Love, Marriage and Finances

January 28, 2015 — Sam H. Fawaz

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. There are, however, two important caveats. First, same-sex marriages are recognized for federal income and estate tax reporting purposes. However, each state determines its own rules for state taxes, inheritance rights, and probate, so the legal standing of same-sex couples in financial planning issues may still vary from state to state. Second, a prenuptial agreement, a legal document, can permit a couple to keep their finances separate, protect each other from debts, and take other actions that could limit the rights of either partner.

Building Wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans and each contributes $18,000 a year, as a couple you are contributing $36,000, twice the maximum annual contribution for an individual ($18,000 for 2015). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which could make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement Benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate Planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax Planning

When filing federal income taxes, filing jointly may result in lower tax payments when compared with filing separately.

Debt Management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

Family Matters

Marriage may enhance a partner’s ability to collect financial support, such as alimony, should the relationship dissolve. Although single people do adopt, many adoption agencies show preference for households that include a marital relationship.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved before tying the knot.

If you would like to discuss financial planning related to your upcoming or existing marriage or any other investment portfolio management matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

 

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The Swiss Franc and Your Portfolio

January 21, 2015 — Sam H. Fawaz

You’ve almost certainly read about the recent drop in the global (and U.S.) stock markets, as a result of the “shocking” announcement by the Swiss central banking authority that it would not force the Swiss franc to trade at 1.2 euros.  Be prepared to be shocked: you can now buy a Swiss franc with a euro.

If you’re like most of us, you’ve probably wondered why this shocking development would have anything to do with the enterprise value of the individual companies that make up the various global indices.  What’s the story here?

The story is actually pretty simple—and surprisingly, isn’t being told very clearly in the press.  The Swiss National Bank had been artificially holding the Swiss franc at 1.2 euros for the past three years.  Why?  Because the value of the euro has been sinking on global markets.  A lower euro means everything manufactured in the Eurozone is less expensive for outside buyers, which is great for exports. By keeping the franc at a steady cost vs. the euro, the Swiss National Bank was protecting Swiss watches, chocolate products and high-end medical diagnostic equipment from becoming more expensive in the countries where Switzerland does most of its export business.

This policy suddenly became more difficult, in part because the European Central bank is expected to announce, on Thursday January 22, what economists delicately call “monetary easing”—buying government bonds, lowering interest rates, and giving banks and corporations more access to more euros.  The inevitable result would be a lower euro compared to other currencies.  Every time the Swiss Central Bank buys euros and sells francs, it is putting money in the pockets of global currency traders and a variety of hot money speculators who have bet that the Swiss will continue their policy.  These traders would have reaped a huge windfall if the euro dropped and the bank continued to fight an increasingly expensive battle to maintain parity.  The effect would have been a transfer of billions of dollars from Swiss taxpayers to shady speculators.

But why does any of this affect the value of U.S. stocks, or stocks in Europe, for that matter?  Why were floor traders on the New York Stock Exchange experiencing what one described as ‘once-in-a-career’ market turbulence, and others described as a ‘massive flight to safety?’  Certain exporting companies in Switzerland will be negatively affected and have to adjust their profit margins downward to stay competitive.  But U.S. companies aren’t selling their goods and services abroad in Swiss francs, and European companies will be slightly more competitive, globally, after the expected monetary easing announcement.

The only answer that makes any sense is that hot money traders dislike any kind of surprises, and they hit the “sell” button whenever they’re startled by news that they didn’t anticipate.  Then they wait until they have a better understanding of what’s going on.  And, since these short-term traders make up a majority of all the actual buys and sells, the markets tend to trade lower even though no fundamental economic reason exists for them to.

This provides a great opportunity for all of us to see the difference between short-term headline moves in the market and long-term fundamental shifts.  Make a note to, a month from now, see if you still remember the fact that the Swiss central bank is no longer supporting the franc against the euro.  At the same time, look to see if any major shift has occurred in the business operations or profitability of U.S. companies due to this adjustment in currency values overseas.

