Financial Planning 101

Social Security--One Less Year

2005-03-23T14:58:00.000-05:00

The Trustees of Social Security have adjusted their forecast to when the system will begin to operate at a deficit and when the "Trust Fund" will be depleted. Instead of 2018, Social Security will take in less revenue than it will pay in benefits in 2017. And the "Trust Fund" will be gone in 2041. It's a good thing we have nothing to worry about.

Weak Dollar--Stronger Blue Jays

2005-03-21T22:29:00.000-05:00

Everyone is trying to think about ways the weaker dollar will effect the world. I was wondering how it will affect the American League East. Could the strangle-hold of the Yankees and Red Sox finally be broken because of the weak dollar?

The past 10 years have not been good ones for the Canadian Dollar. Looking at this chart (you may have to click on "all data" to the left of the chart) you see that in 2002 you could exchange one U.S. Dollar for about about 1.60 C$. You also see that the Canadian Dollar has not been this strong against the U.S. Dollar since the glory days of the Toronto Blue Jays' back-to-back World Series victory's of 1992 & 1993.

Having to pay their players in strong USD's and receiving weak C$'s as revenues from ticket sales and local TV/radio rights made it difficult for the Blue Jays to compete. Those same factors also are one of the least covered reasons why the Expos are playing in DC this year. Now that the USD is comparative weaker to the C$, perhaps the Blue Jays may surprise some people in August with a trade if they are in the race or in the coming offseason with free agent purchases.

Terry Schiavo--Living Wills & Healthcare POA

2005-03-21T10:23:00.000-05:00

Back in January I wrote about the Terry Shiavo case and the importance of having a Living Will and Health Care Power of Attorney. If you have not done so, get one. Regradless of how you feel about this particular case, make things easier on yourself and your family. Put your wishes in writing.

Most lawyers will only charge a nominal fee to set one up for you. If you want to avoid a lawyer and feel confident in your abilities to read basic contracts, type in "YOUR STATE advance directives" in a search engine and you should be able to track down approved forms for Living Wills and Health Care Power of Attorney for your state.

Is Congressman Rob Portman a Free Trader?

2005-03-17T14:38:00.000-05:00

Yes, at least according to the Cato Institute. He scored an 82% on limiting trade barriers and a 100% for limiting domestic subsidies.

As the newly nominated U.S. Trade Representative and my soon to be ex-congressman, Rob Portman will try to get the CAFTA Treaty passed through congress. This will probably be a tougher task than passing NAFTA. Perhaps he will be on Larry King debating Ross Perot.

Who will replace Portman in congress. It sure as hell will not be Charles Sanders. This has been his opponent the last couple of times and in 2004 he lost 72%-28%. Needless to say, the next representative from Ohio's 2nd Congressional District will be a Republican. My guess is that it will be someone who is not currently holding elective office. How's that for a firm prediction?

Happy St. Patrick's Day

2005-03-17T14:22:00.000-05:00

Doesn't look like the Irish markets were too enthused about St. Patrick's Day. You can also see from the link the chart has a steep drop off recently. This was no doubt caused by Elan going from 26.90 to 8.05 on February 28.

By having some of the lowest corporate tax rates, Ireland has definitely turned into a Celtic Tiger over the past decade. We shall see if the EU will succeed in slowing down their growth by forcing them to raise their tax rates.

Social Security--Future Deficit

2005-03-16T12:35:00.000-05:00

I think a little historical perspective is needed when thinking about the year when Social Security's income from all sources (payroll tax, interest on the Trust Fund, taxes on the benefits paid) will become fall short of the benefits it has promised to pay. 2018 seems to be the year most everyone agrees that Social Security will begin to operate at a deficit.

2018--That seems a long way off. Most of us still have a hard time believing we are in the sixth year of the 2000's. But 2018 is only 13 years away. Think back 13 years (1992). It does not seem that long ago when Ross Perot was viewed to have a legitimate shot at the presidency or when Michael Jordan was leading the Bulls to their 2nd NBA title.

The point is, 2018 will be here sooner than we think.

Highest Oil Prices Ever?

2005-03-16T11:56:00.000-05:00

I just received a pop-up from the Wall Street Journal on my monitor telling we that oil has hit its all-time high price. Well, I guess in one sense they are correct. The nominal price of a barrel of crude oil has never reached $56.35.

However, if you look at this chart you will see that we have a long way to go to match the historical highs after inflation is factored. Not that I am excited about $2.15 a gallon for the cheap stuff, but things could be worse.

Major Date in History

2005-03-15T11:41:00.000-05:00

March 15th usually conjures up images of somebody getting stabbed in the back, but there are probably two more important events that took place on this date.

