The Alder Financial Group, Inc.

Shop Smart

2011-11-22T17:00:00.003-05:00

Wow, it's hard to believe that Thanksgiving is upon us and Christmas is right around the corner! And of course we couldn't enter the holiday season without the buzz about the best deals on Black Friday and Cyber Monday. I have never been brave enough to fight the crowds and just the thought of getting up at the crack of dawn just to wait in line and maybe get the item I am looking for makes me cringe. The good news is for those of you night owls, many stores are opening their doors at midnight on the 25th. Even better news is that even if you don't partake in Black Friday, there will be many other ways to save this season and as a prudent financial planner (and shopper for that matter), I wanted to share some helpful hints on how to save and survive the shopping madness this holiday season.

According to an American Express survey, while more than 2/3 of consumers actually have a budget, 1/2 will stick to it. I cannot express how important a budget is as the first step in holiday shopping. Without a budget, it is so easy to grab a gift here and there and not realize how much it all adds up to. The sooner you start planning your holiday shopping, the more money you can set aside and the more carefully you can select and personalize gifts at the best price. Americans will spend an average of $831 on gifts this season, which is actually $121 more than last year. But while they plan on spending more, they are also savvier than ever and plan on using a range of tactics to stay within budget while not compromising on gift giving potential. So what are these tactics?

First off, I'm going to assume many of you have smart phones. This season, your smart phone can be your best shopping buddy. Take Red Laser for instance. This super handy free App for your iPhone or Android phone can perform wonders. All you have to do is scan a product's barcode (or other type of code on the product) and this App can pull up other retailers of the product and their prices in an instant. This certainly gives customers the advantage and will in turn cause retailers to have more competitive prices. Not to mention it will save us a lot of time knowing we don't have to hop from place to place but rather just glance at our phones to know if there's a better deal somewhere else. While I think the most relevant feature is the price comparison, there are many other cool things that Red Laser can do. It provides product reviews, finds books in libraries and can even check food allergens and nutrition!

Next on the list of savings tactics, and also available on your smart phones, is coupons offered online either on the retailer's website, coupon websites or through social media outlets such as Facebook and Twitter. Many retailers now accept coupons on your phone and don't require printed coupons. Taking it even a step further, some stores (Macy's and JCPenney to name a couple), have signs in the stores with phone-scannable codes that pull up their website and sometimes coupons on your phone's web browser. You'll need one of the scanning Apps such as Red Laser to do this. You can also go to the store's website and sign up online to receive coupons. This certainly means you will be added to their email distribution list, but you can unsubscribe after you have received the coupons you need if you don't want to receive future emails. Some stores offer exclusive deals if you "like" them on Facebook or follow them on Twitter. And while you are on Facebook, feel free to "like" the Alder Financial Group as well! Last but not least, you can always search online for coupons and print them out. It's funny how this has almost become the "old school" way of coupon clipping. Some good sites for finding coupons are RetailMeNot.com, couponcabin.com, and coupons.com, but of course there are many more. I often start by just doing a Google search for the store I'm looking for and see what I find.

And now back to Black Friday. As stressful as it can be, there are certainly deals for which the pain is worth the gain. Experts are saying that this year retailers are less stocked and therefore not as eager to lower prices. With not as much inventory to go around, those willing to stay up late or get up early, depending on the store, and fight the crowds will have first dibs. But online shoppers can also take advantage of Black Friday from the comfort of their couch. Best Buy for example claims it will be offering 95% of its Black Friday ad items online for the same price. I have also seen that many stores are offering free shipping. Amazon.com aims to match prices for products they have in stock. It might not be a good idea to wait around for Cyber Monday if you see a good deal since there will likely be less availability as the weekend progresses. The bottom line is do your homework and find out where and when the items you are looking for will be at the lowest prices. Then you can decide if the price difference is worth the effort.

I hope this article helps give you some ideas on how to give the gifts you want to give and save money. Have a wonderful Thanksgiving and if you decide to venture out on Black Friday, be sure to pack a water bottle, a phone charger and your patience.

