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.

Riding the Stock Market Roller Coaster

As the global economy continues to weaken due to lower corporate profits, higher unemployment and tight credit markets, the volatility in the stock market(s) should remain with us through 2009.

Last year was the most volatile market in the last two decades. There were 71 trading days in which the S&P500 moved up or down by more than 2%. Remarkably, 28 of those days experienced extreme volatility of 4% or more. By comparison, 2002 had six such days and 1987 experienced seven days. In the 4th quarter of 2008, three days had gains or losses of 9%. This has only happened twice since 1978!

So, volatility (or risk) is here to stay. At least for the foreseeable future as capital markets deleverage and re-evaluate the proper prices for stocks and bonds.

This can be unnerving... even paralyzing at times. But, volatility is a two way street. It can take stocks lower, but can also take stocks significantly higher. Positive annualized gains can often be contributed to a select few days in which markets soared. This is why most gurus and publications will preach 'stay the course'.

Asset Allocation: It is often said there are no free lunches. This is true in the financial world as well. But, there is one huge exception - Asset Allocation. While it doesn't work in every market environment (2008 to be exact), it has proven to work over time. A mixture of non-correlated assets... stocks/bonds/real estate/commodities... will diversify a portfolio and reduce account fluctuations.

Buy Low: Warren Buffet has often said, "Buy when people are fearful and sell when they're greedy." Great advice. However, the average investor will tend to do the opposite. Fear takes over and they make 'emotional' - as opposed to 'practical' - decisions.

A good example of why you should buy instead of sell during troubled times is evidenced in this March/April time frame. The Dow Jones Industrial Average (DJIA) seems to have bottomed in March at 6,500. While it's nearly impossible to predict the bottom in any market, there has been a significant recovery in the last two months. The DJIA is now 8,400 or 29% higher. Individuals who panicked and sold in March are certainly disappointed they didn't have staying power in hindsight. People who had the courage to follow Warren Buffet's advice have been well rewarded.

Rebalance: Portfolios should be rebalanced every now and then. Most experts would agree, once a year is appropriate. Many life cycle funds and asset allocation models have this feature built into the product. They automatically shift assets back to their original targets. If you started with a 60%/40% mixture of stocks and bonds, the account will automatically rebalance should the allocation change to say 70%/30% due to an increasing stock market.

Contrary to popular belief during turbulent times, 'rebalance' doesn't mean going from fully invested to a money market account. This all or nothing approach may seem logical at times, but often results in under performance over time. As fear sets in, this may seem like a logical decision. But, as I outlined above, investors who had the courage to add to their accounts when the DJIA was at 6,500 have outperformed any other asset class in that time frame - including money market accounts.

Emergency Funds

In last weeks commentary, I discussed "6 Ways to Ruin Your Retirement Plans." In hindsight, I left out one very important item.

Let's call it #7: Emergency Funds (aka 'Rainy Day Money').

We all know about Murphy's Law. Something that can go wrong, will go wrong - sooner or later. Unfortunately, it often comes at a price. If you're fortunate enough to experience a lower end repair, cash flow will cover the expense. However, big ticket items require a different strategy.

Don't get caught in this financial dilemma.

Having emergency funds of 3-6 months of expenses is a cardinal rule when it comes to financial planning. Couples working in different industries can use 3 months as a target it's fairly unlikely they will be unemployed simultaneously. Individuals should shoot for 6 months as they are the solely responsible for household bills.

Since 2008, I've noticed a sea change in client behavior. Individuals and couples have apparently depleted emergency funds for everything from vacations to washing machines. While we could debate what constitutes an emergency? The bigger issue should be getting an emergency fund back in place. Granted, it takes time and discipline to build back up your rainy day account. But, sooner or later, another storm is going to come!

What happens in the meantime? Couples are turning to retirement money for emergencies. The somewhat convenient process of taking premature IRA distributions is becoming a ready source of cash. Unfortunately, it comes at a HUGE expense.

Premature distributions - before the age of 59 1/2 - are taxed and penalized by the Internal Revenue Service (IRS). For example should an individual request $10,000 distribution from their IRA account, the IRS will impose a 10% ($1,000) early withdrawal penalty AND consider the full $10,000 as ordinary income when you file your 1040 tax return at year end. Assuming you are in a 30% tax bracket, this equates to a $4,000 (40%) tax bill at the end of the year.

Let's step back a minute and analyze this from an economic point of view. Everything in life is a compromise, or at least a trade-off. Financial decisions are no different. Would you borrow money at a 40% interest rate AND jeopardize your own retirement? When put this way, I believe most of us would answer 'No'. It's simply too expensive.

So, why do we tap into retirement money when financially pinched? Probably convenience. But, you would be better served to borrow money from a bank or even get a credit card advance should emergency funds not be available. Both come at a significant cost reduction AND don't effect your retirement assets.

At the end of the day, we all strive to make smart financial decisions. Don't let a short term need derail your retirement plans. Make sure you have an emergency fund (aka 'Rainy Day Money').

