Money Matters

Busting 5 Financial Myths

By admin  |  2011/06/08 19:06 Posted in Money Matters  |  Comments (0)

Perhaps you have seen the Discovery Channel television program “Myth Busters.” Adam Savage, Jamie Hyneman, Kari Byron, Grant Imahara, Tory Belleci go about proving whether myths are true or not. Unfortunately they have not tackled any financial myths, of which there are plenty. This post will address 5 such myths and perhaps motivate the TV show to address other financial misunderstandings.

  1. “Dollar Cost Averaging will increase my return.” Sorry folks, dollar cost averaging can make you feel more comfortable about investing into the markets, however there is no evidence to justify the belief that it will increase your return. A primary reason is that the stock market rises more often than it falls so the sooner you have more into the market, generally the higher return you will have. This is particularly true when you are investing over long periods of time.
  2. “Picking the right investment is the main factor to high returns.” Sorry…Wrong again. Several studies over time have shown that having the proper asset allocation (mix of investments, stocks, bonds, and cash) that is appropriate for your goals, time frame, risk tolerance, and risk capacity is responsible for a majority of your portfolio return. Trying to pick the next “big thing” or the “right” investment is very difficult hence the SEC states, “Past performance is a poor indicator of future performance.”
  3. “I don’t need to worry about long-term care costs because Medicare will pay for it.” This is perhaps one of the biggest myths ever. Medicare will pay for skilled nursing care but only for a limited time frame. The vast majority of nursing care costs are custodial in nature and Medicare specifically excludes this type of care. You are on your own for this cost. Don’t look for the government to help unless it is through the Medicaid program for the indigent.
  4. “It’s always best to roll your 401(k) at retirement into an IRA.” Not true but it could be in some cases. Unfortunately, many companies like Fidelity encourage employees to roll over their 401(k) to an IRA when leaving an employer. When doing so the employee loses some asset protection if sued and the ability to borrow from the 401(k). Many 401(k) plans have very good choices available at a very low cost and should be retained. In some cases, the 401(k)’s don’t give you enough diversification of investment choice or have high fees, and going to a no-load IRA would be a better choice. Understanding all the differences is important. If you are unsure, get unbiased advice from someone who will not profit from the advice, such as a fee-only planner.
  5. “Actively managed mutual funds have higher returns than index funds.” This myth has two sides. If you believe economists, college professors, and Nobel Prize winners, over time, index funds (passively managed) provide higher returns than the majority of actively managed mutual funds. If you tend to believe stockbrokers, Wall Street, Banks, and big for-profit companies (all of whom are trying to make money off your investments), you may believe actively managed mutual funds do better. Granted, some actively managed funds beat the index in the short run but no one knows which funds those will be until after it has occurred. Actively managed funds have higher trading and management costs and can incur more income taxes. As a result, passive index funds do better over the long term most of the time.

Do you have a financial myth that you would like confirmed or busted? Just ask! Send your questions to mike@chamberlainfp.com

Michael Chamberlain CFP® AIF®

This article is for informational purposes and should not be taken as legal, tax or investment advice.

Fee-Only Financial Planners Help You in Three Ways

By admin  |  2011/06/02 18:35 Posted in Money Matters  |  Comments (0)

Life is increasingly complex particularly in the area of finance. There are changes in taxation, governmental regulations, mortgages, credit, insurance, education funding, and the stock market domestically and abroad. Social programs such as Medicare, Social Security, and pensions are undergoing change, which can impact your future.

Given all these changes, making good financial decisions is increasingly difficult. Working with a fee-only planner can help you make better financial decisions and balance current needs with future goals. The result can be financial peace of mind.

A fee-only planner does not sell investments or insurance. You pay for advise by the hour like a CPA or attorney so there is no conflict of interest that exists when commissions are involved.

There are three general areas where fee-only financial planners can help you:

  1. Areas in which you know you need help
  2. Areas you don’t know about that are important to your financial well being
  3. Areas you think you understand…but your understanding is incomplete or incorrect.

These following topics may fall into one of the above three areas depending on your knowledge and experience.

Current Financial Status
Are you overspending and not saving enough for future goals? Can you spend more now without impacting the future? Can you really afford that new home? How will you purchase your next car without borrowing? How do you decrease debt? Are your finances as tax efficient as possible?

