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Resist the Folly of Market Timing

James K. Glassman (Kiplinger) November 2011In a time of market turbulence, with stocks losing altitude, it’s only natural to feel compelled to buy and sell according to your own forecasts of whether a stock — or the market as a whole — will rise or fall in the short term. My advice: Resist!

Unfortunately, the urge is strong — almost irresistible. It looks so easy in hindsight, and the results are so spectacular. Let’s pick a stock at random: Waters Corp. (symbol WAT), a midsize manufacturer of high-tech equipment, such as liquid chromatography systems. Waters is not an especially volatile stock, yet in nine of the 12 years starting in 2000, its yearly high has been at least 50% higher than its low. In 2000, you could have bought 1,000 shares at $22, sold them in 2001 for $85, bought them back again in 2003 for $20 and sold them in 2011 for $100. Total gain: $143,000. But if you had bought the stock at the start of 2000 and held it continuously through September 9, 2011, when the shares closed at $75, you would have earned just $53,000.

Or consider the U.S. market, as represented by SPDR S&P 500 (SPY), the popular exchange-traded fund that tracks Standard & Poor’s 500-stock index. If you had $10,000 in Spiders at the start of 2001, you would have had $11,519, including reinvested dividends, at the end of 2010. But if you had pulled your money out at the start of 2001, 2002 and 2008 — all down years for stocks — stuck the cash under the mattress, then reinvested the money at the start of the years that produced gains, you would have had $26,316.

The Efficient-Market Hypothesis (EMH)

Market timing — the term for the process of moving in and out of assets according to predictions of what their prices will do next — looks like it can be a hugely successful strategy. So might the strategy of guessing the numbered slot into which a roulette ball will fall after the wheel is spun. The only problem is that most mortals can’t time the markets consistently well enough to make the strategy worthwhile. And because of the vagaries of human emotions, the act of trying to time the stock market often produces far worse results than just buying a diversified bundle of stocks and holding them for the long haul. People tend to sell in a panic at the bottom and buy in a flush of confidence at the top.

John Bogle, founder of the Vanguard Group of mutual funds, wrote of market timing: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.”

The reason is that markets are efficient. University of Chicago economist Eugene Fama first formulated the efficient-market hypothesis (EMH) in his PhD thesis: “In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.”

Put it another way, a stock’s price represents the consensus judgment based on all the knowledge that can be gleaned about the underlying company at that moment. Tomorrow’s price is unknown and unknowable. Because of the EMH, economist Burton Malkiel, of Princeton, wrote that “a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by the experts.”

The EMH is actually liberating. It implies that you don’t have to spend your time trying to guess the short-term movement of a stock, because you can’t predict it any better than anyone else.

So is this a good time to buy shares of Waters? It is as good a time as any if you believe the EMH because the price of Waters reflects everything that could possibly be known. The rest is mystery. As a result, the best stock-buying strategy is to find great companies, buy them now and hold them for a long time.

Luck or Genius?

But can’t some geniuses, such as Warren Buffett, beat the market by buying and selling stocks (or whole companies) at the right time? The jury is still out. The laws of chance predict that some investors will time the market correctly for a while at least. They look smart, but they may just be lucky.

Buffett certainly has a great record. But if you had decided a decade ago to capitalize on his brilliance by investing in the holding company he chairs, Berkshire Hathaway (BRK-B), you would have been dis­appointed. Berkshire outperformed the S&P 500 in six years and trailed it in five years (including 2011, through September 9). Bill Miller, manager of Legg Mason Capital Management Value Fund (LMVTX), beat the S&P every year from 1991 through 2005, but since then his record has been less than stellar. He’s trailed the S&P in five of the past six years (again, including 2011), and, for the ten-year period through September 9, his fund ranks in the bottom 1% of its category, according to Morningstar.

Mark Hulbert, whose Hulbert Financial Digest has followed predictions in financial newsletters for 31 years, concludes that “market timing is not impossible but very difficult.” At my request, he went through the 97 newsletters that he tracks and that have been around for at least ten years and produced a list of those whose timing calls exceeded the 3.7% annualized return of the broad Wilshire 5000 index over the past decade. (Hulbert measures a service’s timing calls by assuming that an investor in stocks earns the return of the Wilshire 5000 and that an investor in cash earns the yield of a 90-day Treasury bill.)

Only seven newsletters beat the index, including two edited by Dan Sullivan, one of my longtime favorite newsletter editors. But although Hulbert can point to experts who have beaten the market over some periods, “the question,” he says, “is whether they can do it in subsequent periods.”

In his book Fooled by Randomness, Nassim Nicholas Taleb writes that if you set an infinite number of monkeys in front of an infinite number of typewriters, one of them will produce an exact version of Homer’s Iliad (the key word here is infinite). But then Taleb adds, “Now that we have found that hero among monkeys, would any reader invest his life’s savings on a bet that the monkey would write the Odyssey next?”

Irresistible Investments

If you still can’t fight the urge to try to time the market, do it as little as possible and concentrate on areas in which the EMH has the least effect. Buy stocks in areas where information is harder to come by and fewer analysts are paying attention or where, for some reason, investors are shunning perfectly good com­panies. Three such sectors are developing markets (stocks of companies in places such as China, Brazil and Indonesia), micro caps (too small for most mutual funds to buy) and value stocks (which, by definition, have lower valuations than the market as a whole).