Know Before You Owe: The Student Loan Crisis

2011-10-31T11:33:00.009-04:00

By Lori Eason, CFP(R)

Last week, President Obama announced some changes to the government's plan to help ease the burden of student loan debt. This comes after the student debt level has reached $1 trillion, surpassing the amount of credit card debt in the United States. Student loan debt has also been a recurring theme brought up by many Occupy Wall Street protestors. Unfortunately college tuition and fees are rising at an alarming rate making it difficult for many parents and/or students to afford a college education, but is this proposal the relief students are looking for? While I could write a whole article on increasing college costs or my thoughts on this whole Occupy Wall Street movement, I'd like to focus on what changes the government is proposing and how they will help or hurt students.

To give a little background, I am very familiar with the burden of student loans. I fortunately only have a small amount of student loans because I received the Hope Scholarship which covered my entire tuition, my parents helped with my other expenses and I worked during the summers to save up for the school year. My husband, on the other hand, accumulated a large amount of student debt by going to pharmacy school. By marrying him, I get to join in on the fun of making payments on a student loan that feels like a second mortgage. Thankfully, he chose a field in which he knew he'd be able to pay back his debt. We are hoping to have it all paid off in 3 years.

So now on to the relief proposed. Last year President Obama presented and Congress approved the "Pay As You Earn" proposal which will allow students to cap their student loan payments at 10% of their discretionary income and this debt will be forgiven after 20 years of payments. This was actually a revision to the Income-Based Repayment IBR) plan signed in September 2007 by President George W. Bush. The previous version allowed students to cap their federal student loan payments at 15% of their discretionary income and forgave the debt after 25 years. The new, more lenient requirements were originally set to go into effect in 2014. Obama announced last week that they will go into effect in 2012 instead.

While this new proposal has certainly gained a lot of hype, the truth is it will only financially benefit a small handful of students and it will actually cause the majority of students who take advantage of it to pay more interest when all is said and done. Here's the scoop. To be eligible for the Income Based Repayment (IBR) plan, a former student's monthly payment based on a 10 year payment plan must be higher than 10% of his or her adjusted gross income. Because the IBR payment is a percentage of income, as the debtor's income increases, so will the payments required. If the debtor marries, the spouse's income will also be included in determining whether or not eligibility requirements are met. If the income reaches a level at which 10% is higher than the 10 year payment plan amount, a partial financial hardship no longer exists. At this point, any unpaid interest that has accumulated would be capitalized (added to principal) and the debtor will now be capped at the 10 year payment plan's monthly amount. In addition, if there was any additional capitalized interest owed, that would be paid after the original amount was paid off in 10 years. In many cases, if a student has a hard time finding a job, the amount of interest paid if any might not cover the interest outstanding which results in negative amortization and the loan balance growing.

So who stands to benefit from this proposal? The only group I can see financially benefiting would be those students who have an extremely high debt to income ratio over a long period of time. If the debtor's income remained fairly low for 20 years and he or she had a high loan balance, it is plausible that there would be a substantial amount of principal and accrued interest that would be forgiven. I think it's safe to say that college was clearly not the right path for an individual who can't find a decent paying job in 10 or 20 years.

I would certainly expect that the majority of college graduates, though they may have a hard time finding a well-paying job immediately, would eventually get to a level of income that would force them into the 10 year payment plan. This would most likely mean that they would pay off their student loans well before the 20 year point at which loan forgiveness occurs. That being said, in this job environment, I do believe there are students who would benefit in the short term from a cash flow standpoint. For those graduates who can't find a job or who are underemployed and unable to pay the standard payment, this could give them a break and allow them to get their feet on the ground. But keep in mind, if they don't meet the minimum interest payment, their outstanding loan balance will grow from the accumulation of unpaid interest during this time and when they do find an appropriate job, they will owe more.

