Monday, November 30, 2009

Cyber Monday 2009


I'm not exactly sure how Cyber Monday came about, but I could venture a guess. Since the Internet boom of the late '90's, the world wide web became main stream America. Retailers simply figured out another way of selling their goods.


We now refer to the savvy companies as 'bricks & clicks' type businesses. Come to think of it, doesn't every company have a website and a store front? Everyone from Target to Sports Authority to Home Depot to WalMart fits the bill. Perhaps the only TRUE online company is Amazon.com. They have a wonderful online presence, a wide variety of merchandise and no traditional bricks & mortar stores.


Retailers are a crafty lot. I'm sure Cyber Monday was a marketing idea that caught on. Someone should get rewarded for their efforts. However, it kind of seems like a Hallmark holiday to me. Plenty of advertisement and conversation, but no significant meaning.


What do I know though? In due time, today may become a national holiday. Stranger things have happened.




Monday, November 23, 2009

SmartPhones... Convenient & Expensive


Technology is a wonderful thing. We have DVR's to record our favorite shows. We have satellite radio to allow us to hear high quality broadcasts. And, we now have Smartphone- iPhone, Blackberry, Palm & Droid - which allow us to communicate with anyone, anytime and virtually anywhere.


As a Financial Planner, I must admit though, this may not be as great a thing as people think. Yes, the new phones are convenience and offer flexibility. We can talk while we drive (some would argue this is NOT a good thing). Check emails sitting on the beach. And, even use the phone to listen to music, watch movies or get directions (GPS).


All this convenience comes at a price! My late father would surely say, "How did I manage all these years without a smart phone?" Not only do you have to buy a phone. The monthly service fee is the killer. When I last checked, a Blackberry with Verizon service started at $89.99 per month or $1,080 per year before taxes. Ouch! It's bad enough my cable provider charges me just about $1,000 per year. I like annuities that pay me, not cost me!


You can then get killer applications.... or apps... as they are known. They make it even easier to spend money. Starbucks, Gap, Avis, Pizza Hut and eBay all offer customized programs to... dare I say it... increase their bottom line.


Unfortunately, an increase in their sales is generally a decrease in your savings.


Smartphones are a wonderful innovation. They are compact, can increase work productivity and offer the 'cool' factor for some. But, don't kid yourselves... they can be expensive.



Friday, November 20, 2009

Stock Market Volatility 2008-2009




"It was the best of times, it was the worst of times..."
Charles Dickens


I wonder if Charles Dickens knew how appropriate his quote from 'Tale of Two Cities" would be in describing the stock market volatility of 2008-2009. Last year concluded with the S&P500 losing 22% in Q4. It then continued it's losing ways in Q1 of 2009 and dropped another 11%.

The S&P500 has only experienced two consecutive double digit quarterly decreases in 38 of the past 200 quarters... or just 19% of the time. So, for the lucky soles who managed to pick the end of 2008 as a good starting point, they quickly found themselves down 30+ percent in six (6) short months.

Fortunately, the tide turned in mid-2009 and the S&P500 gained 16% in Q2. It then managed to follow this up with another 16% gain in Q3.

Is this volatility unprecedented? Pretty much. It came close in 1983, but the fact remains in the past 50 years the market has not experienced four (4) consecutive quarters with double digit changes.

Monday, November 16, 2009

Challenging Conventional Asset Allocation


We are creatures of habit. We tend to do things that are familiar. We eat at the same restaurants. Shop @ the same stores. Drink the same brand of coffee. Have similar daily routines. And, watch the same TV shows.

Investing tends to be the same. We'll invest more domestically than in foreign markets. Is this a smart economic decision or once again a 'familiarity' issue? You can argue your case either way.

However, you can make a pretty good argument for not following the heard. For instance, if you lived in China, Norway, India or Brazil would the local Certified Financial Planner (CFP) recommend you invest 60%-70% of your money in US stocks? I doubt it. The simple answer may simply be invest where the best opportunities lie within your risk tolerance.