In 1493, Columbus did something more important than leaving for the East; he returned. The Fall of the Berlin Wall led to a huge re-opening of new markets, but Columbus returning from a New World (even though he did not realize it was new) opened up a completely new marketplace. The list of new items from the western hemisphere that arrived in Spain on March 15, 1493 and thereafter is extensive. Just on topic of food, take a look at medieval cookbook. Can you imagine Italian food without tomatoes?

101 years ago today, the Japanese arrived on the global scene by defeating the Russian Empire at Port Arthur. Over 50 years after Matthew Perry (no, not this Matthew Perry) opened hermitical Japan to the West. Their victory over Russia accelerating their interaction with the West. Many of those interaction were devastating, but imagine how different our world would be without the addition of Japan to the global community.

These two events of new markets opening up to the rest of the world have a place in our contemporary times. Everyone talks about China and their 1 billion potential customers and consumers. There are other markets also opening to the rest of the globe. India is finally starting to shed its own socialistic restraints on its population. If both the Chinese and Indians can become truly free and interact with the rest of the free world the potential human capital is astounding. Of course, there are a couple of very large swaths of the globe where people not connected to the rest of the world, but I am optimistic that they will be connected.

By adding more areas and people to the global community and free markets will make the sum total of human advancement much greater than the contributions each individual.

Social Security--Video

2005-03-14T06:51:00.000-05:00

The internet is truly an amazing piece of technology.

The past couple of days I have been watching the Cato Instituion's four hour presentation on Social Security that Michael Tanner (their head of Social Security reform) gave to congressional staff in February. The links are not that easy to find on the web-site, however, once you do find them they are extremely informative.

Even if reform is defeated this year, this issue will not go away.

NASDAQ--5 Years Ago

2005-03-10T07:18:00.000-05:00

Today is the 5 Year anniversary of the NASDAQ's highest close (5,049) and also its intraday high (5,133). With yesterday's close of 2,061 it will take approximately until September of 2013 to close again at 5,049, assuming an 11% average return. If the NASDAQ only averages 8% a year (somewhat more realistic) then it will not be until 2016 before it sees such loft heights.

Only the Dow Jones after the Great Depression took longer to get back to its former high. It was not until 1952 to it get back to 1929 levels. It is important to remember that the Dow Jones did not include dividends which were much higher back then.

So, for those of you expecting the NASDAQ to get back above 5,000--I hope you are not in a hurry.

Life Insurance Needs

2005-03-07T09:40:00.000-05:00

While driving my son to school I always hear this radio ad saying that you need 10X's your income in life insurance. I understand that a 30-60 second radio ad cannot go into too much detail about a potentially complex issue. Then again, I am sure there are many insurance agents who don't want to waste too much time with a prospect and just tell them to buy 10X's their income. This would especially be true if you are doing this with a call center. As a former phone monkey, I know that those phone representatives have to be very efficient with their time.

Any way, many variables need to be factored when determining the right amount of insurance required. Marriage, kids, Social Security Survivor benefits, present savings, will the surviving spouse work etc. Whenever you are approached to buy insurance from anyone make sure that you have a capital needs and principle preservation analyses done. They should not take too long to complete and should ensure that you have the right amount of insurance tailored to your needs and not some cookie-cutter formula.

The Best Retirement Plan?

2005-03-07T07:42:00.000-05:00

Last week I was speaking with an old acquaintance (we grew up on the same street) over a pint of Guinness about the direction of the market. He has been managing money for some time and I believe that it can be good to listen to another professional’s insight. If there is at least one thing you learn and can apply for the benefit of a client from a meeting, lecture, and seminar then your time is well spent. Especially if it only takes an hour out of your day. Unfortunately, neither of us could devise a way where we could guarantee our clients 12% returns over the next 20 years. I did, however, bring up possibly the best way for someone to make sure their retirement is comfortable: eat a balanced diet, exercise regularly, and do jigsaw puzzles.

At first my friend looked strangely at me. I then explained to him that if a retiree can stay healthy they will greatly reduce the risk of outliving their assets. People in the financial services industry have always attempted to make sure that their clients have the biggest nest egg on that magic date of retirement. Being physically and mentally ready for retirement is just as important. Yes, it is still essential to save as much as possible for retirement. There will be other expenses during retirement besides healthcare, e.g. traveling, utilities, new cars, food, spoiling grandkids etc.

If a client is having difficulties with their cash flow I look at where the largest expenditures are. This is where spending may be pared back. According to the Bureau of Labor Statistics, people 65 and older spend approximately 12.7% of their income on healthcare. After housing expenses, this is by far the largest expenditure for this age group. If some type of assisted living or nursing home care is required then you can imagine the costs will be much greater. This percentage is expected to become larger since healthcare expenses have greatly outpaced general inflation. When doing projections for clients I use an 8% inflation rate for healthcare versus 3% for general inflation. Some reports show the future percentage of healthcare expenditures will reach 30% of income. This could wreck havoc on any size nest egg.
I realize that eating a balanced diet, exercising regularly, and doing jigsaw puzzles will not guarantee that your body and mind will remain sharp throughout your life. Genetics, unforeseeable accidents, and many other factors contribute to your well being. But if you can increase the odds of reducing your future healthcare cost in retirement then it may be financially beneficial to eat some vegetables, take a walk, and spend a little time on a puzzle. In case you think I want you to live blandly, don’t forget the benefits of drinking a glass of red wine or beer a day. I recommend a Guinness.

