RichFP

The silver investing bullet - doesn't exist

2012-02-10T16:48:00.000-08:00

"When a market, an individual or an investment technique produces impressive returns for a while, it generally attracts excessive (and unquestioning) devotion. I call this solution du jour the 'silver bullet'.

Investors are always looking for it. Cal it the holy grail or the free lunch, but everyone wants a ticket to riches without risk. Few people question whether it can exist or why it should be available to them. At the bottom line, hope springs eternal.

But the silver bullet doesn't exist. No strategy can produce high rates of return without risk. And nobody has all the answers; we're all just human. Markets are highly dynamic. and, among other things, they function over time to take away the opportunity for unusual profits. Unskeptical belief that the silver bullet is at hand eventually leads to capital punishment."

-- Howard Marks, 5-31-2002

Suspension of disbelief - not that great for investing

2012-02-10T16:40:00.000-08:00

"In fictions, willing suspension of disbelief adds to our enjoyment. When we watch Peter Pan, we don't want to hear the person sitting next to us say, 'I can see the wires' (even though we know they're there). While we know boys can't fly, we don't care; we're just there for the fun.

But our purpose in investing is serious, not fun, and we must constantly be on the lookout for things that can't work in real life. In short, the process of investing requires a strong dose of disbelief ....Inadequate skepticism contributes to investment losses. Time and time again, the postmortems of financial debacles include two classic phrases: 'It was too good to be true' and 'What were they thinking?'"

-- Howard Marks, 10-17-2005

Warren Buffett quote

2011-11-28T11:32:00.001-08:00

“Some great big strong American companies look very cheap compared to investment alternatives. I mean, in the end, you know, you're sitting with money in your pocket. Do you leave it in your pocket, you get zero on, do you put it in a money market fund, you still get zero on it, do you buy 10-year Treasuries and get 2 percent, or do you buy American businesses that are earning very good money, that have high returns on equity, have high returns on incremental capital, are buying in their stock at a rapid rate so that your ownership in the business increases significantly? I love all those things.

“The world's always uncertain. The world was uncertain on December 6th, 1941, we just didn't know it. The world was uncertain on October 18th, 1987, you know, we just didn't know it. The world was uncertain on September 10th, 2001, we just didn't know it. The world—there's always uncertainty. Now the question is, what do you do with your money? And if you—the one thing is if you leave it in your pocket, it'll become worth less—not worthless—worth less over time. That's certain—that's almost certain…If you own a good business locally in Omaha and somebody says Italy's got problems tomorrow, do you sell your—do you sell your business? No. But for some reason, people think if they own wonderful businesses indirectly through stocks, they've got to make a decision every five minutes. So I do not think if Ben Bernanke comes up and whispers to me that he's going to do X, Y or Z tomorrow, I'm not going to change my view about what businesses I want to own.”
-- Warren Buffett on CNBC

Master your emotions

2011-10-04T12:34:00.001-07:00

"Individuals who cannot master their emotions are ill-suited to profit from the investment process."
-- Benjamin Graham

Warren Buffett Quote

2011-10-04T12:28:00.000-07:00

"The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient."
-- Warren Buffett

Ride the market - up and down

2011-08-05T10:47:00.001-07:00

"The only way to ride the market up, is to ride it down from time-to-time."
--Dave Yeske

Americans always do the right thing?

2011-08-03T18:06:00.000-07:00

"Americans will always do the right thing after they've exhausted all the alternatives."
-- Winston Churchill

Ground glass?

2011-08-02T18:12:00.000-07:00

He who lives by the crystal ball soon learns to eat ground glass."
–Edgar R. Fiedler

Peter Lynch

2011-07-25T10:23:00.000-07:00

“Far more money has been lost in anticipation of market declines than has been lost in the actual declines.”
-Peter Lynch

Warren Buffett's Observation

2011-06-07T09:58:00.000-07:00

An observation by Warren Buffett:

It only takes two things to succeed an an investor: first, having a reasonable plan, and second, sticking to it--and it's the sticking-to-it part that investors struggle with.

Your Federal Tax Receipt. Find out what your taxes paid for.

2011-05-24T16:03:00.000-07:00

This is cool (or depressing). Enter your total Federal tax payments INCLUDING social security payments by you and your employer. The display shows how your share is spent. Social Security payments are the largest at 20.4%

http://www.thirdway.org/taxreceipt

Quotes about Human Nature

2011-03-15T16:14:00.000-07:00

"Human nature being what it is, there is a natural cycle to our emotions about the markets. We tend to go from terror during a major decline to disbelief through much of the subsequent advance—and then to a sense of ‘I’ve missed it, and I have to run to catch up—gotta jump on what’s hot!’ as the bull market continues. Again, this cycle of emotions is very human—but it’s a formula for very bad long-term investment outcomes.

First of all, remember that you can act your way to investment success, but you can’t react your way. If you react to falling markets by fleeing them, and then belatedly lunge at whatever’s fashionable in an attempt to catch up, you’ve actually found two ways to get hurt. We’ve talked a lot over the last couple of years about the mistake of panic; now may be the time to talk about the mistake of chasing immediate past performance.

Second only to panicking out of the markets, there may be no more sure way of getting substandard investment outcomes than by overinvesting in whatever has been red hot in the last block of time—and then, when that sector inevitably goes cold, chasing some newer vogue. Warren Buffett famously said that the investor of today does not profit from yesterday’s growth, and performance-chasing is the most painful way of demonstrating that truth to yourself. You are almost always trying to buy a track record that someone else already got, and that turns out not to be replicable.

I continue to believe that the most reliable approach is to diversify across several equity sectors and styles—large company and small company, growth and value, domestic and international—in roughly equal amounts, and then rebalance your portfolio back to its original allocations once a year around the same time. To me, this is the tortoise approach to long-term equity investing. And although we will surely see a red-hot hare go whizzing past us from time to time, as we continue to plod along we’ll sooner than later find that hare gasping in exhaustion at the side of the road—and we’ll pass him.

Broad diversification with annual rebalancing remains the best equity strategy I know to pursue your long-term financial goals. It is the antidote to panic in falling markets. But more to the point today, it is the antidote to the siren song of the one red-hot sector that is going to make up for all lost time."

--Nick Murray

Buying on Sale Applies to Stocks

2010-11-08T09:49:00.000-08:00

“The concept of buying goods on sale is as ingrained in the American psyche as watching primetime sitcoms. We take for granted the idea that any good – a bar of soap, a Pontiac Grand Am or back-to-school clothing – is a better value when the price drops. When the local grocer advertises strip steaks on sale, your initial response might be to buy some. When your favorite fast-food restaurant runs a 99-cent sale on quarter-pounders, there’s a tendency to forego a home-cooked meal and load up on a sack full of patties and fries. Why are Americans like this? Because we crave value. We make mental notes of what constitutes a fair price and often wait until that price level is breached before we buy. We may scoff at a 24-pack of Pepsi priced at $5.99, but at $4.99 it’s suddenly within our range of perceived value.

“The financial markets may be the only institutions in the world that turn the basic doctrine of consumerism on its head. Investors are coached to believe that a stock is a better buy when the price rises, that it’s ‘safer’ to join the crowd in bidding the price up and ‘riskier’ to buy a stock declining in price. Wall Street, you see, likes to implant a ‘fear of omission’ in investors. We are led to believe that if we fail to buy a stock now, the price will only go higher and we will miss the rally.

“The first principle of value investing is to buy securities on sale, just as you would toiletries or a new automobile. You should not differentiate consumer habits from investing habits. There are one and the same. Whether you buy a grocery store item, shares of Intel, a bar of silver, a Treasury bond, or preferred stock in the local utility, you should try to obtain it on sale, when possible, to maximize its value per dollar of investment.”
- Timothy Vick in his 1999 book, Wall Street on Sale

Benjamin Franklin Quote

2010-10-29T14:48:00.001-07:00

The man who trades freedom for security does not deserve nor will he ever receive either.
– Benjamin Franklin

Peter Lynch

2010-10-06T10:06:00.001-07:00

"The key to making money in stocks is not to get scared out of them."
-Peter Lynch

The proper way to lick a bowl ...

2010-08-23T10:53:00.001-07:00

Top Financial Scams

2010-08-07T18:03:00.000-07:00

http://www.snopes.com/fraud/topscams.asp

I always find these amusing and they are worthy of your awareness.

I received a family member (friend) in distress email recently. The email seems almost possible at first until you think - why would this person be emailing me instead of calling a much more relevant person? The more relevant person knows, of course, that his mother is NOT in England on a trip.