I'd now like to switch gears to another fairly recent proposal that I am a fan of. Last year the Consumer Financial Protection Bureau was created and they have since introduced a "Know Before You Owe" campaign for student loans to help students make educated decisions when it comes to paying for college. I can honestly say that as a 17 year old kid, I had no idea what I was signing when I filled out my FASFA application so I am in favor of new steps to help students understand what they are getting into. Currently, schools send students a letter before each school year that details the financial aid they can use. The "Know Before You Owe" initiative proposes a "thought starter" form that colleges can use to present financial aid information to prospective students and their families. This new "thought starter" would not only show the total cost of attendance and the financial aid available to you, but it would also show how much the student would owe in student loans upon graduation and his or her estimated monthly payment. This would help give students a perspective on the impact of taking out student loans. It would also show the student's college cost compared to the national average of other categories of schools and the US student loan default, graduation, and retention rates.

In the same way that I believe owning a home is not a birth given right, neither is a college education. Students need to have access to affordable student loans, but they also need to learn responsibility and understand that this money must be paid back with interest. There are apparently people out there that think a college education should be free. When professors start lining up to work for free, maybe that will be an option. Many people who did not graduate from college have gone on to become very successful in their careers (Steve Jobs, Bill Gates, Henry Ford, etc.). I don't think that college is for everyone and a lot of thought needs to be put into what career to choose and how much is a reasonable amount to spend on a particular degree. This would mean researching job prospects and salaries of the field a student is interested in pursuing before deciding to take on student debt.

To conclude, I do believe there is room for improvement when it comes to educating students on loans and the student loan industry itself. How ironic is it that at 18 years old with no credit history you can't get a credit card, but yet you can borrow as much as your parents paid for their house? With this new "Pay as You Earn Proposal," the devil is in the details and these details are not easy to find or understand. I fear that some students might incorrectly assume that college loans just go away in 20 years and that they may be motivated to borrow more than what is necessary. This can be a very costly mistake even though students think it is an easy decision since after all, they are investing in their future. Keep in mind that student loans are not even dischargeable in normal bankruptcy proceedings, so students need to be very cautious when deciding how much is too much.

The 411 on 401k Fees

2011-09-30T17:04:00.003-04:00

With traditional pensions practically a thing of the past in the private industry, 401k plans have become the most common tax-deferred way to save and I would guess that many of you currently have a 401k. I'd also be willing to bet that some of you have 401ks at old employers. Because people are often unsure of what to do with these savings, we are frequently asked if it is a good idea to leave a 401k account with a previous employer. Our answer is always the same; No.

A 401k is a great savings vehicle while you are employed, especially if your employer matches even some of your contributions. Even without a match, saving into a 401k has substantial tax benefits since you are allowed to contribute up to $16,500 pre-tax ($22,000 if you are over 50). But 401ks are not perfect. They have several disadvantages, two of which are fairly significant: higher fees and limited investment choices. When you change jobs, an IRA becomes a much better alternative.

401k fees have received a lot of scrutiny over the years due to lack of transparency. Since 2007, the U.S. Department of Labor has been putting together a set of regulations that require 401k plan sponsors to better disclose information regarding the plan. A big part of this disclosure involves the plan fees and expenses. Up until now, it has been almost impossible for participants to understand how much they have been paying to participate in their 401k plans. These new rules are meant to improve the quality of 401k plans and make them more consistent from one employer to another. Unfortunately, they don't apply to 403b and 457 plans even though they suffer from the same shortcomings. These regulations were supposed to take effect this July, but have been pushed back to April 1st, 2012, mostly due to service providers arguing that it is too much work to make the changes. This is all but certain the final deadline.

Interestingly, this lack of transparency has meant that not only have many 401k participants not been aware of all the fees associated with their plan, but in some cases, the employer has not been aware either. This makes it difficult for the employer to select the best plan for its employees. Once the new regulations are in place, there will be a lot more disclosure from the plan sponsor to the employer and from the employer to the participant. Those employers who have been lax on choosing the best plan for their participants will now be forced to be more prudent in their selection since employees will be able to see every fee they are charged. Plan providers who have been overcharging for their services will be exposed and either pushed out by competition or forced to clean up their act. We view these new regulations as a much needed change in the 401k industry.