Inflation--Milton Friedman

2005-03-02T23:48:00.000-05:00

About 6 years ago I went to the Cincinnati Library's annual book sale. I was browsing through the selections and I came across a book I had never heard of, but I knew of the author. Since the library was selling it for a whopping $1 I figured I could spare the change.

To this day I still read a section of the book if I need to be reminded of the benefits of the markets. Tonight I read about the causes and the cures of inflation. When the book was written in 1979 the inflation rate was around 13%. Think about that, 13% is about as high as America has experienced.

In the book by Milton Friedman (thank God he never became an actuary) Free to Choose explains how inflation is the result of "the rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various)". He uses historical example of Spain flooding Europe with Peruvian silver, but also of more modern governments printing more money.

The monetary policy since Free to Choose was published in 1979 has tamed the beast of inflation. The Fed chairmen during the period, Paul Volcker and Alan Greenspan, have supposedly won the war against inflation. In fact, not too long ago we were told by Alan Greenspan that we have finally won the war against inflation. Milton Friedman, however, wrote about the effects large deficits can have on producing inflation. So far, we have avoided inflation because we have seen our output (productivity) increase.

There are a couple of sectors where inflation has been rampant: healthcare and education. Anytime I do a retirement plan or education cost projection for a client I have to use an inflation rate much higher than the general rate. Why is this? The demand is definitely there for both services, but like Milton Friedman stated there has a been a large input of money for these sectors that is greater than output. The government allocates huge amount of money to healthcare via Medicare, Medicaid, and numerous agencies. Private insurance companies also contribute a large portion of money to the healthcare industry. If the consumer doesn't have to pay their full freight what do they care of the cost. The same can be said of education.

The only way that the inflation rate of healthcare and education will regress to the mean is if the easy money source of government (through entitlements) and private insurance (claims) make people pay for the services they need. Politically, this will be extremely difficult. Good luck to the politician who has to tell Grandma that the government will have to raise her cost for prescription drugs or that little junior will not longer be able to receive their Pell Grants.

Federated buying May

2005-02-28T09:05:00.000-05:00

What is up with Cincinnati companies? Yesterday it was announced that Federated Department stores is buying May Companies. In my past life as a all-around monkey boy for a sportswear company I became familiar with both of these companies. I remember wondering if departments could survive the onslaught of the Big Box stores and the specialty stores.

In college I read this book which gave the history of the first true department store and realized that the business model might be out-dated. When I was a kid it was a big deal to go to Shillito's downtown during Christmas and look at their toys (and that was only 25 years ago). While there my mom would shop for clothes or whatever else she needed. When the Big Box stores came you realized that a department store was a jack of all trades, but a master of none. Their toys were lame compared to Toys' R' Us and so was their electronics department compared to Best Buy.

The early analyst reactions are positive. When aren't they? This should increase their buying power to help stave of the new fangled department stores from Arkansas and Minnesota. At least I know that my wife's first love is Talbot's, then me, and then Macy's (Federated). At least I am not third.

Cash Substitutes--A response

2005-02-25T10:33:00.000-05:00

I was reading Roger Nusbaum's site yesterday and he had a post about somebody asking about cash substitutes. The emailer mentioned a fund which used bonds and stock, but would have lower volatility than the market. Money markets are yielding around 2% in some places so I can understand people wanting to get a little more for their money, but when I read bond/stock fund as a cash substitute I had flashbacks to '99 & 2000. As a former phone-monkey for a mutual fund company I had people asking me if a tech fund or bond fund would be a good place to put their money that they needed to buy a house within 12 months because money markets were only yielding 5-6%. Or another guy who was a very "sophisticated" investor and was using a Janus fund as his cash substitute, until he could decide between the Munder Net Net Fund or Firsthand Technology fund.

Wisely, Roger gave good advice regarding investing money that might be needed in the near future: don't invest. The low interest rate environment has been difficult for both investors and advisors. I recommend people to have an emergency fund of cash, but people want more than 2% from their cash.

The problem is that there really isn't a substitute for cash. If someone needs that liquidity and safety of principle, cash is pretty much all there is. Short term CD's, commercial paper, or Muni re-sets are a couple of options, but most people don't want to tie up the minimum amounts for the latter two choices.

