Skip to content

Archive for December, 2011


Are you planning for your future?

This is the time of year the media is reviewing the past.  You should looking to the future.  It is too easy to look back.  For some, looking back prevents them moving forward.  Everyone should be asking:  Where am I?, Where do I want to be?, and How do I get there.  The answers for each person will be different!
Some people can do this when planning for: their business, for travel, decorating their homes and/or offices, etc.  For some reason they do not take the same approach for their personal finances. 
An article in the Wall Street Journal today discusses the need for a team.  This could provide the discipline to move forward, whether you are a do it yourself person or not.  The team can: help identify where you are, where you are going and how to get there.  A good team can help you recognize and deal with an ever changing and complex world.  
The article gives tips for evaluating financial advisors, accountants and lawyers. A disproportionate portion of the article is devoted to financial advisors.  Unlike the other two, almost anyone can call themselves a financial professional.  The article gives tips on how to sort through the various credentials, styles and responsibility taken for the various players.

Back to Top


Are we asking the right question?

Recently we have learned that Congress has exempted itself from rules that apply to the rest of us.  The Wall Street Journal today published an article indicting that “…members of Congress make common mistakes despite their seeming advantage of possessing advantages of possessing information not readily available to other investors.”  One example is a Senator that only “…earned more than $1 million … but would have doubled that total…”
Maybe it is my legal training, the professional attitude of a CPA, a child of parents with a strong emphasis on ethics and integrity, or maybe common sense.  If you allow yourself to be in a position to appear to have a conflict of interest, then there is a conflict of interest.
The question is not if you profited from the situation but does it appear that there is a conflict of interest.  What does it tell us if the members of Congress have not benefited from the information they have that the rest of us do not have?  Maybe we are not electing people that are wise enough, smart enough,or competent enough to represent us?
 Are our members of  Congress held to a lower standard of conduct than those that elect them.  Should they be held to a higher standard?  Should we expect them to put our interests before theirs?

Back to Top


The lessons of 2011 are not new!

Articles about what we learned in 2011 seem to be restating what experience and wisdom have taught us over time.  
Everyone should have a financial plan that includes an investment plan.  Rather than reacting to fluctuations, investors should stick with their plan.  Try to tune out the noise.  These short term events go in both direction.  Trying to react to each event puts you in a position of market timing.  That type of short-term approach has been a losing approach.  
At least annually comparing your portfolio to a benchmark that reflects your target portfolio.  Look at the long term-trend not the current noise.  Your target portfolio should reflects your situation including: you time horizon, your, risk tolerance and your financial goals.  Life events and other circumstances should be considered in determining if the target portfolio needs to be updated.  Make the appropriate adjustment to bring your portfolio in line with your target portfolio.   Strategic adjustment would be made at this time.  This re balancing has been shown to improve investment performance over time.   If done too frequently it becomes market timing.  
Diversification is still very important.  In the short-term it may seem that it is not important.  In the long-run it is effective.  Even when investments are moving in the same direction, the movement is not the same and the recovery is not the same.  If the fluctuation of your portfolio is causing sleepless night, you should review your portfolio.  A re-evaluation of your financial goals and other factors should be made at the same time. 

Back to Top


Do you know what factors to consider in picking stocks, mutual funds or Exchange Traded Funds?

You will not be surprised that my answer to the above question is “it depends”.  “Here’s What’s Really Driving Your Returns”, an article in today’s Wall Street Journal Weekend Investor, touts the advantages of “factor investing”.  This concept has been around for a long time.  My preference is to call it “fundamental” investing.  It is selecting the data points to consider and how to weight hem.  
There are an infinite number of data points that can be considered.  If you are familiar with Morningstar, you have probably noticed that they are constantly adding data points for investors to consider.  They include alpha, assets, beta, book value, concentration,  dividends, earnings, debt, growth, liquidity, price, profits, risk,  sales, size, style,  turnover, weighting, Oh My!  Some of these data points are compared to other data points.  Be sure to understand the data points that you watch and how they should be compared to other data points.  
If you are selecting individual stocks you need to determine what criteria you are using.  If you are using mutual funds you need to determine how the manager is weighting these dat points.  If you are using an index fund or an Exchange Traded Fund you need to know how the various factors are weighted.  Do your research, be consistent, and consider costs.
When constructing you investment portfolio, understand the factors that are important to your unique situation.  To do this you must know (at a minimum) what your financial goals are, the time when the goals are to be realized, and your risk level.  How sensitivity to the ups and downs of the market and likelihood of loss are you?  Design a benchmark to measure the performance of your portfolio.  Monitor you progress.  If you think you need to monitor your progress daily, your portfolio is probably too risky.

