The Demise of the US Dollar

The US dollar, as we know it, is dead. There.... I said it. The currency will never disappear, but the 'greenback' will no longer be considered the premier currency in the world. It may maintain its status as the world reserve currency for the foreseeable future. But, this will probably change at some point. China and other countries are already buying more gold and other currencies instead of the US dollar.

The current administrations ability to spend money is driving the dollar into oblivion. Yes, the currency will bounce back from time-to-time. And, we'll hear rhetoric about how 'a weak dollar helps exporters'. But, truth be told, a weak dollar is inflationary... pure & simple.

Oil is settled in dollars and as the dollar falls, a barrel of oil continues to rise. The media will lead you to believe this is due to an economic recovery. This may have some validity. The bigger story though is a weak dollar = higher oil prices = inflation.

Our government informs us inflation is about 2% per year. Does anyone really believe this? The last time I checked bread, milk, fruit & vegetables, prices have almost doubled in the last few years. Even something as simple as a can of tuna fish went from $0.99 to $1.29 (+30%).

Admitting there is high inflation would require the government to raise social security payments. With the current financial state of the system in question, what's the likelihood of the government fessing up to the real rate of inflation? It's like the fox guarding the hen house. It's not going to happen.

A balanced budget is key to monetary policy. With a deficit growing larger by the minute, there is no way the dollar can maintain any resemblance of stability. It's the NZ Kiwi, Australian Dollar, Swiss Franc and to a smaller extent Euro & gold that is gaining in popularity.

The economic power shift is taking place. Throughout history, it was the manufacturing nations that rose to greatness. Spain, France, UK, United States and now China represent the changing of the guard. The key to all of the greatness... manufacturing. Making products at competitive prices is the key to success. Now that the US is a service oriented economy, we no longer have the edge.

We will continue to be a great nation. A symbol of freedom. However, as an economic force, we have handed off the baton.

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?
  
  
  

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.

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).

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.

The Retirement Dilemna: Mortgage or Not?

The real estate roller coaster has caused a bit of a dilemma for many individuals approaching retirement. Namely - should I pay off the mortgage before retiring?

Tough question. Let's look @ some recent government statistics before tackling this one

• 18% of Americans age 65-74 had mortgages in 1992.




• 32% of Americans age 65-74 had mortgages in 2004.




• 43 % of Americans age 65-74 had mortgages in 2007.




• Average housing debt in 1992 = $24,000.




• Average housing debt in 2007 = $69,000.

This is very disheartening. Not only are more Americans taking on debt at older ages, they are borrowing more money as well. As a Financial Advisor, I value the concept, "less debt = less stress."

As you approach retirement, you should strive to reduce monthly expenses. Some retirees may increase their lifestyle(s) through years good planning and disciplined spending. Others will try to do more with less. Curbing expenses is a great place to start. Eliminating your mortgage is probably the single biggest expense in a household.

Some of this discomfort is the result of a turbulent housing market. Individuals who purchased new homes in recent years not only paid higher prices, but borrowed more money as the statistics indicate. These home owners may now find their properties under water (mortgage is higher than the appraised value).

If you had a sizable down payment at the time of your purchase, refinancing may be an option. Rates are currently very low and a fixed rate is a great consideration should it allow you to lower your monthly obligation. However, banks are once again very careful in lending money and the days of easy loans are gone.

Paying off mortgage balances with non-qualified money is a good idea. If you are sitting on CD's, savings account and/or money market accounts, utilizing these funds to pay off existing mortgages makes sense. It is only when clients ask to use retirement assets do I wince. Using retirement funds creates a tax liability and will reduce your income stream in retirement. This may seem like a good idea, but the economics of such a move don't make financial sense.

Tightening your budget or adding extra income to the mix is a better alternative for paying down your mortgage. "Some individuals will simply have to work longer to get themselves in a better financial position to retire, " says Financial Advisor/Accountant Glover Davis of Bronx, NY. "Being realistic about your financial situation is very important."

The NEW Retirement...

As my friend Colleen use to say to her young daughter each morning, "It's a brand new day." Waking her child with a warm and a loving spirit put both of them in a good state of mind. Each day truly is a new adventure - especially for the young.

When it comes to retirement planning, I wish I could call clients and simply say the same thing. Unfortunately, it won't have the same effect. Even if I had my best smiling voice in overdrive, it won't erase the frustrations investors experienced in 2008. Unless you are truly young, retirement planning is going to take some extra work and/or compromise after last year.

Over the last three (3) decades, Corporate America has changed the rules. Common to our parents and perhaps, grandparents, pensions were a reliable source of retirement income. Not only were they guaranteed for life, companies like GE, Verizon & Wyeth were considered pillars of stability. Couple this with social security and you were all set.

This is no longer the case. I believe recent statistics show only 25% of corporations now offering a pension plan and the numbers are getting smaller every year. With people living longer than ever before, the longevity costs to a corporation are staggering. Some would argue this led to the demise of General Motors as we know it. Thus, corporations are shifting the burden of retirement planning to the individual via 401k or 403b plans.

Once you are near retirement age, there are only three (3) sources of guaranteed income: Pensions, social security and annuities. All of them have inherent risk. But, at present, they're the only vehicles that guarantee lifetime income.

Many investors are now converting 401k plans or IRA accounts to annuities to create their own pension plan. A $500,000 IRA converted to an annuity could provide a 5% income stream. Thus, you are guaranteed at least $25,000 per year for life - this alleviates the fear of running out of money. This annual figure could go up should your underlying account value increase, but the income stream is guaranteed regardless of your account value.

These products aren't for everyone and do come with certain restrictions.