401k service providers have long gotten away with bundling fees which makes it difficult to identify how expensive a 401k plan is and what exactly the fees are paying for. The two most common categories of 401k plan fees are plan administration fees and investment fees. Administrative fees include fees associated with recordkeeping, accounting and legal fees involved with the day to day operations of the plan. In some plans, the administrative expenses are covered by investment fees and deducted from investment returns. Otherwise these expenses are either paid by the employer or charged directly against plan assets. Large employers often pick up the tab on expenses, but many smaller employers can't afford to do that. Another type of fee that participants may encounter is individual service fees, but these are pretty uncommon and are associated with optional features such as plan loans.

By far the largest component of 401k fees is investment fees. Investment management fees are generally stated as a percentage of the amount invested in each particular fund. There may also be sales charges associated with the buying and selling of shares. Some mutual funds have sales charges known as front-end or back-end load charges which are assessed either up front when you invest in a fund or when you sell the shares. One type of mutual fund fee expected to receive serious scrutiny is 12b-1 fees. These are ongoing fees paid out of fund assets to cover commissions to brokers.

Every 401k plan is different and so are the types and amounts of fees. While as an employee you don't have direct control over which plan your employer chooses, come April you will at least have a much clearer picture of what expenses you are paying. Armed with knowledge, employees who think they are paying an unreasonable amount in fees will be able to approach their employers and ask for some lower cost alternatives. Hopefully employers will use this as an opportunity to make sure that the plan they have in place is in the best interest of the employees. I don't think they want to get caught fielding complaints from unsatisfied employees.

While these new regulations are sure to improve 401k plans, an IRA held at a brokerage firm is still a superior long term alternative. Once you have left an employer, you are eligible to roll over your 401k into an IRA without incurring any taxes. If you have changed jobs over your career multiple times, you can roll all of these 401ks into a single IRA consolidating your assets and making them easier to keep up with. But perhaps most importantly, your investment choices are infinitely greater with an IRA than the handful you have to choose from in a 401k plan.

In conclusion, I want to reiterate the point that 401k plans are a great savings vehicle for employees. But there is definitely room for improvement and I am glad the Department of Labor's regulations are finally being put into place. Transparency is extremely important when it comes to the cost of services, especially with one's retirement on the line.

More Triple Digit Days

2011-08-18T16:54:00.005-04:00

By: Charles Webb

We've been busy in the Alder Financial pressroom this summer. Again, we're seeing more extreme volatility in the markets and once again, it's all about Europe. We've written over the past couple of months that we felt the stock market was going to be largely driven by news coming out of the Euro Zone. That's exactly what we're seeing today.

Today's selloff came after U.S. federal bank regulators expressed concerns that Europe's debt crisis could spill over to the U.S. banking system. Some of Europe's biggest banks have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. The worry is that the Euro Zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations here in the U.S.

U.S. regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up, and are turning up the pressure on these banks to transform their U.S. operations into self-financed businesses. This would better insulate them from liquidity events in their home countries. The most immediate concern is how these banks are going to refinance their maturing debt in the coming years. While these banks are adequately funded now, one lesson from our own banking crisis a few years ago is how quickly those resources can disappear.

In addition to the banking news, the market is reacting to more weak economic data released this morning. This data shows a continuing deterioration in manufacturing and home sales as well as higher inflation. The uptick in inflation was largely driven by higher gas and food prices.

The worry is that we're headed into another recession next quarter. GDP has recently slowed considerably and is barely in positive territory. This is where the events in Europe become so important. Most of the economic recovery so far has come from rising exports, thanks largely to the weak dollar. Much of those exports have gone to Europe. Should Europe suffer a major setback, the chances are pretty good that we'll see what little growth we have here disappear.

The decline in stock prices are now reflecting another recession. If we're able to avert this, the recent selloff represents a buying opportunity. Otherwise the summer's selloff is justified. Our opinion is that another recession is technically likely but would be short and far less severe than the last one. We've positioned our client portfolios as defensively as we can without making a huge bet in one direction or another.

With cash yielding nothing and the Fed announcing it will remain that way for the next year and a half, we believe bonds are the only place to hide. This is why we continue to be overweighed in that asset class and focused on current income. We're still positioned to wait this out.