There will be known and unknown consequences as a result of this action.  Other countries may decide to manipulate their currencies as well.  Over the coming months, you might have to pay a little more for a Swiss watch, and chocolate manufactured in Switzerland might be pricier as well.  You will want to steer clear of parking your money in the Swiss central banking system, which is now paying an interest rate of negative three quarters of a percent.  If you’re a global options trader who took the wrong side of the bet, this was terrible news for your returns this year.  But the underlying value of the stocks in a diversified investment portfolio aren’t likely to become less valuable based on the latest trading price of options denominated in Swiss francs.

If you would like to discuss your portfolio or any financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://www.forbes.com/sites/marcelmichelson/2015/01/16/swiss-franc-u-turn-is-realistic-move-as-snb-cannot-stop-tide/

http://www.businessweek.com/news/2015-01-15/swiss-franc-surges-to-record-high-against-euro-as-snb-ends-cap

http://money.cnn.com/2015/01/15/investing/interest-rates-negative-switzerland-ecb/index.html

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Why You Still Need Malware Protection

January 12, 2015 — Sam H. Fawaz

Many ask me why I decided to adopt the nick-name TheMoneyGeek. The answer is because I’m such a money nerd and techno geek.  Where money and technology intersect, I’m really in my element.  Unfortunately, so are creative hackers.  They will take any opportunity to separate you from both your computer data as well as your money. So how do you protect yourself? And with Microsoft Defender software available on most new Windows computers, do you really need antivirus software on your home computers?

The short answer is “yes”.  The Internet is increasingly awash with creative malware that can severely damage your computer, destroy your files, and embed themselves quietly in your operating system, sending information that can be used by identity thieves, or allowing hackers to turn your computer into a spam machine or “slave”.

Antivirus software companies monitor the Web in real time.  They are constantly identifying new strains of malware and providing updates to their software that will look for the “symptoms” of every known virus, isolate it and allow you to remove it before it has a chance to damage your files, send compromising information or invite your friends and neighbors to purchase online porn.

Top10AntiVirusSoftware.com has just released its 2015 list of the most effective programs for preventing worms, trojan horses, viruses or malware from installing themselves on your computer.   The top-rated industry leader was McAfee Software, which can be purchased for $24.99 a year.  Other top-rated programs include Kaspersky ($29.99), BullGuard ($23.96), BitDefender ($19.95), Norton Antivirus ($59.99), AVG ($31.99) and ESET ($19.99).  (You can buy any of the programs at a discount at http://www.top10antivirussoftware.com).

If you prefer free anti-malware programs, Consumer Reports likes Avast!, Avira and AVG antivirus. For paid security suites, Consumer Reports ranks ESET Smart Security, G Data Internet Security, F-Secure Internet Security, Kapersky Internet Security and Bit Defender the best (in that order).  But before you pay for and download any security suites, check with your internet provider-they may furnish all subscribers with free software.

Understand that like all things in the software world, the best program in 2015 may not be the top-rated the following year.  And most importantly, recognize that you need to constantly respond to the free upgrades for your software, because some of the most creative programmers in the world are constantly plotting against you and your security.  Paid anti-malware and security suites require an annual maintenance fee, though many allow you to install the program on up to five computers in your household.

If you would like to discuss protecting your money and computers, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Source: http://www.top10antivirussoftware.com/

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As Inflation Fears Fade, Deflation Moves Front and Center

December 31, 2014 — Sam H. Fawaz

As the Federal Reserve winds down its massive bond-buying program, the widely predicted after effects — rising interest rates and inflation — have thus far failed to materialize. The yield on the bond market’s bellwether 10-year Treasury note, which started 2014 at 3.03%, had fallen to 2.33% as of October 29.1 Similarly, inflation, as measured by the U.S. Bureau of Labor Statistics key benchmark, the Consumer Price Index, has risen just 1.7% in the past year and has averaged 1.6% since the Fed first initiated its bond-buying program four years ago.2

Currently, concerns over inflation have been replaced by an opposite economic condition: deflation, defined as two quarters of falling prices within a 12-month period.3