Breakfast at Ginger's- golden retriever dog eats with hands

2010-06-27T21:48:00.000-07:00

Ginger enjoys a leisurely breakfast
http://www.youtube.com/user/sawith65#p/c/CFDBAB87BCE3AD48/3/HaAVZ2yXDBo

Gin the Dancing Dog

2010-06-13T22:37:00.000-07:00

A must see:
http://www.familytiez.com/video/gin.htm

Future Expected Stock Market Returns

2010-06-10T17:48:00.000-07:00

Stock market returns have (theoretically at least) 3 components:

Rate of Inflation
Risk Free Rate
Equity Premium

The expected return is the sum of these three. Current inflation is about 2.2%; historically the long-term risk free rate of return is about 0.7% and the equity premium about 4.8%. The sum is 7.7% which is the expected rate of return of the stock market.

This may seem surprisingly low to some who recall long-term rates of return for stocks in the 9% to 11% range. However, long-term rates of inflation are about 4.7% and the sum of the three components using that inflation rate is 10.2%.

So don't be shocked if nominal (including inflation) stock market returns in the current environment are lower that you remember. Do remember that what you get to spend is the real return (returns after adjustment for inflation) which is expected to be about 5.5% in both environments.

Basics of the Smart Investor

2010-06-10T17:38:00.000-07:00

Smart investors maintain a long-term perspective, stay diversified, and don't react emotionally to every fluctuation.
- NAPFA Planning Perspective May-June 2010

Peregrine falcon fledgling in SF

2010-05-26T13:51:00.000-07:00

The San Franciso Peregrine falcon couple on the PG&E building had four fledglings this year. All doing well so far. Here's a shot of one of the males (tiercel).

Picture by Glenn Nevill.

You can contribute to the group that sponsors the web camera and fledge watch by going to the UC Santa Cruz web site:

https://secure.imodules.com/s/1069/index-2-column.aspx?sid=1069&gid=1&pgid=361&cid=970

Be sure to type "SCPBRG" into the "Other Area" dialog box.

Managers vs. Markets

2010-05-26T13:35:00.000-07:00

Proponents of active management believe that skilled managers can outperform the financial markets through security selection, market timing, and other efforts based on prediction. While the promise of above-market returns is alluring, investors must face the reality that as a group, US-based active managers do not consistently deliver on this promise, according to research provided by Standard & Poor’s.

S&P Indices publishes a semi-annual scorecard that compares the performance of actively managed mutual funds to S&P benchmarks. Known as the SPIVA scorecard1, the report analyzes the returns of US-based equity and fixed income managers investing in the US, international, and emerging markets. The managers’ returns come from the CRSP Survivor-Bias-Free US Mutual Fund Database, and the managers are grouped according to their Lipper style categories.2

The graph below features fund categories from the most recent SPIVA scorecard—all US equity funds, international funds, emerging market funds, and global fixed income funds—and shows the percentage of active managers that were outperformed by the respective S&P Indices in one-, three-, and five-year periods. These are only four of thirty-five equity and fixed income fund categories. But a deeper analysis confirms that the active manager universe usually fails to beat the market benchmarks over longer time horizons. Underperformance of active strategies is particularly strong in the international and emerging markets, where trading costs and other market frictions tend to be higher.

Over the last five years, about 60% of actively managed large cap US equity funds have failed to beat the S&P 500; 77% of mid cap funds have failed to beat the S&P 400; and two-thirds of the small cap manager universe have failed to outperform the S&P Small Cap 600 Index. Furthermore, across the thirteen fixed income fund categories, all but one experienced at least a 70% rate of underperformance over five years.

In 2009, active funds experienced more success over a one-year period, and proponents typically highlight those results in the SPIVA scorecard. However, one-year results are not consistently strong from year to year, and investors should not draw conclusions from short-term results. Over three- and five-year periods, most fund categories have not outperformed their respective benchmarks.

This poor track record appears in other research, as indicated in the graph below. This study compared the same actively managed funds in the CRSP database to the Russell benchmarks and showed similar results over the three- and five-year periods. Over the past five years, about 65% of all US equity managers failed to outperform their respective Russell Indexes, and 84% of fixed income managers failed to beat their respective Barclays Capital Indices.

Of course, the results of these studies will fluctuate over time, and a majority of funds in a given category might outperform over the short term. But the message is clear: As a group, actively managed funds often struggle to add value relative to an appropriate benchmark—and the longer the time horizon, the greater the challenge for active managers to maintain a winning track record.

1. SPIVA stands for Standard & Poor’s Indices versus Active Funds. The report covers US equity, international equity, and fixed income categories. The actively managed funds are grouped according to Lipper style categories.

2. The Center for Research in Security Prices (CRSP), at the University of Chicago Booth School of Business (Chicago GSB), is a nonprofit center that also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26,500 stocks listed on the NYSE, Amex, and NASDAQ exchanges. The Survivor-Bias-Free US Mutual Fund Database includes a history of each US mutual fund’s name, investment style, fee structure, holdings, asset allocation, and monthly data, including total returns, total net assets, net asset values, and dividends. All data items are for publicly traded open-end mutual funds and begin at varying times between 1962 and 2008, depending on availability. The database is updated quarterly and distributed with a monthly lag.

Past performance is no guarantee of future results. This article is provided for informational purposes only and should not be construed as an offer, solicitation, or a recommendation from Dimensional Fund Advisors. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission.
©2010 Dimensional Fund Advisors. Used with permission.

Goldman Sells a Whatzit

2010-05-21T14:52:00.000-07:00

We're sure you've all heard of the Goldman Sachs Abacus scandal, but most folks don't really understand what it means. Well, Goldman created a CDO called Abacus and sold it to its clients. But Goldman forgot to tell its clients that Abacus was designed to fail. Meanwhile, Goldman had placed numerous side bets that it would do just that. It was like "The Producers," that movie in which some dudes raise a mint to put on a show destined to bomb, intent on pocketing the investment money.

But most folks have no idea what a CDO is, what the hell is a derivative. Trust us. We have worked in (or very close to) financial services for eight years. Ask anyone to explain a default swap. Watch them stammer and bullshit. They don't know either. We can only tell you they appear to be an unholy hybrid between an insurance policy and a side bet at a cockfight.

So to help us understand what went down at Goldman Sachs, we've enlisted infamous children's book writer Nurse Noose to explain it to us as if we were five. And here it is:

GOLDMAN SELLS A WHATZIT

In the land of Maglop, just south of Canack
A rich man named Goldman McSachy-McGlack
Arrived into town with a large golden sack
It was stuffed full of whatzits and slung on his back
The foos that inhabit the land of Maglop
Watched as McSachy-McGlack set up shop
The new shop was chic, it was shiny, compelling
"What are you selling?" the foos started yelling
McSachy-McGlack smiled and answered the foos:
"Come see for yourself, you've got nothing to lose."

Inside the shop, there was box upon box
And each box was locked up with five golden locks
"What is it?" they asked, their eyes bright with greed
"It's a whatzit, that's what, and it's just what you need"
"What does it do?" asked young Cindy-lu Foo
"Well" said McSachy-McGlack "I'll tell you"
"It makes the poor rich, and it makes the rich richer
And the richest more richester, now get the picture?
Just buy one or two, put them under your bed
And leave them alone, get them out of your head
And then sell them back, and worse comes to worst
They will be worth ten times what they cost you at first"
"But" he continued "there's one caveat"
The impatient foos said in unison "what?"
"The whatzit will work only if it stays locked"
"What's in a whatzit?" the older foos mocked
"It doesn't concern you, just don't open the box
Keep it under your bed, and don't unlock the locks"
"I'll take one" said one foo "I'll take three or four"
"I'll take a dozen" "put me down for a score!"

Each foo soon had his own whatzit stash
And each knew that soon they'd be rolling in cash
So they bought foo-mobiles and they mortgaged their huts
They had foo boob jobs and foo liposucked butts
What happened next? Well, what do you think?
The whatzits, one-by-one, started to stink
They reeked to high heaven, all icky and rank
Like bungle-beast farts, that's how much they stank
The foos plugged their noses, they cursed and they swore
Til Cindy-lu Foo couldn't take anymore
She took out her whatzit and unlocked the locks
She took a deep breath and she opened the box
What was inside? Well I've got the scoop:
Each whatzit was stuffed full of snorgle-pig poop
When word got around, every foo would lament
"My whatzit portfolio aint' worth a cent!"