Retirement Planning
Will you have enough resources to live the life that you desire when you retire? Will you have to work longer than you want or can you retire early? How much can you spend in retirement and not run out of money?

Education Planning
Will you be able to fund your children’s education that you desire for them? How much will the education likely cost in the future? How much should you be saving now for the future? What are the best options to save?

Risk Mitigation
How are you protected against adversities and hardships? Do you have too much or too little insurance? Are your premiums reasonable for the coverage you have? If you get sued are you properly insured? How would your family be impacted if you died, were disabled or needed long-term care?

Estate Planning
How do you make sure your wishes will be carried out without lawyers and the courts if you were disabled or died? How can you minimize problems for your family at those difficult times? How can you keep the costs low and avoid probate or minimize the tax aspects?

Investing
Do you know the expected rate of return of your portfolio? How do you decrease the costs of your investments? Are you getting the maximum return for the level of risk that is appropriate for you? How much risk is that? Do you have an Investment Policy Statement? Are you adequately diversified? What is the Alpha and Beta of your portfolio? Are your investment designed to be tax efficient?

Unfortunately, anyone can call himself or herself a financial planner and many insurance salesmen, Broker-Dealer representatives, and some bankers love to use the term since it lulls potential customers into a false sense of security since the real goal is to generate a commission when they sell you a product.

When commissions are involved, you never know if the recommendation is in the salesperson’s best interest or yours. Salespeople who call themselves financial planners have tainted the reputation of the field of financial planning with overzealous selling of too much and the wrong type of investments or insurance.

Clients should be on guard when dealing with sales people at even name brand financial services companies such as banks, brokerage firms and Insurance companies.

To avoid the potential conflict of interest, use the services of a fee–only financial planner. These planners do not sell products. They simple analyze your situation and provide advice. Since you pay them for a plan or for their time they do not benefit financially if you take their advice. On the other hand, those planners who are Registered Investment Advisors are legally required to keep your interest foremost at all times!

Many well-known publications recommend that to locate a Registered Investment Advisor in your area go to www.GarrettPlanningNetwork.com or www.NAPFA.org.

With the complexities of finance, there are many ways that you benefit using the services of a fee–only planner. These can be in areas that you know you need help, areas you do not know about yet, and areas that you think you know about, but your understanding is incorrect.

Michael Chamberlain CFP® AIF®

Disclosure – Mike Chamberlain is a Member of NAPFA, the largest organization of fee only Planners and Garrett Planning Network the largest organization of hourly fee only planners.

Tax Refund: Good and Bad Ways to Spend It!

By admin  |  2011/04/01 16:10 Posted in Money Matters  |  Comments (0)

Millions of households have received or will be receiving income tax refund checks from both the state and federal governments. What will you do with your refund check?

Good ways to spend the tax refund

Pay down credit card debt. It’s been a few tough years and maybe you, like many people, have used the credit card to get through difficult times. With credit card interest rates often exceeding 20%, the carrying costs can devastate a monthly budget. Paying off credit card debt with these high rates is like having an investment with an equivalent rate of return.

Set up a rainy day fund. Unexpected expenses or disruptions of income frequently occur. Having a stash of cash is a good idea. Capital One, ING Direct, American Express, and Ally Bank have money market accounts currently paying over 1% interest. These accounts typically beat the interest rate at local banks.

Get financial planning advice. Financial planning can help you in three areas: 1) the areas where you know you need help, 2) areas of opportunity you may not be aware of, 3) the areas you think you understand but may not be right about. Be sure to go to a fee-only planner who will not sell you products but rather give you unbiased advice. Go to www.garrettplanningnetwork.com or www.NAPFA.org to find a planner near you.

Establish estate planning documents. One never knows when disability or death may occur. Being prepared can help safeguard you and your family, and your desires as to what happens with your assets. Always consult an attorney who specializes in estate planning for the preparation of these very important documents. Be sure to include powers of attorney to administer your affairs if you’re incapacitated, and provide instructions regarding: health and healthcare, who should care for your minor children, and how your assets are to be distributed. These laws vary from state to state. Note: do not trust online services or CDs from Susie Orman.

Fund retirement plans more fully. Sticking the tax refund into an IRA or an equivalent amount into a 401(k), 403B or 457 will not only provide tax-deferred growth for retirement but gives you an immediate tax break for next year.