Stable Value funds were all the rage a couple of years back because they did offer you more interest than a money market and the NAV of the fund remained a constant $10. There were limitations: they had to be in a retirement account and they also had minimum holding periods around 12 months. They worked like Guaranteed Income Contracts (GICs) that many qualified retirement plans offer. The SEC, however, took a look at them and now most of them converted to ultra short-term bond funds. Now, if you have a GIC option within you retirement plan then you might want to look at it for your fixed income allocation of your portfolio.

People do look at covered call writing as a way to increase income off of a portfolio. You do receive the premium from selling the call and that can help the yield, but I would not call that a cash substitute. There is the risk that the underlying security could get called away. Now, this is not a horrible situation, but now you have a portion of stock allocation in cash and if you wanted to hold onto that stock you have to buy it back at a higher price than it was called for.

It is important to know yourself or your client for ways to increase yield on a portfolio. You also need to define what is meant by cash substitute as well. I tend to view it as something that would be needed with 3-6 months or even sooner. How much liquidity is needed and when? Can any risk be taken with the money? Answering these questions will go a long way to guiding your best available choice.

p.s. Good luck with the paper trade Roger. I look forward to seeing it.

Currency Mutual Funds

2005-02-23T10:45:00.000-05:00

ProFunds is launching two new mutual funds to track the U.S. dollar. Since this is ProFunds, one of the funds will go long (you hope the dollar strengthens) and the other will go short (you hope the dollar weakens). Unlike most of fund families, ProFunds place no limits on when and how many times you sell the fund. This is definitely geared towards a trader.

Back in the mid-90's Fidelity offered 3 currency funds, but they never really garnered much interest, (read: money). So they were discontinued.

Considering the expenses ratio of these two funds (1.45%) I would imagine an investor could do better by investing in foreign bonds. The volitility would more than likely be less. Investing in foreign stocks could also benefit from a weakened dollar, albeit with more volitility than foreign bonds.

South Korea to Sell Treasuries--Just Kidding

2005-02-23T10:19:00.000-05:00

Yesterday it was reported that S. Korea was going to sell a portion of U.S. Treasury bonds. This had a triple effect by bringing down the dollar, U.S. equity and bond markets.

Looks like something might of been lost in translation, or perhaps it was just a trial balloon. Now S. Korea is clarifying things by saying they are not going to sell their treasuries but rather future purchases they make may be bonds from other governments. Whew! Glad we got that straightened out.

Why did yesterday's news such a big impact? By selling their bonds S. Korea would be driving the yield on bonds higher. More supply on the bond market would force bond traders to offer higher yields to have demand equal the available supply.

I have posted in the past that bond yields have amazingly stayed steady despite predictions to the contrary. One of the reason is that several Asian countries have still been buying our debt. They like are political stability and the yields have been relatively competitive.

I already explained the effects on yields of governments selling our debt. By not buying our debt it would probably force rates to rise to entice more buyers of our debt. And in case you have not noticed we have a lot of debt.

The effects higher yields (interest rates) would have on the economy are numerous. Those of you with an ARM mortgage could see your monthly mortgage go higher. If you wanted to get a loan, you will be paying more in interest. This could led to a cooling off or a retreat in the real estate market. Companies may not want to expand because the cost of money will be more expensive. A ripple effect could occur throughout the economy.

Now before you decide to jump off any ledges, it is important to realize that rates are starting out at a relatively low level and a portion of the market has already factored higher rates. We can expect to have more volatility and I still expect this to a difficult year for US equity and bond market, but we should not see 12% mortgages in the near future.

Because of Because of Winn-Dixie?

2005-02-22T09:05:00.000-05:00

I am not sure how to comment on the news that Winn-Dixie grocery stores have just filed for bankruptcy. Was it because Because of Winn-Dixie finished third at the box office this past weekend?

Actually, Winn-Dixie operates stores in Cincinnati under the name of Thriftway (I guess the name would work too well above the Mason-Dixon Line) and I know why they are filing for bankruptcy. They never have fresh produce and the rest of their selection is weak.

Even more detrimental is the emergance of the 5,000 pound gorilla from Bentonville, Arkansas into the grocery business. From my own personal experience of dealing with buyers from there, they are very demanding and usually get what they want.

Social Security Reform

2005-02-21T20:43:00.000-05:00

Sorry for the non-blogging today, but I have been working on an educational program regarding Social Security and its possible reforms.

It is amazing how easy research is now that just about everything can be found on the internet. The Social Security and Census web-sites were very helpful. The federal government is not entirely wasteful. Google was not bad either.

Carnival of the Capitalist

2005-02-21T13:00:00.000-05:00

Thank you Red Prawn for including me in this week's Carnival of the Capitalist. This is quite an honor.

Test

2005-02-20T16:58:00.001-05:00

Testing...123...Testing

Will Martha Stewart have new cellmates?

