Tuesday, September 29, 2009

Financial Musings...



As the dollar continues to fall and the US budget deficit soars, here are some random thoughts on the US economy, our government, capital markets and traditional financial planning concepts:

  • The world economic powers by century: 1800's = England; 1900's = USA; 2000's = ? (I'd bet on China).

  • Why do people tend to invest in their own backyard? Most growth models still recommend an 80/20 split between US and foreign investments. If we lived in Norway, would they recommend 20% Norway, 80% USA?

  • If individuals are supposed to balance household budgets or risk going bankrupt, shouldn't the US government be held to the same standards?

  • Why are foreign investments considered riskier than American?

  • When did "Made In the USA" became a relic?

  • If 'buy what you know' is a good thing, wouldn't everyone own Sony, Dannon, Toyota, Nokia, Fox Media, Cadbury, etc. (all foreign companies).

  • Is the US dollar a more stable currency than the Euro, Australian dollar or Swiss Franc?

  • If individuals were heading west today to stake a claim, pan for gold, etc., would they be as successful as as yesteryear with today's government imposed regulations?

  • Is inflation in the USA really 2%?

  • Is the "No Tax Without Representation" slogan coming back into vogue?

  • Whatever happened to "Less government is good government"?

  • In terms of age, if "40 is the new 20, " what is the 'new' retirement age?

  • Is the USA still a capitalistic society?

  • When did political parties become so divided?

  • What would happen if the US dollar collapsed?

  • With reduced levels of corporate debt (aka leverage), what type of returns can be expected for cash, bond & stock investments going forward... 2%, 4%, 6%?

  • How important is social security in your retirement plan?

  • Is gold a good investment?


Monday, September 21, 2009

Is the Recession Over???


Let's jump right into it... what exactly is a recession? By definition, a recession is a slowdown in economic activity. In recent years, some economists have dubbed this as a slowdown in the 'velocity of money'.

Here's a quick example: If it use to take 30 days for money to change hands between the customer/painter/paint supplier... it now takes 45-60 days. Albeit a simple example. This is a slowdown in economic activity or exchange of money.

Now the $10 million dollar question. Is the recession over? It appears to be. Economic data is improving and some Economists, such as Brian Westbury of First Trust Advisers, actually think the economy is stronger than people think.

Retail sales jumped a solid 2.7% in August. This is the largest increase since January 2006. Expectations were for an increase of 2.0%. The "cash-for-clunkers" program added steam to motor vehicle and parts sales, which increased 10.6%, the largest increase since right after 9/11.

Excluding autos, sales advanced 1.1%, above the consensus of +0.4%. But July's retail sales were downwardly revised to -0.2% from -0.1%. Gas station sales rose 5.1%, boosted by higher prices at the pump. Excluding autos and gas stations, sales rebounded 0.6%, its largest gain since February.

Recessions are often tied into your personal situation. So, while #'s are improving, if your household income is still suffering due to less overtime, higher taxes, etc., it's hard to feel elated about an economy that is slowly improving.

Take heart... recessions aren't permanent.

Thursday, September 17, 2009

Trading vs Investing


The volatility of 2008 has many individuals asking is trading rather than investing more appropriate in this market environment? This question has surfaced in the past and is always associated with market volatility & human emotions.

We would all love to have the unique ability to time the markets. Buy low & sell high. It sounds simple enough. This would maximize profits and minimize losses. We all get a hunch now & then and feel we know when to head for the exit signs. We are then faced with a two fold endeavor. Getting the first part right is half the battle. When to get back into the market becomes problematic.

Many individuals bailed in the latter part of 2008. They locked in the losses for the year and remain sitting on the sidelines in 2009. Yes, they avoided the Q1 declines of this year, but most are still waiting for the 'right' time to get back into the game. The S&P500 has now risen 50% since the March lows and 18% since January 1st. Sometimes the angst of not losing money gets trumped by missing a great opportunity.