Most asset allocation models will have an emphasis on large US based companies. They'll state the benefits of diversification, quality of earnings (GAAP Standards), transparency and multi-national appeal.

MFS Investment Services has a nifty online calculator for determining your asset allocation(see the left margin for calculators and planners). Even if you test conservative, they recommend a 35% exposure to US stocks. If you are aggressive, you can have an 80% exposure. No model has foreign exposure greater than 20%.

I think it's time to challenge conventional wisdom. This may sound contrarian. But, think about it. When is the last time you saw a 401k plan offering a REIT option? How about a commodity fund? Or, maybe even a gold fund? It simply doesn't happen. Yes, things have evolved whereby some plans offer REIT's these days. But, most plans continue to offer the same asset allocations they did 10 years ago.

Times are changing and portfolio management is evolving. Thinking outside the conventional box could lead to greater returns over the long haul with less risk.



Wednesday, November 11, 2009

Smart Year End Tax Planning

Year end tax planning makes financial sense. There are several things that can be done every year to save money. All they require is a little planning and execution.

Many accountants have told me over the years, clients will come to them in January or February and ask how to reduce their tax bill. Simple answer: Review your tax situation BEFORE December 31st!

Here are 3 strategies worth considering for 2009:

AMERICAN OPPORTUNITY CREDIT
The IRS has effectively expanded the Hope Credit to assist more families with tuition expenses. Four years of post secondary education are now allowed (formerly two years) offering a maximum tax credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

RETIREMENT SAVINGS
Have you recently started a new job? If so and you are eligible for your companies 401k plan, you can fund an entire years amount of contributions the next several weeks. Granted, most people will need the money if they were previously unemployed. But, you can front load the contributions up to $16,500 or $22,000 if you are over 50.

CHARITABLE GIVING
This appears to be the last year for taxpayers over the age of 70 1/2 to make donations directly from an IRA account. This is a wonderful opportunity for individuals to donate appreciated assets @ fair market value and not pay income taxes on the distribution.

As the Financial Planning Association is fond of saying, "Planning Pays Off!"


Tuesday, November 3, 2009

It's All about the Losing Years...


If 2008 taught us anything at all, it's numbers don't lie and losing money is never fun. The uphill battle to regain losses is always challenging. Losing 30% requires a 43% gain to get back to even. So while 2009 is have been fabulous in it's own right, a 20% gain has not made many investors whole as of yet. It's certainly a great start, but only a step in the right direction.

Hedge funds, college endowments and basically, absolute return portfolios, may have the right idea. Their #1 rule: Don't lose money. Rule #2: Don't forget rule #1! They try very hard to minimize risk and manage the downside. In a good period of time, we can all make money. It's the bad periods that concern them.

Having recently read "How Harvard & Yale Beat the Market" by Matthew Tuttle, I was truly impressed how both Universities manage endowment money and how successful they have been over the years. Some of their investments are not available to the average investor, but how they construct a portfolio to minimize risk certainly can be duplicated. Non-correlated assets with Portfolio Managers that add alpha is the key.

"A manager who limited losses last year goes a huge way to helping investors accumulate wealth over time and meet their long term goals" say Don Phillips of Morningstar Inc. "It's the kind of victory that often goes unnoticed."

The typical mutual fund will have a fair amount of volatility as it moves with the general direction of the market. An absolute return portfolio will try to minimize volatility and seek positive year returns year-after-year.

Let's compare two hypothetical investments of $100,000 and use a 5 year time frame. If Fund A (a typical growth mutual fund) has annualized returns of -4%, +12%, +8%, -12% and +14% and Fund B (absolute return product) has returns of +6%, +8%, +6%, +6% and +4%, who has better annualized returns?

Fund A = 3.6% annualized returns with an ending balance of $116,493.

Fund B = 6% annualized returns with an ending balance of $133,775.

While Fund B never has double digit growth in any one year, it manages to avoid losses and increase overall returns through good risk management.