They soon lost their jobs, and then lost their houses.
They started to drink, they were beating their spouses
By the time they were left with no foo-pot to piss in
Goldman McSachy-McGlack turned up missin'
What happened then? It just keeps getting better
Taped to his boarded up shop was a letter
"I'm sorry you're left with nary a cent
But look on the bright side! I've made a mint!
See, to tell you the truth (and I know the truth hurts)
I placed a side bet that the Foos lose their shirts."
"The moral" it said "you should know now by heart:

A foo and his money are destined to part"

-Can O' Whup Ass
for more: http://canofwhupass.typepad.com/my_weblog/

The 4 x 4 Accuracy vs Doubt Matrix

2010-05-21T14:30:00.000-07:00

-4-Block World
For more: http://www.4-blockworld.com/

Grand Canyon river trip video

2010-05-08T22:34:00.000-07:00

http://www.youtube.com/watch?v=yRoP8ztiA3k

The first segment is a view of a California condor.

Banding day for the Peregrine Falcons

2010-05-04T21:52:00.000-07:00

for live video: www2.ucsc.edu/scpbrg/nestcamSF.htm

Things not to do ...

2010-04-29T10:18:00.001-07:00

-Carl Richards, New York Times

The "Lost Decade of Investing" - Bah!

2010-04-07T09:28:00.000-07:00

By now you’ve probably seen an article or heard a news story touting that the past 10 years (2000-2009) was a “lost decade” for stocks. As measured by the media, everyone lost money, and as proof they site the fact that the S&P 500 lost 9.1% from Jan. 1, 2000-Dec. 31, 2009. While this statistic is indeed true, it’s an isolated view.

The S&P 500 is an index composed of 500 of the most widely held (and typically largest) companies in the U.S. While 500 companies may sound like a lot and may seem well-diversified, it’s actually a narrow slice of the universe of companies available for our investment dollars.

At ICM, our portfolios consist of at least six asset classes – not just one (see note below). The portfolios that we are all invested in at ICM contain a piece of more than 10,000 companies. The very smallest companies up to the very largest conglomerates are included in our portfolios. These companies are located in over 40 countries around the globe.

Why maintain such a diversified portfolio? Because each year each asset class has a different return, and when these returns are blended together over a period of time, the effect of diversification tends to increase the portfolio return and decrease the portfolio risk. The chart below shows the total return for the past decade for some of the DFA mutual funds we use. You can see that whereas large company U.S. stocks were negative for the decade, many other asset classes were positive – and some substantially positive. We own many of these funds within our portfolios.

A Look Beyond the S&P 500 January 2000-December 2009
Source: Dimensional Fund Advisors. Performance data represents past performance and does not predict future performance.

Even though it has not been a lost decade for stocks in general, it has certainly been a gut-wrenching ride. The decade began with a bear market in which the S&P 500 was down ~ 49% (March 2000-October 2002) and then remarkably sustained a second bear market that saw the S&P 500 drop ~50% between October 2007 and February 2009.

Looking at it this way, given the severity of these two bear markets over the past decade, it is impressive that the S&P 500 ended the decade with only a 9.1% loss.

Although this was a “lost decade” for the S&P 500, it is exceedingly rare. Between January 1926 and December 2009, 95% of all possible rolling ten-year investment periods delivered positive returns for U.S. large company stocks. This past decade falls into the 5% that failed to produce gains.

We hope that this gives you a better understanding of how diversification has improved the performance and reduced the risk within your portfolio. So ignore the talking heads proclaiming that “this time it’s different.” Take a deep breath and remind yourself: diversification within a prudent portfolio does work, buy-and-hold is not dead, and the laws of gravity have not been suspended.

Note: There are numerous ways to segment the universe of stocks. For simplicity in this example, let’s call the six asset classes U.S. large and small companies, Developed International large and small companies, and Emerging Markets large and small companies. Most of our portfolios also contain bonds, which would be a separate asset class. As you may remember, our portfolios have a tilt toward value companies (versus growth companies) and small companies (versus large companies).

-Julie Schatz, CFP®, Jennifer Cray, CFP®, Rich Chambers, CFP®

Health Care Poetry

2010-03-26T08:41:00.000-07:00

"Say," Speaker Pelosi exuded,
When her colleagues to sausage alluded,
"If this casing we're filling
Is best after grilling,
Who cares how the wurst was extruded?"

-Limericks Économiques

Seven Questions to Ask Your Tax Preparer at Tax Time

2010-03-09T17:23:00.001-08:00

When you visit with your tax preparer to drop off your tax return documents, be sure to ask the following seven questions and share the answers with your financial planner:

Will I be subject to the alternative minimum tax (AMT) in 2010?
What will my marginal tax bracket be in 2010?
Can you help me estimate my income for 2010?
Do I have any remaining capital loss carryforwards for 2010?
If I were to do a Roth conversion in 2010, what would my tax liability be?
Do you have an recommendations for reducing my 2010 taxes? What about 2011 and beyond?
Is there anything my financial planner can do to help my tax situation?

Warren Buffett's Letter to Shareholders

2010-03-01T10:31:00.000-08:00

A favorite portion:

“We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.”
-Warren Buffett

To read the whole letter:
http://www.berkshirehathaway.com/letters/2009ltr.pdf

Roth IRA Conversion Concepts

2010-01-24T13:07:00.000-08:00

Roth IRA conversions will be much in the news this year. While Roth conversions have been allowed for years, starting in 2010, the income limitations are lifted, so everyone is eligible. We want to prepare you now so you will begin thinking whether or not a conversion could increase your after-tax net worth.

Many people know how Roth IRAs and regular (contributory or rollover) IRAs work. But if you want a refresher, let me know and I’ll send you an educational piece.

Why all the fuss? Because the growth of a Roth IRA isn’t taxed and this is about the closest thing to a freebie that the federal government offers to taxpayers.

The Roth conversion process:

take money out of a regular IRA
contribute the entire withdrawal to a Roth IRA
from another source, pay income tax on the withdrawal

You are paying taxes now in order to obtain future tax-free growth.

Rather than go through a bunch of tedious explanations, we examine a number of scenarios.

Scenario 1: Conversion during a low tax year

Scenario 1, Example 1:
Bill (40) got laid off in January and took the rest of the year off. His income was $12,000 from interest and dividends and a bit of unemployment. His credits, deductions, and exemption add up to $44,000, so his taxable income is -$32,000. Bill has $32,000 in his IRA so he can convert all of it to a Roth with no additional tax owed. At age 90, the after-tax value of Bill’s Roth IRA will be about 43% larger ($284,700) than the unconverted IRA.

Scenario 1, Example 2:
Sarah (40) terminated a business and took an operating loss of $100,000. Her income was $70,000 from interest and earnings. Her credits, deductions, and exemption are $50,000. Similar to Bill, Sarah can convert $80,000 to a Roth for no tax cost and gain a similar 43% ($709,200) advantage at age 90. If Sarah were to convert another $34,000 (maxing out her 10% and 15% tax bracket and costing $4,681 for income tax), the advantage is about 38% for a total after-tax advantage of $920,700.

Scenario 1, Example 3:
Roger (40) has taxable income of $34,000. He wants to max out the 25% tax bracket this year and expects to be in the 25% bracket during retirement. Roger converts $48,400 costing $12,100 in additional income tax. At age 90, Roger’s advantage is 16% ($196,600). If Roger needs $5,000 annually for living expenses beginning at age 70, the advantage is 19% ($85,100).

Typical reasons for low tax years:

Getting laid off
Deductions and exemptions wipe out most or all of your income, such as:
....Large charitable contributions
....Large casualty losses
....Large medical expenses
....Large nursing home expenses
Business and other ordinary losses
Net operating loss carry-forwards
Selling a rental property at a loss
Non-refundable tax credits
Note: Capital loss carry-forwards do NOT help much

The general rule is that you convert to a Roth in years when your marginal tax rate is lower or the same as the marginal rate expected at age 70 ½.

Scenario 2: Conversion for the benefit of your heirs

Scenario 2, Example:
Abby (40) is a very successful entrepreneur, and thanks to a wildly successful IPO, she has considerably more than she needs for the rest of her life. Understandably, Abby can leave a substantial estate to her 2 children ages 7 and 10. A Roth IRA is tax free for Abby’s lifetime and also for the children’s lifetimes. Therefore the Roth IRA is one of the best items to bequeath to your heirs. Abby’s IRA is $100,000 and she expects to be in the highest tax bracket for the remainder of her life. It costs $35,000 in tax to convert, but at 90, the after-tax value of Abby’s Roth IRA is about 22% larger ($531,700) than the unconverted IRA. If the heirs drawdown the inherited Roth IRA over 40 years, the additional advantage is about 47% ($12,809,600).