Investing in yourself. Taking a course or class to improve your job skills or qualify for you a new job can provide a high return on the investment.

Bad ways to spend your tax refund

Splurge on things that make you feel better. It is very common for people to buy things to make themselves feel better. It may be clothes, a bigger television, or going out to fancy dinners. Unfortunately these better feelings dissipate quickly and people are left in no better position than when they started.

Taking a “great” vacation. It is somewhat natural after working hard all year to think that we “deserve” a vacation and use the tax refund to pay for it. Taking a break and relaxing for a while to recharge the batteries is a good idea, but resist using the tax refund to splurge on a vacation. Take satisfaction in making a more prudent decision about the use of these funds.

Using the refund as a down payment. It is very tempting to buy things over time by financing the purchase. Having the down payment is only the start of many payments to come. It is far wiser to save the money so that you can purchase the item out right. The exception of course would be a house or car. Don’t finance anything unless you’re certain you can meet the monthly payments thereafter without impacting other obligations or your ability to fund other short-term and long-term goals.

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Put Your Home Back into Your Trust after a Refinance

By admin  |  2011/02/15 19:27 Posted in Money Matters  |  Comments (0)

Having a living trust allows your appointed trustee to control your assets if you become incapacitated. This trust also enables you to avoid probate upon your passing.

When you establish your trust, your attorney will prepare a quit claim deed that transfers your home to your trust. No problem, all is good…until you refinance.

Most lenders want to place the mortgage onto the property when the home is not in trust. The lender instructs the title company to take the home out of trust and then completes the mortgage. There is no problem with this, but you must instruct the title company to transfer the home back into your trust immediately after the refinance.

When interest rates hit a recent low late last year, many people refinanced and the majority failed to put their home back into their trust!

If you have a trust and you own a home, check with your county recorder to verify that it is in the name of your trust. If you are uncertain, check with your estate planning attorney. Be particularly vigilant if you have refinanced since your trust was established.

An once of prevention can save tens of thousands in probate fees and prevent delays in estate closure.

Mike Chamberlain

Do Your Finances Need a New Years Resolution?

By admin  |  2011/01/05 21:50 Posted in Money Matters  |  Comments (0)

Most New Year’s resolutions are often about exercising more and or eating better in order to lose weight or get fit. It is easy to jump on the scale and see we gained a few pounds, or that the belt needs to be let out two holes compared to last year and a change is in order.

For other parts of life, we know the areas of concern and what to do.

  • What do you do to stay healthy? You make good decisions about lifestyle and you get routine check ups from your doctor.
  • What do you do to prevent big auto repair bills? You get regular service and car tune ups from a reputable auto shop.
  • What do you do you prevent a big dental problem? You go for cleanings and a checkup from the dentist.

However, in some other areas, knowing what to do is not as straightforward. Many do not know the questions to ask, let alone the answers, such as:

  • Am I making the right financial decisions?”
  • How are we going to pay for the kids’ education?
  • Can we really afford that house?
  • Do I have too much or too little insurance?
  • Will we have saved enough to retire at age 65?
  • Is my asset allocation right for my situation?
  • How much risk is in my portfolio?

Many people have not thought about the financial questions that they should be pondering in order to make good financial decisions. How confident are you in your financial well being? A good place to start is to take the “Financial Fitness Survey.”

Topics in the survey include quality of life, retirement, investments, estate planning, risk mitigation, and other life events. When looking at the results of your survey, your areas of uncertainty will become clear. These topics may be areas where you could benefit from professional financial advice… just like medical advice from your doctor.

You can download the survey for free . There is one survey for those who are retired, and one for those who are working.

If you are going to make any New Year’s resolutions this year, take 10 minutes and answer the simple questions about your Financial Fitness and start to get Financially Fit For Life!

Americas New Retirement Reality: Decreased Retirement Expectations

By admin  |  2011/01/03 20:56 Posted in Money Matters  |  Comments (0)

Americans are more pessimistic about their future retirement than in the past.

Due to the weak economy, high unemployment, market volatility, national debt, the underfunding of Medicare and Social Security, and the decline in the use of traditional pensions, Americans are coming to understand the new reality of retirement. “We will not have the income for the retirement dreams we hoped for!”

On December 20 2010, 401khelpcenter.com referenced a study by Hartford that indicated the primary retirement goal of “enjoying life in retirement” dropped from an all-time high in 2007 of 42% to just 13% in 2010.