Global X China Consumer (CHIQ), an ETF, provides an excellent way to buy Chinese companies — such as the beautifully named Want Want China Holdings, a maker of rice crackers and dairy products — that benefit from that nation’s booming domestic market. For micro caps, as well as emerging markets, stock picking is difficult, so instead of buying individual stocks you are usually better off with something like Aegis Value (AVALX), an actively managed mutual fund with a good record and a turnover rate of just 10% a year (but, unfortunately, high expenses, at 1.45% annually).

A great hunting ground for value stocks is the portfolio of Vanguard Dividend Growth (VDIGX), which, as its name suggests, invests in companies that regularly boost their payouts. The fund, a member of the Kiplinger 25, has beaten the S&P 500 by an average of three percentage points per year over the past five years and has done so with far lower risk. Among its top holdings are defense contractor Northrop Grumman (NOC), with a price-earnings ratio of just 8 based on expected 2011 profits and a dividend yield of 3.9%, and Medtronic (MDT), a maker of medical devices whose stock yields 2.9% and trades for 10 times estimated earnings for the fiscal year that ends next April.

The best time to buy? What about right now?

James K. Glassman, executive director of the George W. Bush Institute, in Dallas, is the author of Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the stocks or funds mentioned.

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Strategies to Steer Through a Market Correction

(U.S. News & World Report), Kira Brecht, July 14, 2015

One of the biggest mistakes long-term investors make is getting out of the stock market at the wrong time. We’ve all heard the saying “buy low, sell high,” but mom-and-pop investors have a tendency to panic during market declines and sell when stock prices are down, locking in losses.

U.S. stocks have ridden a rising trend for six years as of March, a long stretch by historical standards. While that doesn’t guarantee the stock market will crash anytime soon, it’s always wise to review strategies to handle a declining market. If you are prepared, you can avoid emotional decision-making, which can be detrimental to your financial health, experts say.

Declining stock markets often bring out strong emotions such as fear, anxiety and depression, says Dr. Gary Dayton, a psychologist and founder of Glastonbury, Connecticut-based, a trading psychology coaching firm. “Making investment decisions based on emotions is always the worst way to invest,” he says.

While institutional investors look at market downturns as buying opportunities, individual investors often sell their investments. “This striking tendency has been documented for over 100 years. At some point in a falling market, individual investors’ fear will be at its highest. Frightened at the prospect of losing even more money, many investors panic and sell their holdings,” Dayton says.

For individuals investing for retirement, with a time horizon of 10, 20 or 30 years, short-term bear cycles may not matter. The problem for long-term investors who sell in market declines is getting back into the market without missing the upturn.

“Numerous studies have shown that investors tend to panic during declines and at bottoms. It hurts because once markets recover, they tend to go up quite rapidly before investors realize that things are going back to normal,” says David L. Blain, chief executive officer of BlueSky Wealth Advisors LLC, a New Bern, North Carolina-headquartered wealth advisory firm. “By then, they have missed out on a large portion of the upside.”

The herd mentality also can play a part in stock market selling pressures. “Herding is the tendency of a group of market participants to behave like a school of fish or a flock of birds. When market conditions deteriorate, there is an initial rush to the exits,” says Dr. Kenneth Reid, a trading coach and founder of Santa Fe, New Mexico-based

To avoid becoming a casualty of the herd and selling at the wrong time, consider employing these six strategies in a declining stock market.

  1. Turn off the news. Listening to the news and reading about the dire economic predictions can heighten your nervousness. “Don’t look at your portfolio all the time. Turn off the TV and stop listening to your neighbor and the doom-and-gloom prognosticators. Focus on what you can control, which is your spending and saving. Make a new goal to save an extra X dollars a month while things are declining, and then invest it,” Blain says.
  2. Reevaluate your portfolio. Do the stocks you hold continue to meet your investment criteria? Winnow out the weak stocks by selling them. Stocks that no longer meet strong investment criteria are likely to decline the most in a market fall. You will be increasing your cash position, which can be used for the purchase of new stocks at attractive prices once the decline is over,” Dayton says.
  3. Make a list of stocks or funds you want to buy. A declining market can offer the opportunity to add to your long-term investment portfolio at a lower price point. “Long-term investors should welcome the occasional bear market if they have a good investment strategy and the discipline to see it through. The historical stock market trend is upward, and occasional bear markets are an opportunity to buy stocks while they are ‘on sale.’ As Warren Buffett observed, it is profitable to be greedy when others are fearful,” says Derek C. Hamilton, a certified financial planner at Indianapolis-based Elser Financial Planning Inc.
  4. Stay diversified. A portfolio allocation with 60 percent stocks and 40 percent bonds is an old benchmark and starting point for portfolio diversification. Check out stock-and-bond mixes in a target-date fund based on your age to get an idea of appropriate allocations for your time horizon. Rebalancing your allocations is an important task you can do on a quarterly or annual basis so your portfolio will be ready if the market heads south. “If you have different asset classes, something will be going up. In the global financial crisis, it was U.S. Treasuries. The point is to determine ahead of time what sort of decline you can tolerate, and don’t invest in such a large percentage of stock that you will panic in a decline,” Blain says.
  5. Work with a financial advisor. Develop a comprehensive, written plan that sets out your important financial goals and how you will achieve them. This will be your map when the going gets tough. “We are all human beings, and fear can get the better of us. The best inoculation against a fear-driven investment mistake is professional guidance and a good plan,” Hamilton says.

A fee-only financial adviser can help navigate you through a declining market. “He or she can help you avoid hasty, emotionally driven moves and see to it that any course corrections are well-considered and keep you on track to meet your goals,” Hamilton adds.