2005-02-20T16:58:00.000-05:00

Will the SEC making visits to Boston and Cincinnati anytime soon? It appears that PG's put options and Gillette's call options experienced a large spike prior to the announce of the merger.

This reminds me of the news about large contracts of puts being bought right before 9/11 on American and United Airlines.

Imagine That

2005-02-18T07:39:00.000-05:00

The WSJ reports how American Express Financial Advisors were fined for:

violating state and federal securities laws requiring advisers to act in a clients' best interests and to disclose conflicts of interest that could taint their recommendations.

It appears that their sales reps were given large incentives to sell in-house mutual funds. The top selling reps were even given a free one year lease for a Mercedes. I can't imagine that their advice to their customers would be clouded. I mean, American Express probably has funds that are good. Oh wait, there is more to the article:

...regulators said investors were harmed because American Express funds had lackluster returns. Over the five years ended Jan. 31, fewer than a quarter of the company's funds beat the average investment performance of comparable funds, according to Chicago researcher Morningstar Inc.

If you think American Express is the only one doing this, think again. Even my former employer (a large mutual fund/brokerage firm based in Boston) which is perceived as a company who only pays their employees in salary pushed their in-house funds with incentives. Of course, the incentives weren't anything as nice as a Mercedes, but it became clear that if you did not sell their funds first you would have a black mark on your permanent record.

Be wary when a stockbroker pitches you an in-house product. More likely than not they are not thinking of your best interests.

On Blogging

2005-02-17T19:01:00.000-05:00

This does not have anything to do with financial planning, but it has everything to do with blogging. Impressive.

It's Good to be the King

2005-02-17T10:13:00.000-05:00

The Wall Street Journal (subscription may be required) is reporting that four large brokerage houses gave their CEO's an average 33% pay raise after their stocks rose on average 4.7%. Not bad. I wonder who is paying for the difference.

Speaking of Greenspan

2005-02-17T08:26:00.000-05:00

It looks like he made favorable comments regarding privatized accounts. Of course he did a little CYA by stating "that it should be done in a cautious and gradual way".

This does not sound too different from anybody else advocating private accounts. As I mentioned in a previous post, most advocates are proposing something similar to the Thrift Savings Program available to government workers.

Because of Greenspan's tremendous clout as Federal Reserve Chairman and his previous experience with the 1983 Social Security reform the possibility of privatization should get a boost. We shall see.

In good company

2005-02-16T15:57:00.000-05:00

Last week I posted about how the 10 year bond yield has been stagnant despite the overwhelming belief that it should have risen by now.

Well, it looks like I am not alone. Today Alan Greenspan echoed my confusion on the Hill today, "for the moment, the broadly unanticipated behavior of world bond markets remains a conundrum."

Disability Insurance

2005-02-15T15:07:00.000-05:00

Last Sunday the New York Times did an article on disability insurance. The focus of the article was a woman who suffered from carpal tunnel syndrome and could not work as a dental hygienist. Unfortunately for the woman, her insurance company would no longer pay her disability benefits even though her insurance contract was good for her lifetime. Needless to say, lawyers are involved.

Perhaps it is stories like this make people less receptive to disability insurance. The confusing nature of the policies themselves make it hard for people to understand and for insurance agents to sell. Also, many people do have some type of coverage through work. If you do have disability insurance through work it is important to know if the premiums are paid with pre- or post-tax dollars. If they are paid with pre-tax dollars then the benefits received are tax free, otherwise they are taxable.

Most people, however, are under-insured when it come to disability insurance. The likelihood of becoming disabled is much greater than a premature death and it most cases a disability is more costly than a premature death. While the dead person does not incur any more expenses once they are in the ground, the disabled person still incurs large expenses while not earning income. In financial planning parlance this is called the "living death".

While not wanting to sound like a disability insurance salesman, it is important for people to review their situation regarding disability. The standard rule of thumb is to have benefits that replace 60% to 70% of pre-disability income. If you do need additional insurance make sure you speak with someone who truly knows and can explain the product to you.

Hey, what about Social Security disability benefits? Good luck.

Broker vs. Advisor

2005-02-14T09:05:00.000-05:00

For awhile there has been a debate within the brokerage industry on whether or not their salespeople are brokers or advisors. This primarily stems from the shift from a commission- based business to a fee-based business.

Back in the day when I was a broker for A.G. Edwards I remember our new hire group met with Ben Edwards, the 4th or 5th generation leader of the company. He was not a big fan of the shift to fee-based arraignments with clients. Perhaps he saw the conflict that is upon their industry.

By taking fees for management of assets the brokers are moving towards an advisory position with a client. Now most people always thought their broker was their advisor. Technically, no. To be an advisor, you would have to have fiduciary responsibility for their clients and subject to the 1940 Investment Advisor Act. Brokers do not fall under this Act and they are not fiduciaries; they are salespeople and their first responsibility is to their company (broker-dealer). Advisors are fiduciaries and their first responsibility is towards their clients.