Almost 70% of those 45 and older that were surveyed said “providing for daily expenses in retirement” is their number one priority. This percentage is up from 25% in 2007.

80% of those surveyed are not confident that their future combined resources of Social Security, pensions and savings will be sufficient for their retirement.

This dramatic shift in Americans’ attitude is due to a lack of “will” at the government level and at the individual level. Neither political party, has the leadership ability to stop spending (i.e. borrowing from) Social Security funds and institute the necessary changes to make Social Security sustainable into the future. While 75% of Americans over 45 believe that the responsibility for providing income in retirement rests with each individual, 80% of individuals spend too much on current lifestyle needs and wants to adequately save for their own retirement.

37% of Americans are currently unsure when they will be able to retire. 41% indicate they intend to delay retirement, continue working full-time or perhaps part-time as a way of maintaining income in later years.

Retirement savings have been impacted as a result of market volatility. Five years ago, 46% of those surveyed thought their retirement savings would last more than 20 years. Currently only 16% of those surveyed believe that.

The financial services industries (Broker Dealers and Insurance Companies) use the general lack of understanding to sell products that often have excessive fees and questionable performance, which further reduces people’s ability to properly fund retirement.

The dream about early retirement is becoming more of an illusion. In 2007, 14% of those surveyed thought they could retire before age 60. Today that number is only 7%.

Many people do not have any idea as to the amount of money that will be needed to fund their retirement. Financial planners often plan on clients living to age 95. This means that after working for 40 years (roughly age 25 to 65) one needs to save enough to fund 30 years of retirement (age 65 to 95). Planners also factor in medical costs, inflation and basic needs as well as wishes or dreams.

Recently, a young couple (both age 25) contacted my office to learn how they could retire by age 30. Their income was $60,000 a year, net worth was $2,000, and they could not reduce their spending. Their reality is that there is no way they could retire in five years and little possibility for them to retire before age 67. This lack of understanding is wide spread even with those much older.

To avoid the new reality of retirement of decreased expectations, people should:

  1. Start planning for their retirement as early as possible (in your 30s)
  2. Use the services of a fee-only Certified Financial Planning Practitioner® to assess the best ways to achieve your desired retirement.
  3. Develop and use a savings and spending plan
  4. Be prepared to work longer than currently expected

To find a qualified fee-only planner in your area to help assess how you can have the retirement you want, use the services of a member of the GARRETT PLANNING NETWORK or NAPFA.

Think Twice About Buying Gold

By admin  |  2010/10/22 15:33 Posted in Money Matters  |  Comments (0)

It’s hard not to notice that gold is over the $1,300 an ounce when newspapers, TV and Internet remind us of it on a weekly basis. The reason for the increase in gold price is fear. The fear of chronic government deficits, risk of recession, risk of inflation, as well as the devaluation of our currency compared to that of other countries.

But before you decide to buy gold, think about these five items:

  1. Gold has not served as a good inflation hedge. A broad basket of commodities is viewed as a better inflation hedge than gold alone. In the past two decades oil has been a much better inflation hedge. Everyone uses oil and it’s something we must have at this point. When inflation increases so do prices. Not so with gold.
  2. There is little demand for gold for industrial purposes or jewelry. What has been driving gold prices up is fear.
  3. As the economy improves with more jobs, bringing about an increase in gross domestic product, and less fear in general, the demand for gold will fall as will the prices. What do you think is more likely to happen — the economy getting better — or worse? Most experts expect it will get better over time.
  4. There is no interest or dividends from owning gold, which is unlike bonds, stock or real estate. A buyer’s only upside is that another buyer will be willing to pay more than what you paid for it (less any transaction costs, commissions or storage costs).
  5. Anyone interested in buying gold now is late to the party. Think back to the housing boom when people borrowed money in order to buy a rental house at sky high prices only to find the bubble break, and are now underwater on their “for sure investment.” Just because prices for gold have gone from $215 per ounce to more than $1,300 does not mean it will continue. The fundamentals don’t warrant it.

When it comes to investment decisions you need a game plan or strategy for the long haul. It’s often unwise to make decisions based on short-term events because whether the situation is a certain way one week, or one month, or one year, the events will be different and unpredictable.