Our forecast for this year has been subdued by recent events but remains positive. Our belief is that the headline risk coming out of Europe will begin to subside by the end of September. We're hopeful that stocks will get a bounce off these levels and finish the year modestly in the black. Add this to the cash income, and we'd wrap up the year with a respectable total return.

Another Week, Another Crisis

2011-08-08T17:51:00.003-04:00

By Charles Webb

Standard & Poor's was kind enough to send us home over the weekend with a credit downgrade of U.S. long-term debt. This would have been unimaginable only a couple of years ago, but here we are. Now we're faced with the first day of trading in what many think of as a new financial world, a world in which U.S. debt backed by the U.S. dollar is no longer the unquestioned safe haven in troubled times.

So what does all of this actually mean? Well, we've written fairly extensively over the past few months on the subject of sovereign debt and the dollar and have touched on the subject of a possible downgrade. Now that it's here, it's a good time to put all of the pieces together.

The first thing that is important to acknowledge is that a downgrade on sovereign debt is very different than a downgrade on corporate debt. A downgrade in the corporate world is serious stuff. It directly affects the rate a company will pay when it borrows money, either from a bank lender or from the bond market when it issues debt. Nations, on the other hand, issue their debt via an auction process and the interest rate paid on those bonds is strictly based on the bids received. Thus, their cost of borrowing is a function of the demand for their bonds. That demand is only marginally (at best) influenced by a credit rating agency. For a major economic power like the U.S., the rating is meaningless. What we have there is a moral defeat and not a financial one.

I think it's best to frame this discussion more as a political failure than a financial one. No one, including S&P, thinks that the U.S. will default on its debt. The only risk that holders of U.S. treasuries face is what I earlier described as a soft default. That is to say that higher interest rates and a weaker dollar will hurt current bond holders by devaluing the purchasing power of their future interest income. This is no small thing to foreign investors that hold trillions of dollars in treasuries. There has been a real concern in recent years about holding U.S. dollar denominated assets when the Fed has been pursuing a weak dollar monetary policy while also running massive fiscal deficits. The irony surrounding S&P's downgrade is that there is absolutely nothing in their announcement that hasn't been widely understood for at least two years. That's why I call this a moral defeat or simply the cherry on top of a pile of bad news.

The Financial Fallout

Wall Street often thinks of macro trading strategies as risk-on or risk-off. Risk-on usually means buying stocks- i.e. going long risky assets. Risk-off is the opposite and usually leads to a flight to the safest asset - i.e. U.S. treasuries. What does a risk-off trade look like now? Well, it turns out that it looks like it always has. Treasuries are rallying driving rates down. Not exactly what the textbooks teach. This is why we don't think this downgrade will actually lead to higher consumer rates or hurt the economy long-term. The economic damage will result for the same reason as the downgrade and not from the downgrade. Obviously, this is too much debt and the prospect is for even higher debt levels in the future.

Once again, we are benefiting from the focus on Europe. Due to their own debt chaos, the U.S. treasury market remains the only game in town. There certainly are other nations in better fiscal shape, but those markets simply aren't deep enough to accommodate the required liquidity. Quite simply the world doesn't have anywhere else to park $10 trillion.

Short-term we expect to see a lot of volatility. That is to be expected as market participants digest this news. We still view this as headline risk and are far more concerned with the fundamental underpinning of the economy. The only way this downgrade could affect things long-term is if it leads to higher rates. We just don't see that happening.

Make no mistake, stock prices over the last few weeks, today and in the coming weeks have and will be driven by fears of slowing GDP that could lead to another recession. Market sentiment is pretty low right now. This downgrade is only exacerbating that feeling. As we've seen in the past, attitudes can turn quickly.

Don't be surprised to hear of other downgrades over the week. Because the federal government backstops a lot of other debt issuers, this downgrade is going to trickle through. We're already seeing rating changes on Fannie Mae and Freddy Mac, as well as several other agency debt issues. Once again, I don't expect this to have much of an impact. In fact, spreads on many of these bonds, including treasuries, have widened over the past couple of months. This implies that the market has been pricing in this rating change for weeks.

