Michael Jackson - The Legend and Financial Disaster

He truly was a one of a kind. With the passing of Michael Jackson, we now reflect back on the true extent of his talents. Nobody will deny, he may have been the best entertainer of our generation. He will be remembered right along side Elvis Presley and The Beatles.

His financial affairs were a different story. He couldn't budget and didn't seem to have an interest in doing so. His larger than life lifestyle was out of control and resulted in a tumultuous balance sheet. Last minute loans from hedge funds (allegedly at 16%) averted a foreclosure of his Neverlands mansion in California a few years ago. And, his scheduled comeback tour was an ill fated attempt to get out of debt. He was scheduled to perform 50 shows in London and hoped to net $100m. Unfortunately, he owed somewhere around $500m at the time of his death.

If we go back to financial planning 101, it's pretty simple. Spend less than you're making and you'll be in good shape. He must have missed this class. A basic income statement would have been appropriate. Total expenses were running way ahead of income and changes should have been made.

As for estate planning? This should be interesting. Having three children with two different women, I wonder if Michal Jackson had a will? Who will become the guardian of his children? Only time and legal wranglings will tell.

Retirement Planning - Is $1 Million Enough?

Trying to accumulate $1,000,000 use to be a retirement goal for many Americans. It represented both a sizable amount of money and put you into an elite group. You were now considered a "Millionaire."

Unfortunately, times have changed and the the new question is now: "Is $1 million still enough today?"

Well, to steal a cliche... It depends! Inflation over the years has eroded buying power and everyone has different goals and expectations of what his/her retirement will look like. For some, it will simply be relaxing and going trout fishing. Fortunately for this person, fishing isn't too taxing on the budget. For others, Royal Caribbean easily rolls off the tongue and cruising the world is the dream. This individual will require a whole different budget.

Our parents generation use to rely upon years of company loyalty and thus a pension check. Toss in social security as an income supplement and you were all set. Today's generation of workers are facing a different set of variables. For starters, most people no longer stay with one company their entire career. And, even if the do, it no longer guarantees them a pension.

Tomorrows retiree's will have to rely upon several sources of income to replace their salary. You will have to carefully evaluate your retirement plan and how much annual income you will need to suit your lifestyle. Unfortunately, reality dictates most people spend more time planning dinner than retirement, so for many this will require putting pen to paper.

Let's look @ an example: A couple with a household income of $52,000 will probably seek to replace 75-100% of their income. Assuming the mortgage is paid off and the kids are out of college, doing with less and maintaining your existing lifestyle is feasible. In simple math; less expenses = less required income.

Household income of $52,000 per year equates to roughly $4,000 per month. Assuming no pension, social security and other sources of income will have to suffice. Should social security provide $1,500 per month (simply an estimate), another $2,500 will be required to fill the void. Retirement plans (401k, Traditional IRA, Roth IRA, etc.), annuities (variable and/or fixed), rental income and/or part-part employment are the obvious choices.

The problem comes into play with higher income levels. An individual wishing to maintain a current lifestyle of $120,000 per year will find a different set of challenges. Once again, we'll assume no pension. His/her retirement income will have to be derived from social security and other various sources. Most people in this tax bracket will max out and receive social security benefits just over $2,000 per month (assuming a retirement of 67 years of age). If $10,000 is the magic number per month and social security provides just $2,000 per month, an $8,000 shortfall exists. Where does the remaining income come from???

As a Financial Advisor, I've always said, "I don't care how much you make, tell me how much you can save." For many, these words will be the difference in having an enjoyable retirement and not.

What is a Mutual Fund and Can I Lose All of MY Money???

There are two questions I am frequently asked when it comes to investing. The first is a general question while the second pertains more to the recent economy and stock market turmoil.

Q: What exactly is a mutual fund?

A: A mutual fund is a professionally managed pool of money. Thousands of investors mail money to a fund company and the collective amount is overseen by a Portfolio Manager. There job is to follow the mutual fund(s) stated objective and purchase stocks, bonds, money market instruments and/or other securities instruments to create a diversified portfolio.

Q: Can I lose all of my money?

A: A mutual fund portfolio consists of hundreds of stocks. To go out of business, a fund would have to witness each and every company in their portfolio file bankruptcy. Should your portfolio own 200 stocks such as Proctor & Gamble, IBM, Verizon, Disney and Exxon Mobile, these companies along with the other 95 holdings would have to go out of business in order for you to lose all of your money.

The best example may pertain to Massachussets Investors Trust Fund (MITTX). Considered to be "America's First Mutual Fund", this equity offering has been in existence since 1924. Not only has it survived the Great Depression, 15 recessions and 6 major wars, it has never missed a dividend payment in it's 85 year history. Through 3/31/09, the fund sports an annualized return of 8.56%. A $1,000 investment in 1924 would now be worth $1,076,307.

Life's Lessons - Plain Vanilla

Life teaches us many lessons. As a child, I remember my father treating all my friends to ice cream when the Good Humor man came through our neighborhood. After waving down the truck, my dad would order the same flavor ice cream cones. One week it was vanilla and the next chocolate. His reasoning was simple. Everyone received a cone and nobody squabbled over who got what flavor. As he use to say, "keep it simple."

The mortgage business should be so easy. Since 2000, the types of mortgages offered to the general public became a potpourri of financial bliss - or mess. Borrower's didn't understand loan specifics. And, who can blame them with product names such as; interest only, negative amortization, option ARM and 2/28 to name a few. Yes, you can blame the lenders for steering people into ill advised products. But, personal responsibility should always be the bottom line. If you don't understand something, ask more questions, but don't sign on the dotted line until you feel comfortable.