Michael Chamberlain CFP® AIF®
Santa Cruz / Sacramento CA

What Type of Investor are You?

By admin  |  2010/10/13 15:46 Posted in Money Matters  |  Comments (0)

The other day, my five-year old granddaughter asked me, “Grandpa, if you could be an animal what would you be?” It was fun talking with her about all the possibilities.

As a Registered Investment Advisor and financial planner working with a wide variety of clients, the question made me think that there are different types of investors who seem to have certain animal tendencies.

First is the “River Otter Investor.” This was one of my favorite animals to watch at the zoo. They seemingly would be constantly playing, jumping from one activity to the next. This type of investor gets easily excited about the new, “best investment” to come down the road. There does not appear to be much serious thought in what they do. They seem to go along with whatever others are doing at the time. Taking big risks can sometimes mean big winnings, but more often than not, big losses are the result. They have no game plan.

The “Rabbit Investor” is timid, hops along for a while and then stops to see what’s happening. Rabbits are usually startled and when something scares them, they run for cover even though whatever startled them was harmless. They tend to listen to what the “investment entertainers” or the media has to say even though it’s just a blip in the longer time frame. They often rush to sell when they should be buying, or after they sold they wait too long to buy back in. As at a result of trying to be safe they seldom get ahead.

The “Ostrich Investor,” while having the ability to move swiftly and precisely, finds more comfort by sticking their head in the sand and avoiding the realities in the market around them. They often get eaten since they did not see what was coming.

The “Squirrel Investor” on the other hand is perhaps the type of “animal investor” everyone should strive to be. While the squirrel is generally happy, animated and content, this type of investor balances current needs with future needs. This investor has a methodology and process to regularly squirrel away some nuts or savings for future needs. They don’t stick all their nuts in one place but diversify amongst a number of places. Knowing that they have something for the future they have greater peace of mind; they know that they can enjoy today as well as tomorrow.

What type of animal investor are you? Perhaps this can be a wakeup call so that you too can chose to be a different type of animal investor to better balance current needs with future needs.

Mike Chamberlain CFP® AIF®
Santa Cruz and Sacramento CA
Member of Garrett Planning Network, NAPFA and FPA

Big Fight in Washington: Fiduciary vs. Suitability

By admin  |  2010/10/11 15:44 Posted in Money Matters  |  Comments (0)

When the term “Big Fight” is used, many people think of Ali vs. Frazier, Lewis vs. Scheming or Holyfield vs. Tyson. Right now in Washington a much bigger fight is being hammered out in the Securities and Exchange Commission (SEC) as to how stockbrokers and possibly insurance agents will be required to treat clients in the future.

The SEC has been tasked to report back to Congress whether investment salespeople must abide by the Fiduciary Standard or the Suitability Standard. The outcome will be extremely significant for the public.

Currently, Registered Investment Advisors are held to the Fiduciary Standard, the higher standard. The Fiduciary Standard basically says that an advisor will:

  1. Put the client’s best interests first.
  2. Act with the skill, care, diligence, and good judgment of a professional.
  3. Not mislead clients; provide full and fair disclosure of all important facts.
  4. Avoid conflicts of interest.
  5. Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

On the other hand, stock brokers operate on the Suitability Standard that requires them to do what is “reasonable” for their client. This is obviously a much lower standard and often fails to protect the public.

Most people do not know the difference between the two standards. In a recent study of 1300 investors, Opinion Research Group found that 91% believe that stock brokers and investment advisers should follow the same investor protection rules. 60% already thought that investment salespeople do, but they do not.

Here is an example of how the application of the two Standards would differ. An “advisor” determines that an S&P Index 500 fund is suitable for the client. The advisor’s firm has a fund that pays a 5% commission, which reduces the investment by that amount. An identical fund from another company pays 2.5% commission. Under the Suitability Standard, the advisor can legitimately “sell” the high priced fund. However, under the Fiduciary Standard, the advisor would recommend the non-commissioned fund because that is what is best for the client.

As can be imagined, the financial services companies that sell products are lobbying hard to leave the rules as they are so that they can continue to heap large commissions on the products that they sell.

If consumers want objective advice and to be treated fairly under the Fiduciary Standard they can look for an advisor who belongs to Garrett Planning Network or NAPFA.

Mike Chamberlain CFP® AIF®
Santa Cruz / Sacramento CA