The Political Fallout - warning: if you're politically sensitive stop reading here. This is about to get very opinionated.

As I stated earlier, this event is primarily a political failure. Standard & Poor's really didn't downgrade our debt as much as they downgraded our fiscal policies. This is the result of an abject failure of leadership in this country. The federal government has run deficits for decades. Not surprising as that's what governments do left unchecked. Only from time to time has Congress been serious about addressing our country's debt and spending level. Even then, they usually just gave it lip service. The last time any real effort was made was during the Clinton presidency when the Republicans took control of the House and Senate.

Over the ensuing years of Republican control, the party in charge became drunk with power (because this is what politicians do) and went on a spending binge. Government spending exploded with all of the fresh tech-bubble tax revenue in the late 90's. We then had to suffer through the Bush presidency that never saw a spending bill worth vetoing. Add a couple of wars and we were off to the races. From there we then went to a Democratically controlled Congress and Senate led by a very activist arm of the party. Two years later president Obama was elected.

Federal spending has expanded exponentially to the point that we now borrow 40 cents of every dollar. This trend has been particularly egregious over the last three years - all in the name of stimulus. So let's take a moment to talk about stimulus spending and how it's supposed to work. I'll try to do this without getting lost in the weeds of economic theory.

By nature, government fancies itself as the solver of problems (real or imaginary). As such, Keynesian economic theory has always been very popular in governments around the world. Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize the business cycle. One might call a recession an inefficiency. Keynesian economic theories were first presented in The General Theory of Employment, Interest and Money, published in 1936.

Part of this theory incorporates the concept of the multiplier effect. This theory believes that, for a number of reasons, for every dollar of government spending you will get a larger number back in GDP. The president's first set of economic advisors seemed to think that we would see a 1.5 multiplier. This means that for every dollar they spent, the economy would see a $1.50 increase in GDP (I'm not sure where this brain trust came up with that figure but it seems to be the same place they got unemployment not exceeding 8%). From here the Stimulus Bill was born and all other policy responses were based. In all fairness, stimulus spending was Bush's first response too, although nowhere near in size.

What we have seen in the past two and a half years has been a giant experiment in Keynesian economics and the results are not looking promising at all. This experiment has come at a great cost to our public debt and, in my opinion, not shown much in the way of working. Not only have we had trillions of dollars thrown at the economy, but we've also vastly increased baseline expenses in perpetuity. This is at the heart of the S&P downgrade and the pushback from the public at large.

One thing that I find very disheartening is the response from the White House. Instead of honestly critiquing their results, the reaction is to blame others and want to double-down on this experiment. To be sure, all the president's men came out in full attack mode this past weekend blaming all of this on S&P's analysis. Absurd. Is there anything that S&P said on Friday that everyone else doesn't already know? S&P essentially declared that on present trend the U.S. debt burden is unsustainable, and that the American political system seems unable to reverse that trend. This is not news.

So after trillions spent on "investments" like cash for clunkers, cash for caulkers, cash for first time home buyers, making work pay, cash for green energy, cash for high speed rail, etc., we now have the latest grand idea - an infrastructure bank. This is simply code speak for more stimulus spending. It's a "bank" funded with - can you guess? More debt to invest in our infrastructure. Sounds very shovel ready in my opinion.

To me it sounds like these people are so very in over their heads and out of ideas. I've never been a big believer in the multiplier effect. I think instead all it does is postpone the inevitable. All of these programs have done nothing but drag out this recession/recovery. A great example was the housing price bust. Untold amounts of money were paid to folks to buy homes sitting on the market and thus create demand. It worked. That is until the program ended and then prices fell yet again. Interestingly, they fell by about what the credit was. So instead, the housing price decline lasted a couple more years with prices ending up at basically the same place. In the meantime, our kids have just paid the down payment on a stranger's home.

The bottom line is that the spending must stop and their other favorite solution, raising taxes, would be counterproductive. It's unclear to me how you fix a spending problem by throwing more money at. That's a bit like solving alcoholism with another drink.