  1. Get a grip on your emotions. You may not be able to avoid an emotional response, but you can manage it. “Science is showing that the practice of mindfulness helps us reduce stress, changes brain regions associated with fear and therefore improves our internal control over emotions, and helps us be more aware of both opportunities and dangers when we are in challenging situations such as declining stock markets,” Dayton says. “Mindfulness helps investors maintain an even emotional keel and make better investment decisions. It is the one mental skill I suggest all investors learn.”

He adds: “Following an investment process and being prepared for the inevitable market declines helps you act prudently, keep truly great companies in your portfolio for the long term, protect them during market slumps and be in a position to buy other great companies at attractive prices when others are selling them in panic.”

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Money Honey Strife- the pocketbook war.

New York Post, Gregory Bresiger (New York Post) January 2013

“My husband spends a fortune on cars,” she says.

“My wife never stops shopping. Look at these credit card bills,” he laments.

Financial advisers often hear these complaints. What happens in many homes is two otherwise responsible adults who are both making good salaries have finances that are a wreck. They realize that, after years of marriage, they have little net worth and lots of debt.

Many advisers say it’s because couples never come to an agreement on money.

“In every family, there seems to be a spender and a saver, a risk taker and a risk avoider,” says Lewis J. Altfest, a Manhattan-based adviser who says he has had to resolve many money disputes between couples. Altfest asks couples to compromise on money — if they don’t, the disputes could lead to divorce.

Other times, couples approach money management by ignoring the subject — that is, until it can’t be ignored, advisers say.

Sometimes the financial plans the advisers put together are wrecked over husband-wife money disputes.

“The first step is for one of the spouses to take responsibility for finances,” says Charles Hughes, an adviser in Bay Shore, NY. “But that requires the faith and trust of the other spouse.”

Why does the worst happen to couples because of money?

They didn’t take the time to understand their differences, according to one adviser.

“Many couples never talk over their different financial values. They don’t take the time to understand their different life experiences with money,” says Susan Elser, an adviser in Indianapolis. Elser adds that the way people spend, invest and save is the result of how they grew up. So couples should talk over their money histories, she says.

“That’s important because it helps to understand how the other views money and how he or she feels about debts,” Elser says.

A couple that will achieve healthy finances discusses spending and investing issues frankly, according to advisers.

Budgeting, Altfest adds, is very important, whether it is a written or discussed plan. Altfest works with high-net-worth professionals. Yet budgeting is such a vital issue in the husband/wife dynamic that he devotes part of his practice to credit counseling, even though his clients earn top salaries.

For example, Altfest had a couple in which the husband was hurting the couples’ finances by insisting that they dine out at a pricey French restaurant at a cost of $200 a meal, twice a week. It was an experience that the husband felt was “an entitlement.” The wife wanted him to stop and Altfest agreed with her, asking him if he couldn’t find a less costly dining experience.

“They ended up compromising. He agreed to only go to the French restaurant once a week,” according to Altfest.

Elser says that in most marriages, it is inevitable that one person takes charge of finances, because the person has more interest or more knowledge.

“But it’s still very important that the other person contribute his or her values on money, that they discuss how they will spend and save, and that they agree on a budget,” Elser says.

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Setting and Achieving Goals

Setting — and Achieving — Financial Goals

Ben Steverman, BusinessWeek, September 4, 2007A/dropcap]fter age 45, many folks get serious about saving and investing as big-ticket items, such as retirement and tuition, loom ahead. But, as we live our busy lives, it can be tough to find time to ask ourselves a vital question: What do we really want to do with our hard-earned wealth?

Retire early? Renovate the kitchen? Put the kids through school? Buy that vacation home?

All of the above if you’re lucky. But for most of us, the money is limited, so we must set priorities. We asked financial planners for wise advice on how to set goals, and, most important, how to stick with them.

Setting the Right Goals for You

The first step, advisers say, is to figure out just what you want from your money. This is more difficult than you might think. “Most people will say, ‘I want to retire as soon as possible,’” says Steven Medland, a partner with TABR Capital Management in Orange County, Calif. But, “they haven’t really thought about what that means.” Depending on your goals, retirement can mean anything from the quiet, simple life to expensive world travels to a second or third career.

Michael Franks, a financial adviser at Hogan Financial Management in Milwaukee, sometimes asks his clients a lot of “why” questions, like “an inquisitive toddler.” It’s an exercise designed to find out what really is motivating them. Why do you want to retire early? Perhaps you want to retire not because you want to spend all day on the golf course, but because you hate your current job. “It’s not that you want to retire early,” Franks says. “You just want to do something different.”

Setting the right goals is crucial. Medland has met clients who retired in their 50s only to decide they felt unfulfilled. “They have enough money, but they’re not happy,” he says.

Once you know your own goals, don’t forget to discuss them with the people closest to you. Especially your spouse. A couple might “think they’re on the same page, but until they verbalize it, they might not realize they have different priorities,” Medland says. If both members of a couple aren’t getting what they want, it can cause big problems for spending and saving. “Whoever opens the credit-card statement sees the things they didn’t buy first,” says Indianapolis-based financial planner Susan Elser.

Examining Your Spending Habits

Putting together a spending wish list can be fun, but it’s also important to distinguish pie-in-the-sky daydreams from what’s actually possible for you.

First, figure out how much you can reasonably save for your goals. It may be more than you think. Elser recommends calculating exactly where your money is going. “A lot of what fills people’s budgets is unintentional,” she says. People can make hundreds of thousands of dollars per year and spend it all without really noticing where it’s going. They eat out, go on nice vacations, and buy gifts, housekeeping services, club memberships, new cars, and clothes.