Stevie Wonder could have seen this financial mess coming. Many borrower's were simply blinded by greed and the right to own a property at any cost. This seemed to be accompanied by little or no money down purchases. What's wrong with the plain vanilla mortgage(s) of our parents generation? Fixed mortgages for 15 or 30 years work great! They're simple to understand and have no future rate increases. You can go to bed each night knowing exactly what your mortgage payment will be for the next 15 or 30 years.

With mortgage rates hovering around historic lows, most properties are now more affordable than they've been in several years. If you can't afford to purchase a home with a fixed rate mortgage, you probably don't have enough of a down payment. Most banks are once again requiring a down payment of 20-25%. This size investment increases the likelihood that you will not walk away from a property when times get tough.

Owning your own home is a wonderful concept, but 'keep it simple'.

Quotes on Success

"Character is the real foundation of all worthwhile success." John Hays Hammond

"The secret of success is the consistency to pursue." Harry E. Banks

"Happiness consists more in small conveniences or pleasures that occur every day, than in great pieces of good fortune that happen but seldom to a man in the course of his life." Benjamin Franklin

"An uninspiring person believes according to what he achieves. An aspiring person achieves according to what he believes." Sri Chinmoy

"The man or woman who treasures his friends is usually solid golf himself." Marjorie Holmes

"Most barriers to your success are man-made. And most often, you're the man who made them." Frank Tyger

"A handful of patience is worth more than a bushel of brains." Dutch Proverb

"Success is counted sweetest by those who ne're succeed." Emily Dickenson

"The gratification of wealth is not found in mere possession or in lavish expenditure, but in its wise application." Miguel De Cervantes

"Invest in yourself if you have confidence in yourself." William Feather

"Blow your own horn loud. If you succeed, people will forgive your noise; if you fail, they'll forget it." William Feather

"A quick and sound judgment, good common sense, kind feeling, and an instinctive perception of character, in these are the elements of what is called tact, which has so much to do with acceptability and success in life." Charles Simmons

"On the whole, it is patience which makes the final difference between those who succeed or fail in all things. All the greatest people have it in an infinite degree, and among the less, the patient weak ones always conquer the impatient strong." John Ruskin

"Some men see things as they are and ask, 'Why?' I dream things that never were and ask "Why not?' " Robert F. Kennedy

"Success is a journey, not a destination." H. Tom Collard

The International Arena

Despite what you might as a result of 2008, asset allocation does work. There will be periods of time when you can question the benefits of being diversified amongst different asset classes. But, over time it has proven to work effectively in lowering portfolio risk and increasing returns.

One asset class that should be included in every portfolio is International investing. This can cover stocks & bonds of companies in developed and emerging countries. The former refers to countries such as England, Italy, Spain & France while the latter includes nations such as China, Argentina, India, Korea, etc.

Foreign exposure can be obtained through mutual fund investments in either Global or International funds. Global pertains to investing anywhere in the world - including the USA. International refers to anything outside the USA.

As capitalism, transportation and technology have advanced, many new economic opportunities have arisen and confirmed the concept of Global Village. The world truly is a smaller place. A decade ago, we didn't think of the "BRIC" nations as viable investments choices. Today, Brazil, Russia, India & China are virtually household names in the investment community and are available through various venues. Many Economists feel China will be the economic powerhouse of the next 100 years. Some would argue, it's already happening.

Mutual funds have been a staple for many investors. However, technology has opened the door to other investment alternatives in recent years. One such product is the exchange traded fund or ETF for short. ETF's are similar to mutual funds in many regards. They represent a basket of stocks (or bonds) in a region, country or sector. The key difference is they are traded on various exchanges and thus can be bought or sold during the day. Mutual funds can only be purchased at the end of each day.

To learn more about ETF's, check out iShares and Poweshares. They are both industry pioneers and offer numerous products.

The Magic of Compound Interest

"The most powerful force in the universe is compound interest."
Albert Einstein

Sometimes you have to step back and look at the big picture. Granted, if you're referring to the stock market, this isn't an easy task. The 24/7 news world we live in forces people to analyze, scrutinize and criticize things on a minute-by-minute basis. Several things though are best left for longer time horizons.

Often considered to be the 9th wonder of the world, compound interest is a magical concept. As defined, compound interest is the interest computed on the sum of an original principal and accrued interest. Very simply, it's the money you make on an investment over time!

For our purpose, we'll use the "Rule of 72" to illustrate. If an individual invests $10,000 and gets an annual return of 5% per year, it will take 14.4 years to double his/her money (72/annual return = amount of years required to double investment). Should the investment be more growth oriented and annualize at 8% per year, your time frame is reduced to 9 years. If we shoot for the stars and get 12% year over several years, you will require a mere 6 years to see your $10,000 investment grow to $20,000.

This concept works at any age, but the younger you are, the better. Recent college graduates make a good case study. They have a plethora of time and ample opportunity. Coming up with any type of lump sum is unlikely, but they can rely upon dollar-cost-averaging. Mutual funds will allow new investors to get started for as little as $100 per month. This may not sound like much, but let's take a closer look.

You can be a millionaire! Recent grads can rely upon employment income to come up with $100 per month. If he/she invests $100 per month at 10% per year for 44 years - a total of $42,800 - they will witness the magic of compound interest and watch their account value grow to $1,000,000 by the age of 65! Should their investment do a little better and make 12% per year on average, they will reach the million dollar mark at the age of 60!

The concept is very simple. The difficult part pertains to discipline. Having the courage & fortitude to stick with something for many years is challenging. There will be turbulent stock markets and investment gurus telling you when to sell & buy. As we should know by now, "It's time in the market, not timing the market" that prevails in the end.