Back to Top


How much do you know about deficits?

This is the topic of  Danielle Kurttzleben December 20tharticle in US News.  The article starts with “Caring about an issue and knowing about it can be two different things.”  “Americans are relatively knowledgeable on a few key points…”
Misinformation is being disseminated, compounding the difficulty in understanding the subject.  Examples of misinformation include:
“… most individuals pay more in payroll taxes and medicare premiums than they end up receiveing from Social Security and Medicare.”
“… U.S. taxation is above-average compared to other industrialized nations…”
David Walker, former U.S. comptroller believes our leaders should be educating the public as to facts, truth and help make hard choices.  He believes that both major political parties, individuals, and special-interest groups contribute to the misperceptions. 
“The media is not very good at explaining details.
The website of David Walker’s “Comeback America Initiative” has a fiscal IQ test at   

Back to Top


Illinois pre-paid tuition program is underfunded.

The following link is to IL Statehouse news.  READ MORE
Is sounds as if Illinois is not legally obligated to make up the underfunding.  The article indicates the situation is under review.
If you are in the plan you should watch how this situation evolves.  There website has questions and answers that may be helpful.

Back to Top


Should you buy life insurance because of the promised guarantees?

A December 6th article in the Wall Street Journal reported that a growing number of investors are buying whole life insurance.  Increasingly I hear of situations when people have purchased the wrong insurance product or more than can be justified by their individual circumstances.  Often the the policy purchases is different from the operation of the policy purchased. 
Many of these people have a heard mentality.  They feel they should purchase what they are told others are purchasing.  Some think everyone else is in the same situation they are and in.  They also assume that everyone else did the research.
The first rule is to determine your own situation.  This includes knowing what risk you are trying to insure against.   Another aspect is knowing what assets you have available to cover that risk.  Naturally, you should consider alternatives. 
Whole life insurance combines insurance with investments.  The policy will pay a death benefit regardless of how long the policy owner lives, assuming the premiums have been paid timely.  Term life insurance does not have an investment element.  It will only pay a death benefit for a specified period. 
Many of the whole life policies will invest the investment portion of the premium in excess of insurance costs and fees.  Typically they are primarily invested in bonds.  There are policies that will allow the insured to assume the investment risk.  These policies allow the investor to pick from a fixed menu of investments.  The discussion of other types of life insurance is beyond the scope of this discussion.  
Policy holders are typically told they can have access to the investments.  Unfortunately “…typically they need to hold the policy for at least 15 or 20 years to get the kind of returns they expect.” 
Some “…say the primary negative for whole life remains in place:  It is expensive, in part because of high commissions…”
Life settlements is a vehicle many people are becoming aware of to sell life insurance policies they no longer need.  In many cases the policies did not fit their situation when they were purchased.  
There are circumstances where whole life insurance is more appropriate than term life insurance.  The point is know know what you are trying to achieve and what the alternatives are.    

Back to Top


Inherited IRAs are more complex than many realize.

The rules for Individual Retirement Accounts (IRAs) require careful planning.  The person establishing the account should understand more than how much they can contribute.  Understanding the rules for withdrawals can result in greater benefits for the beneficiaries. 
There are two sets of rules that impact the operation of IRAs.  Legislation authorizing the IRAs have operating rules.  The financial institution that sponsor IRAs have additional operating rules.  Often the impact is on the beneficiaries of the IRAs.  
Naming your estate or a trust that is not a “see-through trust” as beneficiary will reduce the benefits for the beneficiaries.  Sometimes these limitations can be eliminated by transferring the inherited IRA to another financial institution.  To achieve the benefits, this must be done by a direct “trustee to trustee transfer”.
When an inherited IRA is liquidated, it will often reduce the benefits available to the beneficiaries.  If annual withdrawals are taken, the remaining balance is allowed to grow.  the current income and gains in the inherited tax will not be taxed currently.  If the account is liquidated the account will be taxed.  This reduces the amount available for investments.
Withdrawal rules for an inherited IRA are different than those for the original owner of the IRA.  Distribution are generally taken over the life of the beneficiary.  Each year the initial term is reduced by one.  
If the original owner of the IRA was 701/2 or older, they were required to take the required distribution in the year they died.  A beneficiary should make sure that distribution is made by December 31 of that year.
An inherited IRA cannot be rolled into an IRA of the beneficiary.  The title must make it clear that the owner died and you are the beneficiary.     
Different rules apply if the IRA is a Roth IRA.  Beneficiaries are required to withdraw annual minimum amounts.  A 50% penalty applies if the annual minimum distributions are not made.
You should check with your estate planning professional who is familiar with your specific situation when setting up IRAs or taking distribution.

Back to Top