“Clients are usually surprised at how much cash they waste each month on items that aren’t accomplishing any of their top goals,” she says. The key is deciding what you really want, vs. what you’re merely used to having. Eliminating some or all of your unintentional purchases can free up money for real priorities.

Picking and Choosing

Second, make some calculations. Somehow — using a calculator, a software program, or a consultation with a financial planner — decide how much you can save and how much you’ll need to accomplish your goals. You want to upgrade the kitchen, but are you willing to delay retirement to do that? “Make sure all the information is on the table,” says Franks, of Hogan Financial Management.

A planner’s job is to “tell (clients) their options and alternatives,” says Mark Rylance, a financial planner at RS Crum in Newport, Calif. “If you really want this,” he tells them, “this is what you have to do.”

Sticking to the Plan

Once you spend some time thinking about what you want, how do you stay focused on your real priorities? Financial planners have several pieces of advice:

— Write it down. Simply putting your goals on paper is a first step. New Jersey-based planner Jeremy Portnoff recommends setting particular dates — month, day, and year — for each goal. “It makes a goal more tangible,” he says. Other planners recommend setting financial policies, rules that you will follow if particular situations arise.

— Make it automatic. Rylance recommends setting up automatic payments that divert money from each paycheck toward particular goals. If saving for your goals comes off the top, you often learn to live on less. “They’re tricking themselves to save,” he says.

— Check on yourself. Regularly sit down and review, perhaps with a spouse or a planner, whether you’re on track. Elser recommends a planning session like this four times a year.

— Get started. Sometimes people get discouraged by the immensity of their goals. So instead they do nothing. “At least start something,” Rylance says. Even if it will only get you “halfway to the goal, start it.”

— Reward yourself, but also think long-term. Frank Boucher, a financial planner in Reston, Va., recommends allocating funds to all your top goals, but aggressively funding the cheapest one first. Accomplishing your first goal will give you the psychological lift necessary to keep saving, he says. However, it’s important not to sacrifice your long-term goals for short-term priorities. Just because a priority comes first chronologically doesn’t mean it’s more important to you. Don’t neglect retirement planning because you want a new kitchen in a couple years. Boucher recommends focusing first on the fundamentals: Maintain an emergency fund and the right levels of insurance, stay out of credit-card debt, and save for retirement. After those goals are accomplished, feel free to dream.

“Within reason, we can attain all of our goals,” Boucher says. “We just can’t do them all at once.”

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Basic Truths

Roy Diliberto (Financial Advisor Magazine) February 2010These truths for financial life planners form the foundation of their integrity.

As financial life planners, we hold these truths to be the basis for everything we do:

• All advice and recommendations should only be made after we thoroughly understand our clients’ values, attitudes, money histories, goals and dreams. The financial life planning process is the basis for this understanding. Of course, that means taking the time during the discovery process to ask the right questions. We need to know how their history affects their actions today, what their core values and priorities are, what transitions they anticipate in their lifetime and what is important for them to accomplish in both the short and long run. This is time-consuming, but critical to doing the right job for clients.

• There needs to be a renewal meeting each year to discover changes that may require alternative strategies. This is in addition to regular reviews. We should never be caught by surprise or ask a client why we weren’t informed of a change. We don’t ever want to hear, “You didn’t ask.”

• All people who provide financial advice should act as fiduciaries, whether or not they are legally required to do so, because it is the right thing to do. I can’t imagine a client choosing to do business with a financial advisor who is unwilling to commit to putting clients’ interests above his own. You don’t need to wait for a law to pass to adopt this strategy today.

• We need to create memorable experiences for all of our clients. In a world where service is measured by how many buttons you need to push in order to get to the person you want to speak to, we can provide an experience that clients will appreciate. We are a service business, not an advice factory. While providing sound and competent advice is critical to success, that alone will not retain clients unless their experiences are positive. They need to know that we genuinely care for them. Also, as I have written before, the little things do count. Things like having a live person answer the phone, returning phone calls on a timely basis, scheduling appointments in a way that ensures clients will not wait in your reception area for long periods of time, serving refreshments the way you would at home and not in Styrofoam cups, calling frequently just to touch base, etc.

• We need to practice transparency in all of our dealings with our clients. That means disclosing all potential conflicts of interest including how much we earn from our recommendations. If you earn commissions, you need to tell your clients how much they are. We believe that transparency produces client loyalty.

• No prospect is more valuable than any client. This is regardless of how much money he or she may have. As a result, we always return clients’ phone calls first.

• Diversification is not dead. If we learned anything in 2009, we learned that a disciplined diversified strategy that rebalances portfolios based on target tolerances works and reduces the time needed for recovery. Of course, the pundits tell us that diversification is no longer viable and they point to the period from September 2009 to March 2010 to prove it. In times like this, nothing works unless one is clairvoyant. We had no way of knowing that March 9 was the low point, and we certainly didn’t expect asset classes like emerging markets and REITs to rally as much as they did. But because of our disciplined approach, we bought these assets in March and our clients were rewarded for it. We are more confident than ever that asset allocation among many asset classes and opportunistic rebalancing can weather any storm.

• Since we do not know how to “beat the market,” we don’t claim to be able to do so. We can never understand advisors who believe that their primary benefit to clients is their ability to provide superior returns. That, of course, sets their clients up for the inevitable disappointment when these advisors cannot deliver on that promise. Before we accept anyone as a client, they are told what they can expect from us and what would be unreasonable expectations.