Deflation, a Good News/Bad News Story

The paradox of deflation is that it can create good as well as bad conditions. When prices on essential goods and services drop, consumers are left with more disposable income to spend on nonessential items. Case in point: Plunging oil prices have spelled relief at the pumps, as the average national price for gas has now dropped below $3.00 a gallon for the first time since 2010.4

But when prices tend to fall across the board, the effect can turn negative for the economy, companies, and governments alike. Consumers put off making major purchases in the hope that prices will fall even further. That purchasing stalemate can be disastrous for a consumer-driven economy like the United States’, which garners about 70% of its GDP from consumer spending.

When spending stalls, companies’ revenues suffer and pressure mounts to cut costs by laying off workers, freezing or reducing wages, or raising the price of the goods they produce — all of which can further stymie consumer spending and deepen the deflationary cycle.

Debt is the other major problem associated with deflation. On the consumer side, when wages are stagnant or declining, consumer spending power declines, and it becomes more difficult to pay off debts — even fixed-rate debt such as home mortgages — because the value of that debt relative to income increases.

The same scenario plays out for corporations and governments, causing cash-flow shortages, tax revenue shortfalls, liquidity problems, and even bankruptcy.5 Deflation fears are particularly pronounced in Europe, where sluggish economic growth has much of the continent teetering on the brink of recession. To a lesser extent Japan and China are facing similar woes.

On the Right Side of the Problem

The good news/bad news nature of deflation has everything to do with what is driving the drop in prices of goods and services. For instance, if it is a lack of demand — as many economists say is currently the case in the Eurozone — deflation could be damaging. If, however, it is due to a boost in supply — such as the oil and gas boom in the United States — it can prove beneficial to economic growth.6

Either way, analysts say that U.S. investors should benefit from current conditions for the time being. The S&P 500 Index has gained 6.3% thus far this year (as of October 26), while the Stoxx Europe 600 Index has fallen 0.3%. Meanwhile, virtually all major currencies are devaluing against the dollar in an attempt to export deflation to the United States.6

If you would like to discuss your current portfolio asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

I wish you great health and prosperity in 2015!

 

Sources:

1USA Today, “First Take: Beginning of the end of easy money,” October 29, 2014.

2U.S. Bureau of Labor Statistics, Consumer Price Index, September 2014.

3The Economist, “The dangers of deflation: The pendulum swings to the pit,” October 25, 2014.

4AAA’s Fuel Gauge Report, November 3, 2014.

5Yahoo Finance, “Why deflation is so scary,” November 3, 2014.

6Bloomberg, “U.S. Gains From Good Deflation as Europe Faces the Bad Kind,” October 26, 2014.

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Is Your Portfolio “In Style” or Making a Bad Fashion Statement?

December 24, 2014 — Sam H. Fawaz

It is fairly common knowledge that a retirement portfolio’s carefully constructed asset allocation can become unbalanced in two cases: When you alter your investment strategy and when market performance causes the value of some funds in your portfolio to rise or fall more dramatically than others. But did you know there is also a third scenario? Your portfolio can become unbalanced due to unexpected changes in the funds’ holdings.

Getting the Drift

The phenomenon known as “style drift” generally occurs when a fund’s manager or management team strays beyond the parameters of the fund’s stated objective in pursuit of better returns. For example, this may occur when a growth fund begins investing significantly in value stocks or when a large-company fund begins investing in the stocks of small and midsized companies. As a result, the fund’s name may not accurately reflect its strategy.

If style drift occurs within the funds held in your portfolio, it could alter your overall risk and return potential, which may influence your ability to effectively pursue your financial goals.

Feeling the Effects

While some fund managers embrace a strategy that provides significant flexibility to help boost returns, and indeed such flexibility often proves quite successful, investors need to remember that too much flexibility can also present a threat to their own portfolio’s level of diversification. Investors need to consider their ability to tolerate unexpected changes in pursuit of higher returns.