The general rule is that when all these are true …

You expect to be in the highest tax bracket forever
You do not need your IRA assets to live on
Your estate is to benefit your children
You can pay the conversion tax with other assets

… You should consider converting everything to a Roth IRA as soon as possible.

Scenario 3: Opportunistic conversion

Scenario 3, Example:
Angus (40) had a $500,000 IRA invested in a IPO stock that was clobbered in the recent bear market, so the IRA is only worth $100,000 now. Angus is completely confident that the company will survive and grow and that the IRA value will recover back to $500,000. Needless to say, we think Angus is nuts, but if he is right, it sure is a great time to convert to a Roth. Angus is in the 35% tax bracket this year but expects to be in the 25% bracket when he is 70 ½. Converting now costs $35,000 in tax, but at age 90, the Roth is about 8% larger ($214,000) than the unconverted IRA, and that is if the stock never recovers. If the stock recovers, and is replaced with diversified investments, the Roth IRA advantage is 34% ($3,528,000).

The general rule is if you think your IRA is temporarily at a low valuation, then it may be a good time to convert to a Roth even if your tax bracket is higher now than in retirement.

Scenario 4: Tax diversification conversion

Scenario 4, Example:
Matt (40) has a $100,000 IRA and he doesn’t believe anyone can forecast future tax rates, plus he cannot forecast his income before or after retirement. Since the tax rates are an unknown, Matt wants to consider having regular IRA and Roth IRA accounts . Matt can choose a low-income year for converting some of the IRA to a Roth, and in retirement he can withdraw from the IRA in low-income years and from the Roth in high-income years. Matt gains better control of his taxes since he has access to taxable income from the IRA and tax-free income from the Roth.

General Roth conversion rules:

You never, ever want to show a negative taxable income on your tax return. A Roth IRA conversion can be used to get to zero income at no cost.
Never withhold taxes on a Roth conversion (pay the taxes from external sources).
If your marginal tax rate is 15% (federal), consider a Roth conversion to use up the entire 15% bracket.
Roth IRA accounts are among the best possible assets to pass to your heirs. Convert more aggressively if you plan for your heirs to get most or all of your Roth IRA.
Those expecting to be in the highest marginal tax bracket forever may benefit from an immediate conversion of the entire IRA balance.
The longer you can compound the Roth IRA, the bigger the advantage of converting. And the longer your heirs hold onto the inherited Roth IRA, the bigger the tax advantage to them.
Having both an IRA and a Roth IRA provides tax diversification. With both IRA and Roth IRA accounts, you can have better control over your marginal tax rate every year. Generally you want may want to take IRA distributions in low tax years and Roth distributions in high tax years. Having some IRA and Roth IRA assets can be very beneficial for managing for tax rates in retirement.
When your IRA has a temporarily low valuation, consider converting to a Roth.
You are not permitted to convert any of your RMD (required minimum distribution).
In some select cases, estate taxes can be reduced thanks to a Roth conversion.
If you convert in 2010, you have a choice about paying the resulting income tax. You can report all of the income (from the Roth conversion) in 2010 or report 50% of the income on your 2011 tax return and the other 50% on your 2012 tax return. Normally you want to delay paying taxes, but you must consider future increases in tax rates that make could make waiting more costly.

Some things that could occur that could make the Roth conversion less valuable or even worse than not converting:

Income tax rates are reduced substantially or repealed and a national sales tax replaces the tax revenue.
You plan to gift to charity all of your required minimum distributions from your IRA.
You are unable to pay the income tax on the IRA distribution with other assets reducing the amount converted to the Roth IRA.
The stock market drops precipitously after the Roth conversion. By waiting you could have converted for less tax cost.
The income from the Roth conversion may cause your Medicare Part B premiums to increase significantly, at least temporarily.
Many deductions and credits on your tax return are linked to your AGI (adjusted gross income). A Roth conversion will increase your AGI, which may adversely impact other (non-obvious) areas of your total tax. One example, if you are expecting financial aid for college, a Roth conversion can reduce the aid award.

All may not be lost however: If you convert to a Roth, you may recharacterize (move the money from the Roth IRA back to the IRA) some or all of the conversion reducing the taxes owed. There are strict time limits on when the recharacterization may occur.

As you can see, analyzing a Roth conversion is complex and involves multiple factors. Financial planners or tax professionals that perform tax planning are able to help you make wise decisions about Roth conversions.

Assumptions used in all the scenario examples:

The conversion tax year is 2010.
The marginal tax rate in retirement is 25%.
Long-term capital gains rate is 15%.
Any state income tax is not considered.
Unless otherwise noted, no living expenses are taken from either the IRA or the Roth IRA. When needed, living expenses are after tax and are to be taken from the IRAs starting at age 70 and increase 3% annually.
Return rate on IRA investments averages 7% consisting of 2% qualified dividends, 1% interest, non-qualified dividends, and short-term capital gains, and 4% long-term capital gains.
Each year, 40% of that year's long-term gains are realized.
No tax credits are affected by converting to the Roth
All tax owed is paid in the year following the Roth conversion from other resources (not from the proceeds of the IRA distribution, therefore all the proceeds go into the Roth IRA).
The advantage of the Roth conversion is measured compared to the after-tax value of the unconverted IRA.
The advantages of a Roth conversion shown in the examples are computed using an ICM-developed worksheet, and while believed accurate, cannot be guaranteed.

A Foggy Crystal Ball

2010-01-16T13:55:00.000-08:00

"It's a good thing that financial planners and advisors aren't paid to predict the future because, well, nobody seems to be doing a very good job of it lately. I hope you'll remember this as all the major financial magazines come out with their yearly "Here's what will happen in 2010" cover stories.

Reading through some back issues, we find that at this time two years ago, nobody, anywhere, was predicting a fourth-quarter meltdown in the investment markets, or the global economy tottering on the edge of disaster. In fact, not a one of the prognosticators seems to have realized that the U.S. economy had already fallen into a recession. ..."

For the remainder of this interesting article by Bob Veres:
http://tinyurl.com/ybchke3

Remodeling - How to Make it Pay

2010-01-12T13:23:00.000-08:00

"There could be one upside to the real-estate implosion. Plunging prices finally could shatter our national delusion that home improvements are somehow an "investment" in our homes.

Think about it:

With a real investment, you commit your money and hope to make some kind of profit.
With remodeling, you're all but guaranteed a loss.

Even at the real-estate market's peak, most remodeling projects didn't pay for themselves."

For the rest of this article by Liz Pulliam Weston of MSN Money, click here: http://tinyurl.com/ydyjbu9

If you can't access the article, let me know and I will try to find it for you. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address before using it to email to me.

Blame it on the Brain

2010-01-12T12:03:00.000-08:00

"Willpower, like a bicep, can only exert itself so long before it gives out; it's an extremely limited mental resource.

Given its limitations, New Year's resolutions are exactly the wrong way to change our behavior. It makes no sense to try to quit smoking and lose weight at the same time, or to clean the apartment and give up wine in the same month. Instead, we should respect the feebleness of self-control, and spread our resolutions out over the entire year."

For the rest of this article by Jonah Lehrer of The Wall Street Journal, click here: http://tinyurl.com/y8f7f4k

The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address before using it to email to me.

The Market May Be Crazy...

2010-01-12T10:06:00.000-08:00

"The market may be crazy but that doesn't make you a psychiatrist."

-Meir Statman

Create Your Own Pension using an Immediate Annuity

2009-11-23T14:42:00.001-08:00

The American Association of Individual Investors creates really wonderul articles that are well researched and free of bias (they take no advertising).

This article is appropriate for those in retirement who are fearful of terrible stock market returns wrecking their retirment. One idea is to take some of your invesment assets and purchase an immediate annuity that makes monthly payments to you for the remainder of your life. The payments are guaranteed by an insurance company.

Sometimes I advise clients to consider covering their basic living expenses with "safe" income sources. Social Security, pensions, and immediate annuities could fill this need.

See the article for details:
http://www.feesonly.com/rcfp/November_2009_AAII_-_Create_Your_Own_Pension_-_Immediate_Annuities.pdf

Valuation Metrics

2009-11-23T14:27:00.000-08:00

This talk was presented to a meeting of the American Association of Individual Investors (a wonderful organization by the way) and since it is by one of my favorite investing groups, I attach it here for your perusal. Some of the charts are wonderfully educational. In particular, see page 7 of the presentation.