• The goal to achieve the “maximum rate of return” is neither a goal nor measurable. We are leery of potential clients who tell us this. We probe what it is they mean by this and try to stress the importance of investing to reach one’s goals and not attempting to maximize returns just for the sake of getting returns. If they insist on chasing returns, we know that they are not a good fit for our firm and we graciously tell them so.

• Investing is not a contest. This is related to the previous truth, but slightly different. In this case, the client or prospect wants to beat some index, such as the S&P 500, or to have “bragging rights” at a cocktail party. To illustrate the folly of such a goal, we may ask if they would be happy if they lost 20% but beat the S&P 500, which lost 22%. We try to convince them that obtaining a return that has a high probability of them reaching their goals is what is most important. Let the money managers who are paid bonuses based on their performance relative to some index obsess over that. The reality is that it has little if anything to do with the achievement of our clients’ goals in life.

• There is a great deal of difference between risk and market fluctuation. Risk, the way we define it, is running out of money before you run out of life. Fluctuation is what may occur during the interim. The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low it assures that the client’s money will not last. While a portfolio that invests a larger percentage in equities may provide more short-term volatility, it may be less risky than the “stable” portfolio.

• It’s OK for clients to invest most or even all of their money in fixed income. This may seem to contradict the market fluctuation comments made above, but it is different. If a client can reach all of her financial goals in life and avoid market volatility, there is nothing wrong with this strategy if it is what will make the client comfortable. After all, why do people invest in the first place? Is it to accumulate money to watch it grow, or is it to reach their financial goals? We believe it is the latter.

• Clients don’t fire financial planners because of market fluctuations. That is, unless their advisors have claimed to be money managers immune from normal (and abnormal) fluctuations. It’s all about delivering what you promise and not promising unless you are confident you can deliver.

• Most individuals who act out of greed are not greedy. Many people spend too much time listening to the so-called “experts” who, with the advice they provide through the media, encourage people to seek the highest return they could (asking, “What is the hot stock this week?”) As a result, many clients want to chase returns because so many people tell them the objective of investing is to maximize returns. When these clients are educated properly, it is the experience at our firm that they will invest in portfolios that mirror their unique goals instead.

• “Stay the course” is not blanket advice. Clients are unique, and in times like those we’ve just experienced they need to be treated uniquely. There were clients who needed to experience the recovery whenever it occurred, so they needed to stay fully invested or even to increase their exposure to equities. For these clients, “stay the course” may have been appropriate advice. However, there were many other clients who were agonizing over market volatility and did not need a recovery to reach their goals. They were advised accordingly.

• Disciplined saving to reach long- and short-term goals is far more important than investment returns. We need to encourage our clients to maintain a saving strategy, particularly when markets are not performing well.

• Clients will forgive us for poor returns during down markets, but not for failure to understand them or their goals.

• The odds of success (as calculated by Monte Carlo simulations, etc.) literally change every year, every quarter and even every day. Our clients need to understand that a 90% probability of success this year may very well be 60% next year if the clients spend more than they expected to, earn less, achieve below-average returns or experience any one of myriad other variables. This is one reason why regular reviews and updates are essential.

• Retirement is not mandatory. Financial planners need to change their question from, “When do you intend to retire?” to “How do you visualize your life in your 60s, 70s, 80s and beyond?”

• Our most important asset is our employees. While we exist for our clients, we need to remember that our success would not be possible without dedicated employees, and they need to be treated fairly, with dignity and respect.

Businesses, like people, have personalities. And like people, they are shaped by values and truths. Living these truths is what integrity is all about.

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How to Draw the MAX (Safely)

Walter Updegrave (Money) October 2011

(MONEY Magazine) — “What’s the most I can pull from savings each year without running short of money later in life?” It’s the single most frequent question I get from retirees and near retirees.

A formidable challenge anytime, turning one’s savings into lasting income is especially daunting today. Slowing growth and high levels of government debt make it unlikely we’ll soon see a bull market delivering ’90s-style returns. Add in the fact that many nest eggs are still recovering from the 2008 meltdown, and it’s no surprise that folks are eager to squeeze more from less.

Alas, there’s no magic formula that will allow you to draw outsize sums risk-free. However, I’ll lay out four options to help you get the most out of your money, starting with the conventional 4% drawdown, then moving to methods that can provide a bit more spending cash if you make certain accommodations.

No matter which you choose, you’ll need to stay flexible. “You can’t just set a withdrawal rate and leave it on autopilot,” says T. Rowe Price senior financial planner Christine Fahlund. Depending on the market and your needs, you may have to make midcourse corrections.

But adjusting our living standard to our income is the sort of fine-tuning we routinely do during our careers. Why should retirement be any different?

The Conventional Wisdom: Follow the 4% Rule

How it works: Separate studies conducted in the early 1990s used historical stock and bond market returns to try to determine the most retirees could safely pull from savings each year.

The research showed that if people limited themselves to an initial draw of roughly 4% ($20,000 on a $500,000 portfolio), then adjusted that annually for inflation (assuming it’s 3% a year, you’d take $20,600 in year two, $21,218 year three, and so on), they’d have a high level of assurance of their assets lasting at least 30 years.

Using Monte Carlo software, which accounts for thousands of market scenarios, investment firms have since come to similar conclusions. Today the “4% rule” is the most frequently cited retirement income strategy.

Pros: T. Rowe Price estimates that by following this rule you’d have an 88% chance of your money lasting 30 years.

Cons: Those with small nest eggs and without pensions may find it hard to get by on 4%. Another concern: If the markets do well over time and you only adjust withdrawals for inflation, you could end up with heaps of savings (and regrets) later.