6 Ways to Ruin Your Retirement Plans

Longevity is the single greatest advancement in the last 100+ years. Due to medical technology, we are all living longer than ever before. If 60 is the new 40 and 50 the new 30, we have many years of healthy living ahead of us! Should you have the option of retiring at 60 or 65, you could live 30+ years in retirement. For many, this will last longer than your career(s).

Your retirement nest egg is going to be more important than ever. Here are 6 common mistakes to avoid:

1. Save Little or Nothing - Most people spend more than they make. This is a fact. How do you think the average consumer has $7,000 in unpaid credit card balances? We live under the banner 'consumption nation' and spending is the American way. However, if you want to retire one day, curbing your spending habits and saving more money is going to be imperative. Try and save 10% of your of your annual pay. This may not happen all at once. So, try starting with 4% and gradually increase your savings as you adjust your budget.


2. Invest too Conservatively - We all know people who invest in money market accounts via their 401k plans or IRA accounts. This is akin to travelling cross country and buying a bicycle for the trip. Yes, you will eventually get to your destination, but boy is it going to take a long time! If you have 10-20 years before retirement, you need growth in your portfolio - a plane, car or motorcycle is a better mode of transportation! If nothing else, you have to outpace the rate of inflation just to maintain your purchasing power. With historic inflation rates averaging 4% per year, today's money market account and CD rates of 2%-3% fail to keep pace.


3. Ignore Tax Benefits - Tax deferred or tax free growth is a blessing in disguise. Because of compound interest, money will grow faster inside a qualified retirement plan (401k, Traditional IRA, Roth IRA, etc.) than outside. Also, because income tax brackets will probably be increasing in the very near future, do not underestimate the benefits of tax FREE growth offered through a Roth IRA.


4. Overestimate Portfolio Growth - The days of annual growth ranging from 10%-12% per year are gone. Yes, we may have some bounce back years after 2008. But, because business models are changing (less borrowing, leverage, etc.), companies will grow at slower rates going forward. Keep your expectations realistic.


5. Ignorant about Investments - When it comes to your investments, ignorance isn't bliss! Owning several mutual funds doesn't guarantee diversification. As a Certified Financial Planner, I've always encouraged clients to learn more about their investments & portfolios. "The more you understand, the easier my job" has been my mantra for over a decade. Having a general understanding of your investments is a must.


6. Set it & Forget it - Monitoring your portfolio is critically important. This doesn't mean you should check the daily changes, but a quarterly review is certainly warranted. If your mutual fund built it's reputation on a certain portfolio manager calling the shots, make sure the individual is still at the helm. Also, check to see if the fund objectives are still the same. It's easy to say I own the "ABC Fund", but that's the same as saying I own the #8 car in the NASCAR race. If Dale Earnhardt, Jr. is still the driver, you're in great shape. However, if the up & coming college kid is in the driver's seat, it may be time for a change.

Stock Market Historical Facts

Today, a few historical facts on the United States stock exchanges.

The New Amsterdam Stock exchange started in 1602.

The first form of the stock market in New York started in 1792 with just 24 stock brokers meeting in the Tontine Coffee House on the corner of Wall and Water Streets.

The New York Stock Exchange (NYSE) didn’t start until 1817 when the brokers created the New York Stock & Exchange Board. They rented out 40 Wall Street and chartered a constitution to govern trading practices. There were 24 brokers involved.

The New York Stock Exchange had its first day on which a million shares were exchanged on December 15th, 1886.

Brokers joined the New York Stock Exchange by purchasing seats up until December 31, 2005, when the system switched to annual trading licenses. Before the switch, the highest amount paid for a seat was $4 million on December 1, 2005.

The first female member of the New York Stock Exchange was Muriel Sibert who joined in 1967.

Joseph L. Searles III was the first African American member to join the stock exchange. He joined in 1970.

After October 10th, 1953, there has never been a day on the NYSE where less than a million shares have been traded.

The NYSE’s largest volume day on record is February 27, 2007. Over 4 billion shares were traded on that day.

When there is a 30 percent drop in the market, the NYSE closes down trading for the rest of the day.

The Dow Jones Industrial average began in 1896 by the Dow Jones & Company to track the success of the market on any given day.
There are thirty different companies listed on the Dow Jones Industrial average and the included companies change from time to time.

The NASDAQ stock exchange began in 1971 with a focus on trading OTC stocks. The name is an acronym for National Association of Securities Dealers Automated Quotation.

In 1998, the NASDAQ merged with the American Stock Exchange to create NASDAQ-AMEX. Despite the merger, both exchanges are still held separately.

In 1987, the Dow Jones dropped 22.6 percent. In September of 2008, the Dow Jones dropped by 7 percent.

Three of the five largest losses by percentage in Stock Market history took place in 1929.

The largest loss happened in 1987 and a day in 1899 rounds out the top five list.

The largest single day drop in the Dow Jones average history was on September 29, 2008 when the index fell 777.68 points.

October 13, 2008 was the largest single gain in the Dow Jones average. The index rose 936.42 points.