They do fall under quite a bit of regulations, namely the Securities and Exchange Act of 1933. Most importantly they have to know their customer. They are subject to fines and penalties if they do not sell products that are suitable to their customers.

Things may change very shortly as the SEC will rule if brokers can be viewed as advisors and not be held with the fiduciary responsibility. This is the so-called Merrill Lynch Rule. I am definitely interested in how they decide. Most brokers do look out for the best interest of their clients, but there are times when a conflict of interest arises. I personally know of one person who was fired because he would not sell annuities since he knew that they were not beneficial to his clients. This is one of the reasons why I am an advisor, I do not want to have that conflict of interest.

Happy Valentine's Day

2005-02-14T09:03:00.000-05:00

I hope everyone has something planned for that special someone. Hey, DK if there is no special special woman at least take care of your mom.

With 70% rates, you better pay every month

2005-02-12T12:40:00.000-05:00

Link
(HT: Drudge Report)

Dividends (cont.)

2005-02-11T09:44:00.000-05:00

More news regarding dividends. Just this past week 12 companies in the S&P 500 have raised their dividends, my clients own one of the companies.

Historically speaking, the S&P 500 is still way below its dividend yield average. Over the past 25 years there was a strong shift away from dividends because tax rules changed to favor capital gains. Now that dividends have a favorable tax status there is has been more interest in those type of stocks. Changes in tax laws can definitely cause a long-term shift in how people invest.

One important aspect to remember though is that the favorable status for dividends will expire at midnight on December 31, 2008. Then we go back to taxing dividends as regular income. Keep an eye on developments concerning making this permanent.

VD

2005-02-11T09:32:00.000-05:00

After health problems, I would have to say divorce would be one of the main reasons people file for bankruptcy. With that in mind make sure you have something planned for Valentine's Day. Here is a simple dessert recipe that I have made for my wife in the past. She will be impressed.

Will Bond Rates Ever Go Up?

2005-02-10T14:35:00.000-05:00

I love sports and history so when somebody brought into work a newspaper when the Bengals went to the Super Bowl in 1982 you would think that I would be interested in it. Yes, but not for the reasons you would expect. I was fascinated by the ads the local banks had for CD's around 12%. Many people believe that inflation could not beat and rates could go higher.

Fast forward to today and it seems like the 10 year treasury has been hovering around 4% for an eternity. Over the last couple of years everybody has predicted that rates will rise. The rising deficit has been the main cause of concern. Greenspan's raising of short-term rates has not affected the 10 year treasury yields. Just like people thought that interest rates couldn't go down there are peoplee who say that will not go up.

Perhaps we are in another period where yields will stay below 5% for over 15 years like they did from 1953-1967. If this were to happen bonds might not bring much real income (read: after inflation). According to Ibbotson, long-term government bonds had an after-inflation return of -0.1% from the beginning of 1953 through the end of 1967. So much for safety with bonds. That is why you have to be just as careful with your bond investments as with your equity investments.

My historical background has also taught me that history never really repeats itself. Many circumstances have changed since 1953, so I do not foresee an exact repeat of those times.

Light Blogging

2005-02-10T14:23:00.000-05:00

Sorry for the light blogging lately, but when Mardi Gras, Chinese New Year, and the Islamic New Year fall on consecutive days...

Dividend Stocks

2005-02-07T13:58:00.000-05:00

When recently successful strategies that I use start to get noticed in the press I start to get nervous. The contrarian in me believes that once everybody knows about something then the party is over. This past weekend my local paper carried an AP article extolling the virtues of stocks that have higher than average dividend yields. It is believed that if a company is willing to give the shareholders cash they must be fairly confident of their future prospects. Combine that with the more favorable tax status of dividends, it is believed that this trend will continue. I still agree that dividends play an important role with a client's portfolio, but I also think that some of the companies with higher than average dividend yields have started to become overvalued. This is why they need to be closely monitored.

David Jackson of Seeking Alpha is not jumping on the dividend bandwagon. He would much rather see a company buy back shares of stock rather than give out dividends. His reasoning is that by taking more shares out of the market the stock will rise (less supply will cause greater demand, thus higher prices). In theory this works, but companies do not always buy back what they promised to buy back. Dividends are a different matter. If a company lowers a payment or stops a payment, the market punishes greatly. That is why companies take great pains to maintain their dividend. While not a guarantee, dividends are more reliable than stock buy backs. Kind of like having one in the hand than two in the bush.

Social Security

2005-02-04T09:01:00.000-05:00

Have you heard that there is a debate coming on Social Security? Seriously, this and immigration will be the two big domestic issues over the next couple of years. I will write more on the debate as it progresses. Right now I am leaning towards some sort of privatization (sorry, personal) accounts. Everything I have heard is that it will be based on the Thrift Savings Program that is used by government employees and uniformed personnel. After looking over the information on its web site the Thrift Savings Program is as basic as a retirement plan can be. And that is its advantage.