Right for you if … Your nest egg is large enough that you can live comfortably on the amount this strategy provides, or you’re willing to accept a tighter budget in exchange for extra security.

Alternative Strategy No. 1: Pump Up Your Drawdown

How it works: The premise is the same as that of the 4% rule, except that you start with a higher initial withdrawal rate. So instead of pulling $20,000 from a $500,000 savings stash, you might start by drawing, say, 5% ($25,000).

Pros: A higher withdrawal rate gives you more spending money, making it easier to afford the lifestyle you want.

Cons: The more you pull from your portfolio, the greater your risk of running out of money. Going from an initial 4% withdrawal rate to 5% reduces the chances that a 65-year-old’s stash will last to age 95 from 88% to 64%. The likelihood drops even more dramatically if your portfolio suffers a big loss early on. The combination of the hit and higher withdrawals so weakens your portfolio that it would have difficulty recovering even when the markets revive.

All that said, there may be times when new retirees can take higher draws and have a greater degree of security than Monte Carlo analyses suggest. Research by financial planner Michael Kitces suggests that a portfolio of 60% equities and 40% bonds can sustain a withdrawal rate as high as 5.5% for 30 years if the stock market is undervalued — and thus more likely to generate lofty returns — at the time of the initial distribution.

0:00 / 1:22 Make the most of your retirement savings

Unfortunately the market doesn’t appear to be priced to support bigger withdrawal rates right now. To judge value, Kitces uses Yale professor Robert Shiller’s 10-year average price/earnings ratio, calculated using inflation-adjusted stock prices and average earnings. By that metric, stocks have been selling at a P/E over 20, well above the historical average of 16 or so.

Right for you if… You’re willing to accept a higher risk of running short of money in return for being able to spend more freely, or you don’t think you’ll need to draw on your savings for a full 30 years. You might also go with a higher withdrawal rate if you have other assets to fall back on like a big pension or substantial home equity.

Alternative Strategy No. 2: Spend Now, Economize Later

How it works: You start with a higher withdrawal rate — say, 6% instead of 4% — at the beginning of retirement. Then instead of sticking to that higher rate, you dial back after the first five or so years to a lower level of withdrawals that are more likely to be sustained for the remainder of retirement.

Pros: You have more spending money in the early stage of retirement when you’re more active and probably better able to enjoy the extra cash. And by having a plan in place ahead of time to cut back, you have a better chance of your portfolio supporting you for 30 or more years than if you just opt for a higher withdrawal rate indefinitely.

Cons: There’s no free lunch here. In return for living larger early on, you’ll likely have to cut back your withdrawals pretty significantly to avoid the possibility of not having enough for regular living expenses later in life. If your period of freer spending coincides with a market setback, the budget cuts you would need to make could be especially painful — and difficult to pull off. The amount you’d have to dial back to would be well below what you had been drawing, and even well below what you would have drawn at that time if you followed the 4% rule.

The other challenge is that as you age, you’re likely to face rising health care costs. So while you might figure you can handle a big spending cut later on, you may end up with less wiggle room than you think.

Right for you if… You’re financially and emotionally prepared to make cuts in your expenditures, perhaps even draconian ones, later in retirement for the chance to spend more right after you call it a career. This strategy could work for you if a sizable percentage of your budget goes toward discretionary items, like travel and entertainment — expenses that could be trimmed fairly easily.

Alternative Strategy No. 3: Postpone Retirement

How it works: Instead of leaving the workforce on your original timetable, you put your departure off for a few years and continue to contribute to your retirement accounts during that time.

Pros: Additional contributions and compounding time should allow you to pull out more income from your savings without boosting the risk of your money running out. Even if the market were to drop during your last few years of work, your nest egg would be larger than it would have been had you been withdrawing money rather than putting more in.

With a larger nest egg, that safe 4% withdrawal rate provides more income. And with a shorter time horizon, you may be able to increase your initial withdrawal to something slightly above 4% while maintaining low chances of running out of money. The graphic below shows you just how much putting off your goodbye party by a few years can increase your income.

This strategy has another benefit: Working longer will help you delay claiming Social Security, which can significantly boost the size of that payment. Hanging on just three years more than you’d planned can increase your monthly check from the government by upwards of 30%.

Cons: You’ll have to stay tethered to the 9-to-5 ball-and-chain when you might rather be getting a start on retirement.

Right for you if… Your nest egg at its current size can’t provide enough money for a comfortable retirement at a reasonably safe withdrawal rate, or you’re willing to work a few extra years in return for a shot at more spending money with more security when you do finally retire.

Carole No Comments

Selecting a Financial Professional

nvestor Bulletin: Top Tips for Selecting a Financial Professional

Office of Investor Education and Advocacy ( September 2012

Investor Bulletin:

Top Tips for Selecting a Financial Professional

Choosing a financial professional-whether a stockbroker, a financial planner, or an investment adviser-is an important decision. Consider the tips below as you make your choice. Also the third page of this document has a list of questions you can ask a financial professional whose services you are considering.

Tip 1. Do your homework and ask questions.

A lot of the information you’ll need to make a choice will be in the documents the financial professional can provide you about opening an account or starting a relationship. You should read them carefully. If you don’t understand something, ask questions until you do. It’s your money and you should feel comfortable asking about it.

Tip 2. Find out whether the products and services available are right for you.