For example, let us assume an investor allocates her equity investments equally between growth funds and value funds with the hope of managing risk and increasing exposure to different types of opportunities. If the manager of the growth fund begins to invest heavily in value stocks, the investor could end up owning two funds with very similar characteristics and a much greater level of risk than she intended.

Truth in Labeling?

Although most investment companies, including those represented in your retirement plan, adhere to stringent fund management standards, you may not want to simply judge a book by its cover, so to speak. An occasional portfolio review can help ensure that you remain comfortable with each fund’s management strategy.

For a comprehensive look at each fund and to evaluate its potential role in your portfolio, take the time to study its prospectus and annual report to determine how much flexibility the fund manager has in security selection. Also, look carefully at the fund’s holdings to see if they are in line with the stated objective. If you discover something that appears amiss, it may be appropriate to rebalance your portfolio accordingly.

If you would like to discuss your current portfolio asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Have a Merry Christmas!

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Investor Know Thyself

December 10, 2014 — Sam H. Fawaz

In an ideal world, emotions would play a very small role in the way people invest and manage their money. Everyone would thoroughly research their options, maintain realistic expectations, and keep counterproductive habits under control.

But in the real world, even well-informed investors sometimes make emotionally charged decisions that may threaten their ability to stay focused on important financial goals, such as accumulating enough money for retirement. In fact, such missteps are so common that many academics have done extensive research on “investor psychology” or “behavioral finance” to explain why some people tend to keep encountering the same obstacles in their financial lives.

Behavior Insights

As you might imagine, different financial attitudes can result in very different consequences. For example, the behavior known as “anchoring” is the tendency for investors to hold on to a belief based on their own limited experience, despite the availability of contradictory information.

For instance, someone who lived through the Great Depression might be more likely to be a conservative investor, while someone who did very well in the market during the 1990s might tend to be a more aggressive investor. Of course, history shows that that type of decline or growth experienced by such individuals, is more the exception than the norm. As such, one possible result of anchoring is making long-term investment decisions based on misguided performance expectations or incomplete facts.

Overconfidence in one’s own abilities is another mindset that could make it more difficult to achieve lasting financial security. Why? Because it may lead investors to ignore sound advice, misunderstand goals, and potentially implement inappropriate investment strategies. On the other hand, a lack of confidence may be to blame for the “fear of loss” (or “fear of regret”) that causes some nervous investors to adjust their portfolios too often — or not often enough.

You’ve Got Personality

It can also be insightful to think about what type of “financial personality” you have. “Impulsives,” for example, are prone to spending spontaneously and not saving enough. “Planners,” however, are in the habit of setting aside as much as possible and sticking to an appropriate investment strategy.

If you would like to discuss your financial personality or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

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Massive withdrawals from 401(k)s thwart Americans’ retirement planning efforts

December 3, 2014 — Sam H. Fawaz

As the IRS released the 401(k) contribution limits for 2015, attention turned, as it has in prior years, to the large number of plan participants who come nowhere close to contributing these amounts. In contrast, many individuals use their 401(k) accounts as a means to pay off loans and other current expenses.

The amounts withdrawn are not negligible. According to a recent study by Vanguard, the average withdrawal represents one-third of the participant’s account balance. Additionally, most withdrawals are not for hardship — non-hardship withdrawals outnumber hardship withdrawals 2-to-1, and the rate of new non-hardship withdrawals doubled between 2004 and 20131.

So, why are so many withdrawals occurring? One reason is to pay off debt, including student loans. Another may be to help make ends meet when people are between jobs. Fidelity reported earlier this year that 35% of participants took all or part of their 401(k) savings when leaving a job2.

No matter the reason, the long-term implications of early 401(k) withdrawals can be considerable. In withdrawing from the account, plan participants will miss out on tax-deferred compounding of that money, which can add up over time.