For one thing, this keeps cost down. The investments are index funds and they have ridiculously low expense ratios. No private corporation plan has anything nearly as low as these fees. Typically you see total expenses at approximately 1.5% and by the looks of it the TSP is around .3%.

The other advantage to its simplicity is that participant will not be overwhelmed with choices. Even though Americans say they loving having lots of choices, when it comes to investments most of the time it is better if people have fewer choices. With too many choices paralysis by analysis kicks in and no choice is made. Some people might be upset if all they have to choose from is a Large Cap, Small Cap and International fund on the equity side, but for the vast majority of people this will be more than enough choices. Which leads me to one of my concerns.

How are brand new participants in Social Security going to be educated on their investment choices? When I first found out about FICA I was barely 17 years old and was absolutely clueless about investments. Will the employer be responsible for the education on new employees or will the government take on that responsibility? Considering that most people are introduced to Social Security before they are 21 and at jobs that are very low end, I cannot imagine many companies having the resources to educate their new employees who may only be on the job for 3 months. Just a thought.

REIT's--Is the Bubble Bursting?

2005-02-02T11:09:00.000-05:00

When I started this blog I had no intention to turn this into a real estate blog, but it seems that I have been touching upon the subject quite a bit lately. Anyway, has anybody notices that REITs were down approximately 8% for the month of January. This really does not have much to do with a housing bubble. REITs primarily deal with commercial real estate and not residential real estate. REITs have been white-hot for the past five years as this chart suggests. Last April REITs did pullback quite big, but more than came back to lead the market. Right now I am very apprehensive to purchase REITs.

Housing Bubble--Gillette

2005-02-01T08:26:00.000-05:00

I thought I would combine two old posts into one. There was an article in last Saturday's Enquirer concerning how Boston has lost another company. Of course, Boston has a lot going for it. The universities alone in the region make Boston competitive, but the cost of housing does pose a drag on the local economy. There are several web-sites that show what you would have to make in Boston to equal what you would make in Cincinnati. Needless to say a company in Boston will have to pay you much more than a company in Cincinnati. Will the move of Gillette halt the rise of housing on the East Coast and even lead to a decline in housing values?

Break

2005-02-01T08:24:00.000-05:00

I took a slight break over the weekend to play Go Fish, read other blogs on the Iraqi elections, and setup my new Dell computer. Now I am back.

Tax Folder

2005-01-28T13:06:00.000-05:00

I hope you have a folder for all the tax forms that are arriving in the mail. You should also include a checklist of all the forms you are expecting this year. Once they all arrive the fun really begins.

P&G

2005-01-28T08:52:00.000-05:00

How could a financial planning blog based in Cincininati not write about Procter & Gamble buying Gillette? I have not yet heard back from my friends in Boston if the Patriots will be playing in Pampers Park instead of Gillette Stadium. We shall see? So far the news has been very positive around town, especially since it has been reported that the headquarters will remain in Cincinnati (the loss of P&G would have been divestating to this city). None other than Warren Buffet has given his blessing:

"This merger is going to create the greatest consumer products company in the world," said Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., Gillette's largest shareholder. "It's a dream deal. To quantify that, I intend to purchase enough shares so that by the time the deal is closed, we will have 100 million shares of P&G."

How can you argue with the Sage of Omaha? Phrases like synergistic effects and larger economy of scales will be bandied about. The first one is the key element. Every one in Cincinnati knows at least one Proctoid and the company has a very distinct culture (which has been successful). If they can come together it should work well.

Two more things: Gillette has a greater percentage of its sales based overseas than P&G. If the dollar continues its decline this could help earnings since they will be earning more in stronger currencies, e.g. Euro. Also, there is not a lot of overlap between the two products. Gillette has a greater presence with male products than P&G which has stronger female products. They should compliment each other and even allow for more sales opportunities.

Are the Habsburgs returning?

2005-01-27T14:25:00.000-05:00

The U.S. markets had a decent return last year, but Austria market was up an astounding 74%. Perhaps it was the afterglow of favorite son, Arnold Schwarzenegger's victory in California. More likely it was the growth in Austria's former territories of Poland, Czech Republic, and Hungary. In dollar terms those countries were up 32%. It is now believed:

...Vienna has evolved into a hub for Eastern European commerce," says Soeren Rytoft, portfolio manager for Metzler/Payden European Emerging Markets fund.

Does that mean that the Habsburgs (Austrians) are reclaiming their old territories?

Living Wills and Durable Power of Attorney

2005-01-27T09:30:00.000-05:00

Regardless of your feelings for the Terry Schiavo case, you need to have a living will and a durable power of attorney for health care. The last thing you want is any confusion if you were to become incapicitated and make sure these documents are easy to find and updated. On a personal note, recently a family friend suffered a stroke and we could not find any of his documents. These documents are easy to do and most states have a standardize form. Here is a link for the state of Ohio's form.