It will be of more interest to those particularly intrigued by market history. See the presentation:
http://www.feesonly.com/rcfp/AFAMI_AAII_Presentation_11.19.09.pdf

The Devil's Dictionary - Crisis Edition

2009-11-23T14:13:00.000-08:00

The financial crisis of 2008-09 has created a real opportunity for newly minted acronyms, neologisms, and euphemisms. Matthew Rose of The Wall Street Journal has cooked up a hilarious modern version of Ambrose Bierce’s original “Devil's Dictionary."

AAA, n., obsolete. A rhetorical device used to dupe buyers into purchasing securities backed by shacks dressed as houses, and to secure the highest possible spot in telephone directories. common usage: AAA Septic Drainage and Mortgage Backed Security Services.

BAILOUT, n. First known use: Noah. Novel regressive taxation scheme whereby vast sums of capital are transferred from those citizens who didn't participate in the illusory Bacchanalia of the housing bubble to those who did and weren't clever enough to get out in time.

BANK, GOOD, n., archaic. Sober, conservative, risk-averse institutions designed to midwife customers' capital and enable prudent lending to deserving businesses and consumers. See Capra, F., the Bailey Building & Loan Association.

BANK, BAD, n. 1. Everyone else. 2. Especially Goldman Sachs.

BORROWERS, n. For liberals, the unwitting dupes of unscrupulous bankers and lenders whom one shouldn't blame for the crisis. For conservatives, irresponsible graspers with a credit-busting taste for cathedral-ceilinged entryways and 70-inch flat-screen televisions whom one should absolutely blame for the crisis.

CREDIT-DEFAULT SWAP, n. loose translation from the original Latin "ubi mel ibi apes," or "where there's honey there are bees." 1. A complex financial instrument vital to the functioning of a modern economy in the way it spreads risk among consenting parties. (Greenspan, A., pre-Sept. 2008.) 2. A complex financial instrument that nearly destroyed modern capitalism Greenspan, A., post-Sept. 2008).

For the rest of the list click here:
http://tinyurl.com/yz87op9

The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address before using it to email to me.

Your Credit Score

2009-10-06T10:05:00.000-07:00

This is from out latest MoneyMinute. Let me know if you would like future MoneyMinutes emailed to you automatically (about monthly).

October 2009 MoneyMinute – Your Credit Score

By Julie Schatz, CFP(R)

Credit scores. We hear about them all the time, and if you’ve recently applied for a loan then you have felt their importance firsthand.

If you are curious to know more about what seems to be a ‘black box,’ then I recommend this excellent article by Karen Blumenthal at the Wall Street Journal, “Credit Scores: What You Need to Know Now.” This link will take you to the full article:
http://tinyurl.com/yczpcby The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address before using it to email to me.

Here’s the 30-second summary on what you can do to enhance your scores:

Make all payments on time.
Open as few new accounts as possible.
Keep old accounts with good payment history open.
Maintain balances that are less than 50% of credit limits.

Today, a good credit score matters more than ever. Lenders are requiring higher scores for their best interest rates, and they’re less likely to lend to borrowers with flawed credit histories. Because of that, treat your credit score like any valuable asset that needs to be monitored and maintained.

A great source for information on credit scores and to obtain yours, go directly to the Fair Isaac Corp. (FICO) website: http://www.myfico.com/.

Lastly, if you are planning to buy or refinance a property in the next six months, then contact us for a referral to mortgage brokers we trust. They can guide you on making your score as good as it can be before the lender checks your credit.

Bear Market History

2009-09-07T12:12:00.000-07:00

“The further we look back, the further we may see ahead.”
-Winston Churchill

“The only thing new in the world is the history you do not know.”
-Harry Truman

Let's review the bear markets in the post-WWII era. A bear market is defined as about a 20% drop in the stock market and we’ll use the S&P 500 index as a measure of the markets.

for a better view, click on the table

A few things to note from the data:

The market has gone down an average of 30%, 13 times in 63 years. That’s one bear market about every five years.
Even though economic events in some of the bear markets seemed to portend the end of life as we know it, every time the market has recovered and gone on to new highs.
Because this chart is based on the price of the S&P 500 index and excludes reinvesting dividends, it makes both bear and bull markets look worse than they really were. Our media does not understand this detail and so they report a worse-than-reality scenario in the news.
The S&P 500 is not very diversified so better portfolios should have better results.

When you use stock market investments, bear markets come and go with regularity. We all must be prepared for them and live through them.

Thanks to Nick Murray in his book, Behavioral Investment Counseling for the inspiration for this topic.

Quote - time the market?

2009-08-31T16:00:00.000-07:00

"Don't try to time the market. It's very, very difficult to do. There may be a couple of people in the world who can do it, but if there are they're not telling you."
- Ben Bernanke

Quote - Socialism

2009-08-31T15:59:00.001-07:00

"The problem with socialism is that eventually you run out of other people's money"
- Margaret Thatcher

Is Buy and Hold Dead? Part III

2009-08-12T14:55:00.000-07:00

Part I - May 13, 2009
Part II - July 6, 2009

Can you name the 10 most successful market-timers? No, how about the top 5? One?

I can't and it's not for lack of searching. Market timing is a very attractive idea that has seen quite a resurgence due to this dreadful bear market. It's attractive and impossible.

As proof, I offer Joseph Granville who was considered to be the market guru of the 1980s. He made some very impressive market timing calls and at one point could actually move the market in one direction or another based on what he said that day. Joe sold his market timing advice via a newsletter.

Mark Hulbert publishes the well researched, Hulbert Financial Digest where he monitors the performance of 100s of investment newsletters. I've used the Digest to get an independent assessment of a newsletter's quality and I respect the data Mark provides.

Go read what Wikipedia has to say about Joseph Granville. Hulbert Digest data is mentioned there.
http://en.wikipedia.org/wiki/Joseph_Granville

Well -20% per year is so awful that it is not to be believed. So I looked it up in the Digest for myself and Granville's Traders Portfolio achieved -0.2% per year since mid 1980 (still awful). If you invested in the Wilshire 5000 (all domestic stocks) you earned +10.3% per year.

Starting with $1,000,000 29 years ago and compounding it at -0.2% annually, you end up with $943,595. In contrast, the Wilshire 5000 investment is worth $17,166,820.

You would think at least the Granville portfolio was less risky than the Wilshire 5000, but no, Hulbert says the Trader's Portfolio was 5% more risky.

Conclusions:
1) Market timing doesn't work and never will.
2) The only people who made money on the Trader's Portfolio were the people selling the newsletter!

P. S. if you compound $1M at -20% for 20 years you have all of $1,547 left.

Thanks to Harold Evensky and Financial Advisor Magazine for the idea for this article.

Why oh Why Do I Invest in Stocks?

2009-08-11T09:37:00.001-07:00

Cick the chart for a better view.

This is why we invest in stocks. If government bonds seem "safe", then using "unsafe" large-cap stocks more than tripled the return after inflation. Using small-cap stocks caused the return to more than quadruple.

This makes a lot of sense. The returns from bonds are much more stable (reliable) than the returns from stocks. The market assigns returns based on an estimate of reliability. Bonds are more "reliable" therefore they must return less than the "unreliable" stocks.

To achieve their financial planning goals, most of my clients need returns that are greater than what can be provided by bonds or cash or CDs, etc. By mixing in an appropriate amount of stocks with the bonds, we hope to achieve the required return.

The disadvantage to using stocks is volatility and this can be very painful at times.

Right now we are in an extreme bear market that illustrated quite well that the pain of owning stocks is watching them go down, down, down. However, for most of my clients, cheaper stock prices are a good thing because they can buy more stocks at lower prices. For those nearer retirement, an adjustment to more bonds and less stocks may be an answer although the planning is complicated by spending patterns, Social Security, other sources of income, and perhaps the need to leave a bequest for the next generation.

Data Source: Morningstar 2008. Thanks to Nick Murray in his book Behavior Investment Counseling for the idea for this article.

The Economy Has Hit Bottom

2009-08-02T17:54:00.001-07:00

I like this article because it concentrates on fundamental truths -- economies do recover, sometimes with surprising gusto.

From the Wall Street Journal, 7-23-09 by Alan S. Blinder

"How’s the economy, you ask? I have the proverbial good news and bad news, but in this case, they’re exactly the same: The U.S. economy appears to be hitting bottom.
First, the good news. Right now, it looks like second-quarter GDP growth will come in only slightly negative, and third-quarter growth will finally turn positive. Compared to the catastrophic decline we recently experienced—with GDP dropping at roughly a 6% annual rate in the fourth quarter of last year and the first quarter of this year—that would be a gigantic improvement.