Alternatives to Raiding Your 401(k)

Withdrawing from a tax-deferred retirement plan to meet short-term needs should be a last resort. Before doing so, consider alternatives such as the following:

  • Savings accounts or other liquid investments, including money market accounts. With short-term investment rates at historically low levels, the opportunity cost for using these funds is relatively low.
  • Home equity loans or lines of credit. Not only do they offer comparatively low interest rates, but interest payments are generally tax deductible.
  • Roth IRA contributions. If there is no other choice but to withdraw a portion of retirement savings, consider starting with a Roth IRA. Amounts contributed to a Roth IRA can be withdrawn tax and penalty free if certain qualifications are met. See IRS Publication 590 for more information.

If withdrawing from a 401(k) is absolutely necessary, consider rolling it over to an IRA first and then withdrawing only what is needed. According to the Vanguard study, fewer than 10% of withdrawals were rolled into an IRA; more than 90% were taken in cash1, which typically generates withholding taxes and IRS penalties.

If you would like to discuss your retirement investments or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
1Vanguard Investment Group, How America Saves 2014, June 2014.
2The New York Times, “Combating a Flood of Early 401(k) Withdrawals,” October 24, 2014.

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Relative Prosperity

November 30, 2014 — Sam H. Fawaz

You might have read that the U.S. investment markets are jittery on the news that Japan has experienced two consecutive quarters of economic decline—the official definition of a recession.  But if you turn the news around, it offers us a reminder that, however much we complain about slow-growth recovery from 2008, Americans are actually part of one of the most robust economies in the world.

The statistics tell an interesting story.  The U.S. economy is growing at a rate of about 2.95% for the year, which is (as the complainers correctly point out) slightly below its long-term pace.  But this doesn’t look so bad compared to the 2.16% growth average for the G7 nations in aggregate, and our growth numbers are well ahead of the European Union, whose economies are expanding at an anemic 1.28% rate this year.

Look deeper and our story looks even better.  The current recession is Japan’s fourth in six years, despite long-term stimulus efforts that make the Fed’s QE program look like a purchase at the candy store.  Europe is rumored to be teetering on the edge of recession, which would be its second since the 2008 meltdown.  The published GDP figures coming out of China (which are very unreliable due to heavy government editing) could drop to about half the long-term rate this year, and Brazil entered recession territory last summer.

But what about the 5.8% unemployment rate in the U.S.?  That’s better than the 10% rate at the end of 2008, but it’s not good—right?  Compared with the rest of the world, America’s jobs picture looks downright rosy.  The list, below, shows that only 13 countries have lower jobless rates than the American economy, and some of those (Malaysia, Russia, Saudi Arabia) may be giving out numbers that their leaders want to hear.  Yes, it would be nice if the long, sustained GDP growth we’ve enjoyed these last six years were faster, and we all hope that the unemployment rate continues dropping.  But compared with just about everywhere else, life in the U.S.—on the economic front, at least—is pretty good

Global unemployment rates

Malaysia (2.7%)
Switzerland (3.1%)
South Korea (3.5%)
Japan (3.6%)
Norway (3.7%)
Taiwan (3.9%)
Denmark (4.0%)
Brazil (4.9%)
Russia (4.9%)
Germany (5.0%)
Mexico (5.1%)
India (5.2%)
Saudi Arabia (5.5%)
UNITED STATES (5.8%)
Indonesia (5.9%)
Pakistan (6.0%)
United Kingdom (6.0%)
Australia (6.2%)
Israel (6.5%)
Canada (6.5%)
Chile (6.6%)
Philippines (6.7%)
Venezuela (7.0%)
Czech Republic (7.1%)
Argentina (7.5%)
Sweden (7.5%)
Netherlands (8.0%)
Austria (8.1%)
Colombia (8.4%)
Finland (8.5%)
Belgium (8.5%)
Iran (9.5%)
Turkey (10.1%)
France (10.2%)
Ireland (11.0%)
Poland (11.3%)
Egypt (12.3%)
Italy (12.6%)
Portugal (13.1%)
Iraq (15.1%)
Spain (23.7%)
Nigeria (23.9%)
South Africa (25.4%)
Greece (25.9%)

