situations where retirement accounts went to ex-spouse rather than the current spouse. 
The planning should be communicated.  Your wishes should be discussed with partners, children, or others that are to receive assets or who will administer the plan.  This includes the contact information for advisors, financial institutions and passwords and PINs.
Sharon Epperson, a CNBC correspondent , recently expressed her gratitude to her father for planning.  The article concluding sentences are very powerful “My father left us a wonderful gift.  his desire to make sure he had a ‘Financial Plan B’ in place is a legacy that truly underscores the love he had for his family.”

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