Furthermore, there is a reasonable chance—not a certainty, mind you, but a reasonable chance—that the second half of 2009 will surprise us on the upside. (Can anyone remember what an upside surprise feels like?) Three-percent growth is eminently doable. Four percent is even possible. Surprised? How, with all our economic travails, could we possibly mount such a boom? The answer is that this seemingly high growth scenario isn’t a boom at all. Rather, it follows directly from the arithmetic of hitting bottom."

For the entire article: http://tinyurl.com/msbhcj The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

Government Intervention and Stock Returns

2009-07-31T08:13:00.000-07:00

An informative presentation by Dimensional Fund Advisors. They have a superlative research team.

"Should equity investors be alarmed by the prospect of greater government intervention in the US economy? Weston Wellington looks at examples of US intervention in the past and examines the record of stock returns around the world over the last thirty-nine years. The evidence suggests that government intervention is just one factor among many affecting stock returns, and that an above-average degree of intervention is not necessarily associated with below-average returns."

For the rest of the presentation: http://www.dfaus.com/library/videos/governme/

The Fight Over Who Will Guard Your Nest Egg

2009-07-30T11:10:00.000-07:00

Another interesting article similar to the post just below, "Wary Investors Are Seeking Out Objective Voices ". Both argue that registered investment advisors have a fiduciary obligation to their client vs. the less stringent "suitable" standard provided by most other financial advisors.

From the Wall Street Journal, 3-28-09:

"A power struggle in Washington will shape how investors get the advice they need.

On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.

Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra's rules, brokers must recommend only investments that are "suitable" for clients.

Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of "fiduciary duty," or the obligation to put their clients' interests first."

For the entire article: http://tinyurl.com/cd2bdb The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

Wary Investors Are Seeking Out Objective Voices

2009-07-30T10:36:00.000-07:00

From the Wall Street Journal, 7-29-08:

"In the aftermath of the financial-market crisis, investors are leaving Wall Street to sign on with independent investment advisers.

Last year, registered investment advisers brought in more than $108 billion of net new assets into the three largest custodians, according to Charles Schwab Corp., which holds roughly $500 billion in assets for such advisers. By contrast, the four major Wall Street brokerage firms saw an outflow of $8 billion in 2008.

Investors seeking to repair their damaged nest eggs say the chief lure of independent advisers is more-objective guidance."

For the entire article:
http://tinyurl.com/m9x8b3
The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

Quote - Economics as a Profession

2009-07-24T09:38:00.000-07:00

“Economics was the only profession where a person could be considered an expert without having once been right.”

- George Meany

All-bond allocation unwise despite equity jitters, says Ibbotson

2009-07-22T14:47:00.000-07:00

A short article noting that while bond and stock returns were both about 8.5% over the past 40 years, expected future bond returns are 3 to 4% (annually) due to low current interest rates. A balanced portfolio of 60% stocks and 40% bonds returned 9.1% over the same 40 year period.

Read the entire article:
http://tinyurl.com/n5t8ny

Home Ownership Was Never a Road to Riches

2009-07-17T15:35:00.000-07:00

There is a good article in the Wall Street Journal about this topic. The author (Neal Templin) starts out:

"My wife and I have sold all of our four previous homes for more than we paid for them—sometimes a lot more.

We’ve been pretty lucky. We’ve never overpaid much for a house, we’ve always bought in good school districts and decent neighborhoods, we’ve lived in neighborhoods where prices soared during the real-estate bubble, and we’ve been hurt but not decimated by the bursting of that bubble.

When I constructed a very basic cash-flow model for our home-buying history—selling price minus purchase price, renovations and repairs—it showed a roughly 3.5% annualized return on investment, from 1991 through the summer of last year. That’s when we sold our last home and bought our current one."

For the rest of the article:
http://tinyurl.com/m4xylp
The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

P.S. the number one reason home ownership does not lead to riches is that you have to live in it! Since you can't "spend" your home, it becomes wealth for your heirs but not for you. While it's true that some people can downsize and spend a portion of their home, it's quite rare when this is actually done in my experience. And yes, you can get a reverse mortgage, but this results in a significant wealth transfer to the reverse mortgage holder.

Should You Annuitize Some of Your Retirement Assets?

2009-07-17T10:34:00.000-07:00

Everyone has found out how extreme stock market volatility can be! One way to avoid the highs and lows of stock investment and to obtain a lifetime benefit, is to use income annuities.

As an example, suppose you have $1,000,000 of investments in a balanced portfolio starting at the stock market peak Oct 7, 2007. At the bottom on March 9, 2009, your portfolio is worth a lot less, about $420,000 less*. Even if the stock market fully recovers (it always has), you might not want to experience such a emotionally wrenching drop again.

A reasonable approach is to purchase a lifetime income annuity so that your Social Security income and the annuity income cover you basic living expenses. Let's assume that takes $500,000 for the annuity. You can see about how much an annuity pays by going to:
http://www.incomesolutions.com/AnnuityCalculator.asp
For a female age 65, the annuity pays $38,280. The apparent return is 7.7%. Not bad for guaranteed income for life. The income stream will be very comforting in the next bear market.

If you kept the $500,000 invested in a balanced portfolio, a safe withdrawal rate is about 4% which is $20,000. The annuity pays a lot more!

It seems like a no-brainer to go with the lifetime income annuity. But what are the disadvantages?

You income is dependent on the ongoing success of the underlying insurance company.
Once you give the $500,000 to the insurance company, you cannot get it back. If you die the next day, your heirs get nothing. If you need more cash for an emergency, the insurance company will not give it to you. You or your heirs can get everything that is left in the investment portfolio.
The income stream is not inflation adjusted. The withdrawal rate from the investment portfolio is inflation adjusted. At 3% inflation, the withdrawal from the investment portfolio is projected to exceed the income from the annuity in year 23 (your age 88). So if you live a long time, inflation could become a problem. However, the insurance company guarantees to pay the income for your lifetime no matter how long. The investment porfolio provides no such guarantee.
There is no upside potential with the annuity while the investment portfolio could do better than expected permitting larger withdrawals than we projected. Of course the investment portfolio could do worse.

Should you annuitize? As always, "it depends" on your need for stability, your need to provide an inheritance, your life expectancy, and your concern about inflation.

*using DGSIX (DFA Global 60/40) as a proxy for a balanced portfolio. It was down -42% from 10-7-07 to 3-9-09:

Avoid Being Scammed!

2009-07-14T11:28:00.000-07:00

You can hardly blame clients of investment managers for having a real sense of mistrust these days. How can they be sure their investment manager isn’t going to disappear with their hard-earned assets? In many life situations, it is difficult to know who to trust, especially in the choice of an investment manager.

This issue affects our clients, and it affects the people working here. The phone hasn’t been ringing so much these days with calls from prospective clients. Partly this is due to the gruesome bear market we have experienced, but much of it is that prospective clients don’t know who to trust. Getting a 2% CD rate begins to sound good compared to the possibility of being duped out of your money, as portrayed in the daily news cycle.

But most of our clients can’t afford to retire on CDs. Earlier generations could get by with CDs because their pension and Social Security incomes provided for most of their spending needs. These days there are few pensions to be had and many of these are under pressure. It’s now required that each individual save and invest intelligently in order to produce adequate retirement income. So who to trust?

The Securities and Exchange Commission’s website posts a list of questions to ask any financial professional. Could these be used to detect a scam artist?

What experience do you have, especially with people in my circumstances?
Where did you go to school? What is your recent employment history?
What licenses do you hold? Are you registered with the SEC, a state, or FINRA?
What products and services do you offer?
Can you only recommend a limited number of products or services to me? If so, why?
How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
For registered investment advisers, will you send me a copy of both parts of your Form ADV?

While these are good questions to ask, the Madoffs of this world can pass this test with flying colors. Thus these questions alone aren’t adequate to protect you from someone conniving to steal your money.

We submit that it is the investing environment that provides aid and comfort to the scam artist. So in addition to asking about the investment manager’s credentials, you must also understand where your money is and who can access it.

What do you need to protect yourself? We believe the following is extremely useful:

Always use a third-party custodian.
Use investments that are priced daily in a public market.
Use investments that you understand.
Avoid anything that sounds too good to be true.
Avoid anything that is proprietary, secret, or touted as exclusive.
Know how much the fee is and how it is paid.
Lastly, trust with verification.