Housing Bubble

2005-01-26T13:21:00.000-05:00

Is there a housing bubble? That seems to be the question on everyone's mind. After what we experienced in 1999 and 2000 with stocks nobody wants to suffer the same fate. National publications have been writing articles concerning this issue for the past couple of years. Friends of mine in the Boston area tell me how the average house house gone up over 30% a year for the past few years. Perhaps that is one reason why a 35 year old with a good job would live with their parents.

Anyway, when the Cincinnati Enquirer starts to write about a housing boom then you might want to believe the hype. Right now 70% of households own their own home. This is easily a historical record. How many more people are out there to buy new homes. Have we reached a saturation point? Are we entering a New Era (have we heard that phrase before) of home ownership?

Can real estate even lose value? Haven't we always been told Will Roger's quote of "buy land, they aint' makin' any more of it". Well, the Japanese used to think that way in the 1980's and they are still waiting for their real estate values to return to those levels.

So what are home owners supposed to do? In a lot of cases--nothing, as long as you like your house and your neighborhood. You can ride out the volatility in most cases. This is especially true for those living in my fair city of Cincinnati. Since we have not experienced a boom like both coasts, there should not be a huge bust if there is one. If you do have an adjustable rate mortgage and plan on staying in the house for a while you might want to try to lock in a rate now before interest rates rise. Make sure that your house is well kept so that if you do need to sell it, it will look good. A fresh coat of paint usually provides the biggest bang for the buck. If you are convinced that a downturn will take place, avoid using your home equity for borrowing. Definitely do not use the home equity to purchase stocks.

Even though we are always being told that our house is our biggest investment, do not think of it as such. It is a home for you and/or your family. If you make a "profit" off it, that is just gravy.

Iraq and the Market

2005-01-25T21:02:00.000-05:00

I remember watching Iraq playing Canada in the 1984 Olympics in Boston (yes, I realize that L.A. was the host, but they played the preliminary games throughout the country) and not realizing how much that Arab country would effect the future. Btw, the game ended 1-1.

In the Summer of 1990 I had a little money to invest in the market and a week after I made my first stock purchases, Hussein invades Kuwait. Welcome to the market and your first Bear market. Fortunately, I had to go back to school to concentrate on the Cincinnati Reds' drive for a World Series victory so I did not make the mistake of buying high and selling low.

Doom and gloom was predicted as the coalition forces were preparing to evict Hussein from Kuwait. The market reflected the apprehension as the Dow Jones Industrial closed at 2,490 on January 15, 1991 after being 2,900 on August 1, 1990. After the first week of the war Wall Street and the rest world realized that Armageddon was not going to occur and the market began to ascend to 2,915 on March 26, 1991.

Fast forward to 2003 and doom and gloom is being reported again as coalition forces this time were preparing to evict Hussein from Iraq itself. People were fearing the worst and after the previous three years who could blame. Now we are going to war with the likelihood of losing 10,000 men. Then people started to remember what happened to the markets the last time we went to war with Iraq. A week before the war, the market began to shoot up and only had a brief pause when the 3rd ID had to take a respite due to sand storms.

Now we are 5 days away from the elections in Iraq. More doom and gloom is being predicted as Iraqi head to the polls. What kind of effect will Iraq have on the market now? Is today's positive run an indication of future returns? Do good things come in threes? Before anyone gets excited and decides to leverage everything; hold on.

Unlike the two aforementioned occasion, Iraq is not the only item dominating the news or markets. The declining dollar, increasing government debt, and potential interest rate hikes have been influencing the markets more than Iraq. Also, it is important that remember that before the two wars with Iraq the markets experienced Bear markets. That has not been the case this time. Once again, the past cannot give us any definite answers of what will happen in the future. Things are always different. They key thing to do is to keep with your plan and rebalance your portfolio if necessary.

Welcome

2005-01-25T14:10:00.000-05:00

I have always believed that educating people about financial planning is very important. There is more than enough financial information on the web nowadays, but there is very little coordination of that information into knowledge. By focusing on the areas of financial planning (i.e. budgeting, insurance, investments, retirement, taxes and estate planning) this blog will give comprehensive insight and knowledge into how to have financial peace of mind.

One of the most important things to remember about financial planning is that it is a process that never truly ends. Once a plan is in place, one cannot simply implement the plan and forget about it. Events and circumstances are constantly changing; so must your financial plan. That is why I think a daily blog is a great way to demonstrate the importance of the financial planning process.

As the subheading of the blog indicates I will include my personal experiences as well as history and current events to educate people in regards to financial planning. This will help to keep the site lively (but civil) and hopefully to put events in proper perspective.