If you would like to discuss your current portfolio/asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:
http://www.washingtonpost.com/business/economy/japan-recession-europe-stagnation-cast-pall-over-global-economic-outlook/2014/11/17/5cd81612-6e8f-11e4-ad12-3734c461eab6_story.html

http://www.washingtonpost.com/world/japans-economy-tips-back-into-recession-in-another-blow-for-abe/2014/11/16/9a8f2e94-8c9c-44cf-a5e8-b57a470fd61f_story.html

http://www.washingtonpost.com/world/japans-abe-says-tpp-trade-talks-with-us-are-near-the-final-stage/2014/11/07/24ba0b42-63a8-11e4-ab86-46000e1d0035_story.html

http://www.washingtonpost.com/world/british-prime-minister-david-cameron-says-red-warning-lights-flashing-on-global-economy/2014/11/17/acc29d06-c38f-49a1-b478-30d334fd3389_story.html

http://www.tradingeconomics.com/country-list/unemployment-rate

http://www.economywatch.com/economic-statistics/year/2014/

http://vicshowplanet.blogspot.com/2014/08/brazils-economy-falls-into-recession.html

https://uk.news.yahoo.com/ebrd-says-russia-certain-fall-economic-recession-122646029–business.html#PklpsIB

http://online.wsj.com/articles/chinas-slowdown-raises-pressure-on-beijing-to-spur-growth-1413893980

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When Diversification Fails

November 26, 2014 — Sam H. Fawaz

Correlation coefficients are one of the most complicated areas of the asset management world, but the idea behind them is pretty simple–or, at least, most of us thought it was until the 2008-2009 meltdown.  The basic idea is that you study the price movements of, say, the stocks of large companies (represented by the S&P 500), and then look at the price movements of, say, stocks in the NAREIT (real estate) index.  You find that, on average, they tend to march to different drummers; when one goes up, the other goes up less, or it may go down.  When the other goes down, the first asset may go up or stay the same.  They have, in the parlance of experts, a low correlation.

These correlations between various flavors of stocks and real estate, commodities, bonds and other assets are expressed mathematically, and are one of the factors that professional investment advisors take into account when they build portfolios.  Whenever one kind of asset is going down, ideally you want something else in the portfolio to be going up, responding to different influences.

But all of these carefully-crafted models and all the higher mathematics went seriously awry during the 2008-2009 downturn, when every risk asset–from commodities to real estate to stocks–went down in concert as if the correlation coefficients had suddenly decided to converge at exactly the wrong time.  How could this happen?

At a recent investment conference, the outlines of a possible explanation began to emerge.  It was noted that all of those risk assets had one thing in common: they were financed or owned by the same small number of investment banking and brokerage institutions.  When Lehman Brothers went bankrupt and Bear Stearns was essentially folded into J.P. Morgan, when Citigroup and Merrill Lynch and Goldman Sachs suddenly had to rebuild their balance sheets, they all needed to sell assets to raise money.  The result: the world’s largest owners of risk assets were all desperate sellers at the same time.  Suddenly, all those assets, no matter how different their underlying economics, were in the same boat: they had to be sold so that companies could meet their net capital requirements and stave off bankruptcy.

And, of course, this caused those assets to have something else in common: they were dropping in value so fast that the average investor was scared out of his wits.  Instead of a run on the banks, as we saw in the 1930s, there was a run on the markets, fueled by the same kind of panic: will I be able to get my money out before it disappears?

This explains how the normal historical correlations failed to protect even the best-diversified portfolios.  The discussion then turned to: is there anything we can do about this going forward?  The solutions under discussion ranged from buying expensive hedges (which, of course, become dramatically more expensive during a panic), to selling into the teeth of the storm (and locking in significant losses), and, in general, the answers weren’t very satisfying.  The consensus was twofold: first, these kinds of panics don’t happen very often.  Interestingly, the mathematics of modern portfolio theory suggest that a 2008-like downturn should happen every 65-80 years, and that happens to be just about how long it was between the Great Depression and the Great Recession.