Always use a third-party custodian:
A third-party custodian gives you another layer of checks and balances. The custodian is legally required to protect your assets from everyone – including your investment manager. For example, Schwab prevents investment managers from withdrawing unreasonable management fees. Additionally, the custodian should send statements directly to you at least quarterly (the statements must not pass through the investment manager’s firm). Choose your custodian well. (Schwab is well-respected.)

Madoff did not use a third-party custodian for his clients. Therefore all the money went through his hands. He was able to fake statements and investments since no independent parties were watching.

Use investments that are priced daily in a public market:
If you can independently evaluate your portfolio any day you wish, then you have eliminated a major source of fraud. Some fraudsters create fake statements with any values needed to keep you convinced the portfolio is doing well. Publicly traded securities are easily valued so the fraudster prefers to avoid them.

Use investments that you understand:
It’s much harder to fake returns and statements for securities that are easily understood and verified independently. Stocks, bonds, and mutual funds are all easy to monitor. Hedge funds and private equity deals are not.

Avoid anything that sounds too good to be true:
Promises of future returns are the ultimate warning sign. No one knows the future, and if they did, they sure wouldn’t be telling us. Promises of positive returns under all conditions are just lies for anything other than risk-free securities: Savings accounts, CDs, and Treasury bills are about it.

Just by following the news you can get a good idea of how the investment markets are doing. Your investments should be performing in a similar range, otherwise, beware.

Part of Madoff’s mystique was that he had delivered positive monthly returns for decades with almost no exceptions. This must be a huge red flag to any sensible investor. Don’t let greed get in the way of common sense. Anytime someone offers you profits that sound exceptionally good, you should:

Wonder why me instead of his best friends and family?
Wonder why not keep the process a secret so it won’t get copied and possibly ruined?

Avoid anything that is proprietary or touted as exclusive:
This goes along with using investments that are priced daily in the open market and easily verified. Propriety and exclusive implies investments or a strategy that are hidden in a black box and unverifiable.

Know how much the fee is and how it is paid:
It should be very clear how much your investment manager is paid and how she/he is paid. If you don’t know for sure, ask.

Lastly, trust with verification:
After you have found an investment manager that passes all the above tests, you need to trust them so the relationship works for all. However, you must verify that the relationship stays honest.

Review your monthly statements from the independent custodian for anything unusual like mysterious investments. Contact your custodian right away if you see any withdrawals you didn’t make or authorize.
Monitor your performance and make sure it is about what you should expect from the types of investments you are using. If you are making money in a year when most others are losing, you should be suspicious not gleeful.

Buying High and Selling Low

2009-07-14T10:17:00.000-07:00

"Last year, investors made a bad situation worse in the bear market by trying to time when to get into and out of stock mutual funds. As a group, they would have lost less money had they simply held onto whatever funds they owned when the bear market began."

- Mark Hulbert, New York Times 7-12-09

To read the entire article:
http://www.nytimes.com/2009/07/12/business/mutfund/12stra.html

We're becoming socialist. Should we get out?

2009-07-10T11:28:00.000-07:00

"The degree of government intervention is just one of many factors affecting expected stock returns, and investors should be cautious in assuming it is a principal factor."

- Weston Wellington, Dimensional Fund Advisors

Quote - Confessions of a Former Mutual Funds Reporter

2009-07-10T10:11:00.000-07:00

"Mutual funds reporters lead a secret investing life. By day we write 'Six Funds to buy NOW!' We seem to delight in dangerous sectors like technology. We appear fascinated with one-week returns. By night, however, we invest in sensible index funds."

- Anonymous Fortune writer, Fortune 4/26/99

Quote - The Big Tease

2009-07-10T10:07:00.000-07:00

"What many of us foget is that all these diverse media vying for your eyes aren't trying to offer you advice, nor are they trying to influence you into making a rational decision. They are selling advertising."

- Jane bryant Quinn, Newsweek, "The Big Tease" 8/7/95

Quote - What's a bear market?

2009-07-08T09:48:00.000-07:00

“A bear market is an extended period of time during which people who think this time is different sell all their investments to people who understand that this time is never different.”

- Unknown

Is Buy and Hold Dead? Part II

2009-07-06T11:02:00.000-07:00

I found some thoughtful quotes on the topic:

From John Bogle (former CEO of Vanguard):“Our emotions tend to lead us in the wrong direction. We are usually optimistic when the market is high and pessimistic when the market is low. So the odds of being able to time the market are not good. The stock market isn’t a place for betting. The place for betting is Las Vegas.”

From Don Phillips, Managing Director of Morningstar:“No one’s used market timing successfully in a mutual fund over time.”

From Janet Bodnar, Editor Kiplinger’s Personal Finance
“With so many of us eager to make up market losses, we’re sitting ducks for new products and strategies – or new twists on old ones - that promise to recover lost ground quickly. Lately I’ve spent time on the road listening to what financial engineers and others in the profession are cooking up, and this is my advice: Proceed with caution. For instance, after the “lost decade” it was inevitable that buy-and-hold investing would be declared dead and that some pros would try to revive market timng. But at the Morningstar investment conference, nearly everyone seems happy to let market timing rest in peace. ‘It’s really dangerous,’ warns Chris Davis, the respected manager of Selected American Shares”.

From Jeremy Siegel, Professor at the University of Pennsylvania's Wharton School
"Stock-market investors are an unhappy bunch. Standard & Poor's 500-stock index is no higher than it was 12 years ago, and over the 10 years ended in May, stocks have returned a dismal minus 1.7% per year. So it's no surprise that investors wonder whether 'buy and hold' and 'stocks for the long run' are discredited concepts.

The short answer is that stocks are still the best long-term investments. As bad as the past decade has been, there have been other ten-year periods during which stocks have recorded even bigger losses. Yet over periods of 20 years or longer, stocks have never lost money, even after inflation. Including the latest bear market, stock returns have averaged 7.8% per year over the last 20 years and 11% annually over the past 30."

Target Date Mutual Funds - Ever wondered how they work?

2009-06-15T15:30:00.000-07:00

I am a long-term member of the American Association of Individual Investors (AAII) and this month's AAII Journal has very good coverage of target date mutual funds. These can be useful as default choices for smaller accounts such as a new 401k account or a custodial account since all the rebalancing and allocation adjustments are done by the mutual fund company.

The five mutual fund families reviewed are American Century, Fidelity, Schwab, T. Rowe Price, and Vanguard. The article discusses the important facts that you need to consider when choosing a target date fund. If you would like to see the article, email me: richc@feesonly.com with Target Date Funds article in the subject line. I won't use your email for anything else.

BTW, AAII is a wonderful organization. If you are interested in an unbiased education in investing and personal finance, join and attend the monthly local chapter meetings and read the monthly AAII Journal. AAII is a non-profit and they accept no advertising.

Home Equity Loans - Pros and Cons

2009-06-12T15:20:00.000-07:00

A home equity line of credit (HELOC) used to be easy to get and probably will be again once the mortgage mess clears up and home values begin to appreciate.

Having a home equity line of credit can be useful for emergencies especially since using it costs so little. The interest rate on mine is 2.25% currently. Instead of using a margin loan at Schwab, I took out a loan against the equity line saving about 5%.

The trick with using the equity line is to make the interest deductible. Most of you know interest on the first $100,000 of a home equity loan is deductible. What you may not know is that the interest is subject to Alternative Minimum Tax (AMT) and since most of my clients are paying AMT every year, then their HELOC interest is not reducing the income taxes owed.

One way to avoid the AMT issue is to use the home equity loan proceeds for something that makes it deductible. Examples are:

use the proceeds for rental property
use the proceeds for investment
loan the proceeds to your LLC or corporation

Using the HELOC for these ideas requires tax planning and perhaps a formal election. Check with your tax preparer before taking action.

A few more pitfalls:

home equity loan interest is not deductible to the extent that all the home loan debt exceeds the fair value of your home
itemized deduction phaseouts may reduce the value of the HELOC interest deduction even if you are not subject to AMT

Having a large and permanent home equity loan balance is not advisable because the interest rate is variable and if you can't pay the loan back easily, then big increases in the rate could take a surprisingly large chunk out of your cash flow.

Ridiculous Headline: "Investors beware: Rally may not last, MFS strategist says"

2009-06-04T13:22:00.000-07:00

Today's ridiculous headline implies that investors should beware and that the rally may not last.