Most investors should stay fully invested. It may be difficult at times. We're all human and the 24 hour news media provokes emotions. Allocations can be altered to rebalance investments or better align objectives. Liquidating and going to cash is not only extreme in nature, but almost always fatal to your financial plan.

Actively managed mutual funds and privately managed portfolios have full-time Portfolio Managers. Their sole job is manage our money. Let them do their job! They will position the portfolio(s) to maximize objectives and make changes where appropriate. These are not static portfolios that sit tight through good/bad times. Mutual fund activity can be verified through turnover ratios. Simply put, this figure reflects account turnover. Thus, a portfolio with a 40% turnover ratio means 4 of 10 stocks were sold during the calendar year. Value funds tend to have less turnover than growth oriented funds. To see your mutual fund account activity, go to morningstar.com.

It may sound logical to trade your investment account, but prudent investors know that market timing is an extremely difficult game to win. Simply staying invested within your risk tolerance is the key to long term success. Should you feel the urge to trade stocks, use discretionary funds and open a discount brokerage account (i.e. TD Ameritrade).


Friday, September 4, 2009

Top 10 Retirement Planning Mistakes


It is never too early to start planning your retirement. The IRS allows several convenient ways to provide for your retirement with tax incentives. Most of us have a retirement plan (401k, SEP/IRA, Roth IRA, etc.), but don't always utilize it to it's full potential. Here are the top 10 mistakes that slow down your progress.

  1. Not taking advantage of time - The earlier you start, the better. Time works wonders in a tax deferred or tax free account. Too many people make the mistake of waiting to start a retirement plan. Put time on your side. Once again, the earlier, the better!

  2. Non investing on a regular basis - Many people start to invest and then stop along the way. Investing on a regular basis - monthly or annually - is the key to success. Contributions + long term growth = more $$$.

  3. Not taking full advantage of tax-free retirement vehicles - If you can afford to fund your account to the max, go ahead and do so. In a 401k plan it allows you to deduct more money for tax purposes. In the big picture, it gets more money working for you on a tax-deferred basis.

  4. Not creating a retirement plan - As you're approaching retirement, you need a game plan. Figure out how much $$$ you are going to need on a monthly or yearly basis AND the sources of this income. Look at all of your financial sources.... pensions, social security, IRA's, etc. Some people should consider annuity products if there is a risk of running out of money. A lifetime income benefit may provide peace of mind.

  5. Poor asset allocation - It's amazing how many individuals leave their money in a money market fund because it's 'safe'. This may sound like a logical strategy, but unless you have $2 million dollars in your money market account, you're not going to get to the finishing line. Growth is to the key to outpacing inflation, maintaining purchasing power and building wealth.

  6. Forgetting about your 401k plan - Although most employees take advantage of their company plan, there are a ton of people who don't participate. Most firms have some type of company match and not participating in such a plan is giving away free money. Learn all you can about your company plan and be sure to participate.

  7. Cashing out or borrowing against your retirement accounts - This has been an all too common theme in recent years. The weakened economy has forced people to borrow or cash out retirement plans. This is the kiss of death! This is why emergency funds are a vital part of the financial planning process. IRA's and the like are NOT intended for for short term needs (hence the stiff IRS penalties). Leave them alone and let them grow!

  8. Not considering a Roth IRA account - The government deficit is becoming a huge problem. Tax free growth provided by a Roth IRA could be worth its weight in gold should personal income tax brackets escalate. Should you qualify for a Roth IRA, they should be used as part of your retirement plan.

  9. Relying too heavily on social security - The whole intent of social security is to compliment your other sources of retirement income. The system is financially challenged and the financial impact of social security is diminishing.

  10. Don't rely too much on company stock - MCI Worldcom, Enron, Washington Mutual, etc. Need I say more? While it seems loyal to own your company stock, never have more than a 20% exposure to an individual stock.