Second: these panics seem, in retrospect, to be great times to buy risk-based securities.  When others are selling in a panic, you can almost name your price, and to the extent that you don’t believe that civilization is coming to an end, you trust that sooner or later the stocks you bought cheaply will, when the panic subsides, rediscover their true value.  The trouble, as one advisor put it, is: how are you going to tell your frightened clients, in the height of a storm, that this is a great time to put more money into the market?  Is anybody going to listen to that advice when the largest global investing organizations are trying to unload those same assets at any price they can get?

The bottom line here is that professional investors are finally getting a handle on why well-diversified portfolios didn’t protect against the 2008 downturn.  But the fact remains that the people who can control their panic seem to be the only ones who will be protected the next time there’s a panic run for the exits.  Until we invent a cure for the human tendency to flee with the herd, investment portfolios are likely to go down the next time we experience a serious market downturn.  Let’s hope we’ll have to wait 60-80 years.

If you would like to discuss your current portfolio/asset allocation or any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Posted in Fee-only, Financial Planning, investing, markets, retirement planning. Tags: , , , , , . Leave a Comment »

Fee-Only Financial Advisers Who Aren’t

September 21, 2013 — Sam H. Fawaz

Today’s (Saturday September 21, 2013) Wall Street Journal contains an article entitled ” ‘Fee-Only’ Financial Advisers Who Don’t Charge Fees Alone” written by award-winning writer Jason Zweig, better known as “The Intelligent Investor.” Jason acts as beacon to guide investors towards the better practices of saving and investing and warns them of the tricks and traps.

In this article, Jason points out that “You might think a “fee-only” financial adviser will never charge you commissions or other sales charges that could induce him to favor selling you something that is better for him than for you. Think again.”

Through his research, he found that many advisors who hold themselves out as “fee-only” indeed earn commissions, kickbacks, trails or other hidden compensation even though they might not sell you a product that generates one. He found that numerous advisors (661) that were Certified Financial Planners (TM) and worked for large Wall Street brokerage firms such as Morgan Stanley, UBS, RBC, Wells Fargo, J.P. Morgan Chase, Bank of America Merrill Lynch, Raymond James and Ameriprise Financial also listed themselves as fee-only advisors on the CFP (r) website. By definition, based on the nature of the firms that they work for, they cannot designate themselves as fee-only advisors or planners.

Many people also confuse fee-only with fee-based. They are definitely not the same. Fee-based means that the advisor can earn both fees for services as well as other commissions or kickbacks for selling investment, insurance or other financial products.

NAPFA, the National Association of Personal Financial Advisors (the de facto fee-only organization of planners and advisors found at napfa.org), the Financial Planning Association and the Certified Financial Planner board of standards are currently working on more clearly defining the “fee-only” standard and urging members to update their profiles and re-assert that they meet the more clearly-defined standard. I applaud this effort.

I wish to reassure our clients, prospects and friends that our firm, YDream Financial Services, takes a very serious and crystal clear stance on meeting the fee-only definition. Fee-only planners, like us, are compensated solely by fees paid by our clients and we do not accept commissions or compensation of any kind from any source. We also don’t earn any money or consideration from trails, referrals or markups. We have zero incentive to recommend any financial products and don’t accept anything (except perhaps trinkets from wholesalers or fund companies worth $5 or less handed out at conferences) that influences our recommendations. Our custodian, Charles Schwab does not reimburse or compensate us for any trade commissions or for the use of any particular financial products that they offer.

As a fiduciary, we take our responsibility to put your interests first and we endeavor do that in every recommendation or transaction that we initiate on your behalf. Finally, any conflicts of interest that our compensation approach might present are clearly discussed and disclosed with our clients and prospects prior to implementing the recommendation or moving forward with the engagement.

You can find the Wall Street Journal Article here http://goo.gl/23Oy3B. It’s worth the short read. If the link requires a log in or subscription to the Wall Street Journal Online, I suggest typing the title of the article above into your favorite search engine then click on the search hit that it finds.

Posted in Fee-only, General, investing, markets. Tags: , , , , . 1 Comment »