This information is useless. Investors (we assume they mean stock market investors) should always beware. Stock market investments are volatile and may go down a lot with no notice. Similarly they may go up for no apparent reason. It's unpredicatable. The rally may not last? Of course it may not last. If the author had any guts he would say it won't last, not it may not last.

More quotes from the article:
“We may be on the way to a secular bull market,” Mr. Swanson said. “But I think the sustainable bull market will begin during the summer sometime. This may not be it. It could be liquidity driving stock prices up. Investors should be wary."

Totally useless. The bull market may begin in the summer? It's June 3rd. Summer starts in 17 days!

Yeck, ignore this kind of useless blather.

Highest and Best Function of an Investment Advisor

2009-06-02T15:32:00.000-07:00

"Consider the possibility that the highest and best function of an investment advisor isn't economic commentary or market prognostication, but simply in saving his clients from the media...and from themselves." Nick Murray

Diversification - Always in Style

2009-06-02T15:23:00.001-07:00

In a bear market as severe as ours, all the nuts come out. You can read about how buy and hold is dead and how asset allocation doesn't work.

Recently an article in Wealth Manager caught my eye, one paragraph in particular that summed up the asset allocation issue nicely.

"Since the end of 2007, the broad-based fall in equities has drained a mind-numbing 30 trillion of value from the stock market. Worse yet, amid the economic meltdown of 2008, investors were punished across essentially all asset classes -- regardless of the level of diversification. Not surprisingly, then, reasonable people have been asking the question: Does diversification still work? Yes, and unequivocally! It's just not a hedge against short-term loss." - J. Gibson Watson III

Roger Gibson is a very famous (to us) asset allocator. He has several books worth reading. My favorite for clients is "Simple Asset Allocation Strategies: Easy Steps for Winning Portfolios". You may need to search for a used one as it may be out of print.

Peregrine falcon fledglings

2009-06-02T12:59:00.000-07:00

My earlier, May 13 post about banding has turned into all 3 of this year's nestlings having fledged. This is a shot of Liwa, a female that has landed on a window ledge on a building near the nest site (in San Francisco).

Volunteers keep watch for about 2 more weeks in case the fledged bird ends up on the ground and unable to get back into the air. The parents continue to feed them and teach them how to hunt during this period. Then the fledglings are on their own and usually disperse geographically.

To see more about the group that follows these magnificent birds: http://www2.ucsc.edu/scpbrg/index.htm

Post-recession rallies

2009-05-23T14:34:00.001-07:00

I don't care for USA Today's title "Stocks poised for powerful rally?"; you can find just as many articles saying that the recent rally won't last. I do like the chart from the article, it's a good history of the gains have happened in the stock market after past recessions.

When will the economy be improved?

2009-05-18T15:05:00.000-07:00

When will the economy be improved? It's sort of like baseball!

First, credit markets must improve more and yield spreads need to tighten. Currently corporate bond yields compared to treasury yields are the highest since 1932. With rates this high, it's more difficult for companies to make a profit. Another measure is high-yield bond spreads. Currently high-yield bonds trade at 17% above treasuries. Even in the Great Depression, the spreads were not that large.

Second, equity markets need to improve. Stock markets have had much higher than average volatility in the recent past. A bullish indicator is when volatility (VIX) is 20-30. It has been above 30 consistently since September 2008. Last week it was 33.1. In addition, price earnings ratios normally dip into single digits (the current P/E is about 13 to 16 right now) before a bull market takes off. Keep in mind, P/E can decrease because earnings increase or because prices drop.

Third the economy begins to improve. So unemployment decreases instead of increases and the economy grows instead of shrinks.

Feel free to add comments.

You Know you are Living in 2009 When ....

2009-05-15T10:53:00.000-07:00

1. You accidentally enter your password on the microwave.
2 You haven't played solitaire with real cards in years.
3. You have a list of 15 phone numbers to reach your family of 4.
4. You e-mail the person who works at the desk next to you.
5. Your reason for not staying in touch with friends and family is that they don't have e-mail addresses.
6. You pull up in your own driveway and use your mobile phone to see if anyone is home to help you carry in the shopping.
7 Every commercial on television has a web site at the bottom of the screen.
8. Leaving the house without your mobile, which you didn't have the first 20 or 30 (or 60) years of your life, is now a cause for panic and you turn around to go and get it.
10. You get up in the morning and go on line before getting your coffee.
11. You start tilting your head sideways to smile. : )
12 You're reading this and nodding and laughing.
13. Even worse, you know exactly to whom you are going to forward this list.
14. You are too busy to notice there was no #9 on this list.
15. You actually scrolled back up to check that there wasn't a #9 on this list AND NOW YOU ARE LAUGHING at yourself.

Go on, forward this to your friends. You know you want to.
http://richfp.blogspot.com/

Personally, I am Getting a Life (I hope).
Thanks to Naima for communicating this list to me.

Now's a Good Time to Reasses Your Finances

2009-05-15T10:31:00.001-07:00

Our friends at Bedrock Capital (in Mountain View) are good folks and very similar to ICM - fee only, independent, a small boutique firm.

Their Q2-09 newsletter was interesting this month and worth a read.
http://tinyurl.com/q83hrv

Let me know (via comments), what you think of it.

Is Buy and Hold Dead?

2009-05-13T11:44:00.000-07:00

You can see this idea expressed in many, many articles these days.

Market Timing: getting in and out of the stock market in order to enhance returns by sidestepping downturns. Depending on the quality of the timing, can produce much higher or much lower than market returns

Buy and Hold: staying in the stock market through thick and thin. Produces market returns less expenses.

Market timing is a very attractive concept but the articles I've seen were disappointing since they had no practical suggestions for when to exit or reenter the stock market. There's a reason for that, it's impossible to do on a consistent basis. In my 37 years of stock market experience, I have not yet found anyone who could consistently time the stock market. Many have tried, all the ones I know of have eventually failed to beat buy and hold returns.

The bottom line for me is that, to borrow a phrase, buy and hold is a terrible form of investing, it's just better than all the others.

There's a lot to say about this important topic. What's your opinion?

More later.

Banding day for peregrine falcons

2009-05-13T11:09:00.000-07:00

I don't know if any of you watch any of the peregrine falcon cameras (Google for peregrine cam) but yesterday was banding day in San Francisco. Here's one of the stills from the experience. No, she's not amused by this giant mammal that has invaded to nesting area (on a top floor balcony on the PG&E building).

There are three chicks and they will fledge in about 2 weeks. There is a whole group of volunteers trained to help out if any of the fledglings don't make their first flight to a safe place.

When returns are poor...

2009-05-13T09:26:00.000-07:00

Our investment commentary for May 2009 is full of wisdom. Take a look and let me know what you think of it.
http://tinyurl.com/qz3kdw

Retirement (from the woman's perspective)

2009-05-11T15:36:00.000-07:00

Twice the husband, half the income!

Build America Bonds

2009-05-07T15:09:00.000-07:00

Perhaps you have heard about the Build America Bonds and have wondered if they would work as an investment for you?

Generally they would not, at least not yet. The first reason is that there is no active seconday market (meaning once you buy, selling would be a real issue). The second reason is that these bonds are generally long i.e., the maturity is 20 to 30 years. This is too long for the typical individual investor (10 years is about the maximum you should do).

The good news about these bonds is that they compete with other taxable bonds, corporate bonds in other words, but generally have far less default risk than corporate bonds. So good interest rates with lower default risk.

If a viable secondary market materializes and if shorter maturities are sold, then perhaps Build American Bonds would become attractive for individual investors.

Refinance Now

2009-05-05T16:52:00.000-07:00

Now is a great time to refinance. We are paying down our mortgage by about 200k to fit into the high balance conforming category. We are getting a 5.0%, fixed-30, no points loan vs. our current 6% loan. The monthly payment is about $2,000 lower.

Bonds outperform Stocks over long periods?

2009-05-05T16:40:00.000-07:00

You may have heard recently that bonds outperformed stocks for the last 20 years? It was true less than 10% of the time. The dark line is VFINX (S&P 500 index fund) and the red line is VUSTX (long-term Treasury bonds). The time period is 5/1/89 to 4/27/2009.

Myths of Market Underperformance

2009-05-05T16:38:00.000-07:00

My latest MoneyMinute, "Myths of Market Underperformance": http://tinyurl.com/clvkhz, discusses the ways the media misunderstands or distorts long-term returns from the stock market.

Bear Market Discussion

2009-05-05T16:32:00.000-07:00

Of all the discussion about the bear market, this is the best. Takes about 30 mins. http://www.dfaus.com/share/whatshou/