This leads me to another complaint. The blame game isn't going to help matters. I'm perplexed to see time and time again the president go on national TV demagoging entire industries and large segments of our population. One of the other themes seen this weekend was that the downgrade was the fault of the Tea Party movement. I fail to see how a movement that arose out of the desire to curtail spending is in anyway responsible for the situation we find ourselves in today. Of course, what the administration is really saying is that those members of Congress aligned with the Tea Party objected to a balanced approach - i.e. raising taxes. Once again, this problem didn't spring up because of any tax shortfall thus the solution won't be found there. At best, higher taxes would only slow (and not by much) the decline in our fiscal situation. There just aren't enough corporate jets in this world or hedge fund managers to make a difference.

S&P did mention in their report that one problem they saw was an unwillingness to raise taxes. One important thing to note here is that they are not in the job of writing economic policy. They would rather see the deficit gap close as quick as possible regardless of the long-term consequences - give the man another drink and he'll be quiet for a while.

In Summary

This too will pass. If the politicians won't adequately address the problem, the market will force the issue. This is a wakeup call to Washington. The president used to say that elections have consequences. This downgrade will have consequences too and it won't be financial but instead will be felt at the polls. We should all be furious with everyone in Washington who contributed to this mess. Good credit is nothing to play around with and is very hard to get back once you've lost it.

There Will Be Days Like This

2011-08-05T13:22:00.011-04:00

By Charles Webb

It's never easy to sit back and watch the Dow drop five hundred points. But it happens. From a technical standpoint, the last two weeks have put the U.S. and most foreign stock indices in "market correction" territory (down 10%).

Yesterday's action was the culmination of a steady deterioration in the fundamental data over the last two months in the U.S. and continued liquidity uncertainty coming out of Europe. The primary emphasis here has been poor Jobs data and revised lowering of GDP for 2011. In Europe, it's just been more of the same - declining quality of sovereign debt.

From a technical trading standpoint, a number of key thresholds have been crossed on the downside leading to more momentum lower. All of this adds up to a glut of bad news and very little to look forward to.

After today's rout, most stock indices have erased their year-to-date gains and are now negative for the year. The Dow Industrials are down 1.67% and the S&P lower by 4.58%. Higher quality corporate bonds have been the place to be in the past four weeks with those indices up 4-5%.

There really isn't anything unusual about what is going on right now and we've seen plenty of days like this over the years. Admittedly, it's hard to remain optimistic after a big selloff, but our outlook for the year is still positive on stocks, although slightly less than we had at the beginning of the year. The problem now is that we don't see a catalyst for a change in sentiment in the near future. Until then, stocks are likely to drift lower.

So what can we do in the meantime? Since the economy crashed in 2007, our investment strategy has been to focus on increasing the cash flow in our client portfolios and adding predictability to the returns with bonds. Those efforts are still paying dividends today (literally). While many of our highest yielding securities have paid down over the last couple of years, our overall portfolio income remains strong and valuations less volatile. In most cases, our clients' portfolios are cash flowing around 4% and the values are back to the pre-crash levels. That's no small feat considering the Dow Industrials are still down 18% from the highs in 2007.

Going forward, we want to stay out of cash. You'll probably be hearing a lot in the financial press about cash being a safe haven. In real terms though, (taking inflation into account), cash balances only guarantee losses. The Federal Reserve has been pushing investors out of cash for several years in order to get that capital working in the economy. They've done this by keeping short-term rates near zero. We don't see that attitude changing anytime soon.

Instead, we'd like to keep everyone fully invested and slightly over-weighted in bonds. Our expectation is that stocks will struggle for the next month or two and then come back in the fourth quarter. We think the market needs to see two months of a positive trend in employment and GDP to really turn around. Growth is now just about flat and there are real fears of slipping back into a recession. We don't think that will happen but even if it did, it would likely be very short and shallow.

The best real-time gauge of market sentiment will be the news coming out of Europe. The Euro Zone economy is larger than the U.S. and thus is a significant global trading partner. The fear is that a significant slowdown in their economy would have a ripple effect around the world. This is especially a threat here in the U.S. and could be the difference between slow growth and no growth in our economy.