Financial professionals offer a range of financial and investment services such as:

Financial planning
Ongoing money management
Advice on choosing securities
Tax and retirement planning
Insurance advice

Just like a grocery store offers more products than a convenience store, some financial professionals offer a wide range of products or services, while others offer a more limited selection. Think about what you might need, and ask about what would be available to you. For example, do you want or need:

Access to a broad range of securities, such as stocks, options and bonds, or will you mostly want a few types such as mutual funds, exchange traded funds, or insurance products?
A one-time review or financial plan?
To do your own research, but use the financial professional to make your trades or to provide a second opinion occasionally?
A recommendation each time you think about changing or making an investment?
Ongoing investment management, with the financial professional getting your permission before any purchase or sale is made?
Ongoing investment management, where the financial professional decides what purchases or sales are made, and you are told about it afterwards?

Tip 3. Understand how you’ll pay for services and products, and how your financial professional gets paid as well.

Many firms offer more than one type of account. You may be able to pay for services differently depending on the type of account you choose. For example, you might pay:

An hourly fee for advisory services;
A flat fee, such as $500 per year, for an annual portfolio review or $2,000 for a financial plan;
A commission on the securities bought or sold, such as $12 per trade;
A fee (sometimes called a “load”) based on the amount you invest in a mutual fund or variable annuity
A “mark-up” when you buy “house” products (such as bonds that the broker holds in inventory), or a “mark-down” when you sell them

Depending on what services you want, one type of account may cost you less than another. Ask about what alternatives make sense for you.

And remember: even if you don’t pay the financial professional directly, such as through an annual fee, that person is still getting paid. For example, someone else may be paying the financial professional for selling specific products. However, those payments may be built into the costs you ultimately pay, such as the expenses associated with buying or holding a financial product.

While some of these fees may seem small, it is important to keep in mind that they can add up, and in the end take away from the profits you otherwise could be making from your investments.

Tip 4. Ask about the financial professional’s experience and credentials.

Financial professionals hold different licenses. For example, financial professionals who are broker-dealers must take an exam to hold a license, while state regulators often require investment advisers to hold certain licenses. Financial professionals also have a wide range of educational and professional backgrounds. They may also have certain designations after their names, which are titles given by industry groups that themselves are not regulated or subject to standards other than their own. If a financial professional has an industry designation, like “CFA,” you can look up what it stands for at the “Understanding Investment Professional Designations” page on FINRA’s website at Don’t accept a professional designation as a badge of knowledge without knowing what it means.

Tip 5. Ask the financial professional if he or she has had a disciplinary history with a government regulator or had customer complaints.

Even if a close friend or relative has recommended a financial professional, you should check the person’s background for signs of any potential problems, such as a disciplinary history by a regulator or customer complaints. The SEC, FINRA, and state securities regulators keep records on the disciplinary history of many of the financial professionals they regulate.

Check the background of your financial professional to learn more or to help confirm what he or she has told you:

For financial professionals who are brokers: you can find background information on the person and his/her firm at FINRA’s BrokerCheck website.
For financial professionals who are investment advisers registered with the SEC: you can find background information on the person and his/her firm at the SEC’s Investment Adviser Public Disclosure database.
State securities regulators also have background information on brokers as well as certain investment advisers. You can find your state regulator at

Investor Checklist

Some Key Questions for Hiring a Financial Professional

Expectations of the Relationship

How often should I expect to hear from you?
How often will you review my account or make recommendations to me?
If my investments aren’t doing well, will you call me and recommend something else?
If I invest with you, how can I keep track of how well my investments are doing?

Experience and Background

What experience do you have, especially with people like me? What percentage of your time would you estimate that you spend on people with situations and goals that are similar to mine?
What education have you had that relates to your work?
What professional licenses do you hold?
Are you registered with the SEC, a state securities regulator, or FINRA?
How long have you done this type of work?
Have you ever been disciplined by a regulator? If yes, what was the problem and how was it resolved?
Have you had customer complaints? If yes, how many, what were they about, and how were they resolved?


What type of products do you offer?
How many different products do you offer?
Do you offer “house” products? If so, what types of products are they, and do you receive any incentives for selling these products, or for maintaining them in a customer’s account? What kind of incentives are they?

Payments and Fees

Given my situation and what I’m looking for, what is the [best / most cost effective] way for me to pay for financial services? Why?
What are the fees that I will pay for products and services?
How and when will I see the fees I pay?
Which of those fees will I pay directly (such as a commission on a stock trade) and which are taken directly from the products I own (such as some mutual fund expenses)
How do you get paid?
If I invested $1000 with you today, approximately how much would you get paid during the following year, based on my investment?
Does someone else (such as a fund company) pay you for offering or selling these products or services?

Related Information

For additional educational information, see the SEC’s website for individual investors, Investor. gov. For additional information about selecting a financial professional, see:

SEC Fast Answers: “Financial Planners,” “Investment Advisers”

SEC Publication: “Investment Advisers: What You Need to Know Before Choosing One”

SEC Publication: “Protect Your Money: Check out Brokers and Investment Advisers”

FINRA Publication: “Selecting Investment Professionals”

National Association of Personal Financial Advisers Publication: “Pursuit of a Financial Adviser: Field Guide”

You may also be interested in:

FINRA Mutual Fund Fee Calculator

Information about different types of financial products is available at http://www.investor. gov/investing-basics/investment-products.

The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Carole No Comments

Yours, Mine, and Ours: Estate Planning for Blended Families, Kira Brecht, June 10, 2015

The number of second marriages in the U.S. has nearly doubled in the last three decades to 42 million adults, according to Pew Research Center. Marriage do-overs often stir estate planning challenges for blended families that should be addressed early on.

“Memories fade and intentions change,” warns Derek Hamilton, a partner at Elser Financial Planning, Inc., an Indianapolis-based, fee-only financial planning firm. Planning ahead and looking at tough questions before saying “I do” can save hurt feelings and financial vulnerability down the road.

Grab the reins and get your estate plan in place. If you don’t have one, state law will decide for you, and the results may be very different from what you intended. Laws vary from state to state, with different amounts directed to spouses and children.

Create a plan and be clear about who gets what, even if you don’t have a lot.

Ask the Tough Questions

If your plan is to simply leave all your assets to your spouse outright, thinking that he or she will “do the right thing” for your children, think again, because you may have created an impossible situation. “If you want your kids to have something, make it so in your estate plan,” Hamilton says.

“If you really want your son to have that classic Mustang, don’t just say it, put it in your will. Many times I’ve heard, ‘Dad wanted me to have this,’ but Dad didn’t write it in the will. Things can get ugly fast in a blended family,” he says.

Fair and equal are not, well, equal concepts. “Aim for what is fair, which may not be an equal distribution,” Hamilton says. “If you combined your family with your spouse’s later in life, treating all your children equally could be grossly unfair.”

Who Can You Really Trust?

Couples in a second marriage with blended families can turn to trusts to distribute to the surviving spouse and your children as you intended. The trust can also be set up to distribute to children and even grandchildren after both spouses are gone.

But  be careful about whom you choose to be the trustee. “This can be a recipe for constant strife and even litigation,” Hamilton cautions. “Consider instead selecting a bank or trust company to be the trustee. The price of a neutral professional can be well worth maintaining the family peace.”

Beware of the Hidden Estate Plan

Beneficiary designations can get lost in the shuffle of remarriage, and if not handled, could turn out to be a secret disaster in the making. A large portion of a couple’s assets may transfer through beneficiary designations on life insurance, IRAs, and other retirement accounts, in addition to jointly titled assets, which could include a residence and bank and brokerage accounts. Hamilton calls this the “hidden estate plan.”

“Make sure it fits with your actual estate plan,” he says.

Be aware of the “spousal elective share” that’s on the books in many states. “Unless your spouse waived it in a valid pre- or post-nuptial agreement, he or she may have the right to receive one-third to one-half of your estate, depending on the state,” Hamilton says. If your plan is for your spouse to receive less than that, get an attorney involved.

Your estate plan is your legacy and should be treated with care. Take the time now to create a plan that will distribute your assets in the way you intend.

Carole No Comments

Minding Retirement Accounts in Estate Plans

Arden Dale, (WSJ) July 30, 2013

When crafting their estate plans, some people neglect to pay much attention to how best handle their retirement accounts.

And that lack of attention to detail can create potential problems–such as higher estate and income taxes–for their heirs.

Many people often assume an estate plan is as simple as naming a beneficiary. In fact, it can include a trust to protect spendthrift kids or a spouse. Or a well-developed plan may have provisions to get a tax advantage by giving an account to charity.

Financial advisers are careful to review retirement accounts because they are so often ignored, even when they comprise a large share of an estate–sometimes the biggest portion it. A surprising number of clients, for example, forget to even name a beneficiary or change the names after a divorce.

“We’re always asking clients about these accounts and they look like deer in the headlights,” said Karen Altfest, principal adviser at Altfest Personal Wealth Management in New York, which manages around $1 billion.

Last week, one of her clients, a single woman with an account worth around $500,000, chose her nieces as beneficiaries after Ms. Altfest discovered she hadn’t named anyone yet.

This year, changes to the federal estate tax add a new twist. Spouses need to review whether to name each other as beneficiaries now that they can share their estate-tax exemptions.

Michael Krol, a senior wealth counselor at Waldron Wealth Management in Bridgeville, Pa., said the new estate rules, known as “portability,” will have the biggest effect on spouses with a combined net worth over $10 million and who have a lot of money in IRAs. In the past, his firm often counseled clients with this profile to create trusts to be beneficiaries of the IRAs.

“Now we’re looking at all our client situations, and we would not want a trust to be a beneficiary,” said Mr. Krol, whose firm manages around $1 billion.

Divorce that leads to a second or even third marriage is the source of many of the missteps she sees with clients’ retirement accounts, said Susan C. Elser, an adviser with her own firm in Indianapolis, who manages $85 million. People either forget to change beneficiaries, or name the new spouse with no provisions to ensure their own children by a first marriage will get some of the money, she said.

Another common mistake, Ms. Elser noted, is when a person creates a trust in estate documents to distribute wealth to their children over time, and then naming the same kids as primary beneficiaries on a retirement account. All of the retirement money will go to the kids at once that way, circumventing the goal of the trust, she said.

To keep minor children from inheriting a large retirement account all at once–or any other heir not up to managing money–advisers sometimes recommend that an account name a trust as beneficiary. That way, a trustee can control when the funds get distributed.

Another common mistake with retirement accounts: Giving it to the kids when the charitably inclined owner could give it to a favorite cause instead. Charities don’t have to pay income tax on retirement accounts they inherit, and the donor gets a charitable deduction for the gift.

“I can’t tell you how many wills I’ve seen that leave some amount to charity when they have this lovely taxable IRA going to beneficiaries who will have to pay income tax on it,” Ms. Elser said.

Lesley Moss, an estate attorney for Oram & Moss in Chevy Chase, Md., said more states have adopted rules to let someone with a power of attorney change beneficiaries. That’s helpful as more grown children assist aging parents to get their retirement savings in order. An older person may have had 401(k)s with three or four different employers.

“We find where they moved from, say, Morgan Stanley to Merrill Lynch and didn’t change the beneficiary; the power of attorney can help,” Ms. Moss said.