We of course will keep our clients informed as things change. For now we feel that everyone is situated about as best as can be hoped for. Once again, we think cash flow is the key to avoiding the need to sell into this market. Remember that the only two days you care about what something is worth is the day you bought it and the day you sell it. You don't want to be in a position to have to sell into this market. That's when investing becomes gambling.

Perspectives On The Debt Ceiling Debate

2011-08-01T09:45:00.012-04:00

By Charles Webb

"For those who say further responsible spending reductions are not possible, they are wrong. . . For those who say more taxes will solve our deficit problem, they are wrong. Every time Congress increases taxes, the deficit does not decrease, spending increases." – Ronald Regan

The debate over the U.S. statutory debt limit has come down to the wire. The U.S. Treasury has stated that if an increase in the debt ceiling is not in place by August 2nd, they will run out of funds to pay all of their bills. Yet with just days left before the deadline, political brinkmanship in Washington shows no sign of letting up.

There are so many ways in which this political crisis can play out. Each one is further complicated by the fact that there is no way of knowing precisely how financial markets will react if this deadline is breached. For decades, U.S. Treasuries have served the global financial markets as an unquestioned source of liquidity. When this conventional wisdom is thrown out the window, the world looks like an unpredictable place and financial markets hate unpredictability.

As we see it, there are four possible outcomes. The first and most desirable outcome is that a consensus is formed around a spending plan that puts this country on a sustainable fiscal path. By contrast, the current path is quickly running out. The can has been kicked down the road so many times that the road has simply run out. Even the Congressional Budget Office acknowledges that our current situation is unsustainable.

Scenario 1

This best case scenario would immediately raise the debt ceiling, putting any short-term uncertainty to rest, and institute a fiscal austerity plan in place that would bring the country’s outstanding debt to within a reasonable percent of GDP. In the short-term, stocks would rally, Treasury spreads would narrow and the dollar would strengthen. Medium-term, this would put downward pressure on economic growth and slow the recovery. Four trillion dollars in cuts over ten years, it is estimated, would reduce GDP by about 0.5% per year for the next five years. This deleveraging cycle would be very similar to what we’ve seen in the private sector over the last three years; a sharp impact short-term but lasting benefits long-term. It would be the take your medicine now approach.

Scenario 2

Similar to the first, scenario two would have a last minute deal struck by Congress and government operations would not be interrupted. However, this deal involves only an incremental increase in the debt ceiling in exchange for ongoing discussions on a larger fiscal agreement. Standard & Poor’s has repeatedly stated that they would still consider downgrading the status of U.S. debt if they believe a credible long-term solution to the rising debt burden has not been found. However, even if this were to occur, it would likely have a relatively minor impact on the U.S. economy as other ratings agencies do not appear inclined to follow.

With the risk of a shut down in government operations and a debt default having been averted, we suspect markets would take a downgrade by a single agency in stride. Nonetheless, worries about the long-term prospects to deal with the fiscal imbalances would persist. This scenario would bode for continued weakness in the U.S. dollar, but not a sharp decline from current levels. Bond yields would be largely unaffected, as markets would go back to fretting about the sub-par pace of economic growth.

Scenario 3

The third scenario arises if the political impasse takes us past the August 2nd deadline. In all probability, this would eventually be followed by a ratings downgrade by Standard & Poor’s, and there would certainly be heightened risk of action by other rating agencies.

In this scenario, we end up with a double hit on the economy. The first hit comes from the direct impact of withdrawing government funds from the economy equal to their financing shortfall - estimated to be $135 billion for the month of August. The second hit comes from the indirect impact of a potential rise in Treasury yields and flight out of equities due to deteriorating market sentiment.

There is no way in knowing how long the political impasse would last if it were to occur. If we assume a political resolution is not found for the entire month of August, a reduction of $135 billion from the economy would equate to an annualized 1.5 to 2 percentage point drag on GDP growth in the third quarter. The market reaction would be serious. At the very least you would see a flight out of risky assets, like equities. Similarly when Congress initially failed to pass the TARP legislation in late 2008, the S&P 500 suffered one of its largest single day drops on record (-9%).

The likely public reaction would certainly lead to a quick compromise in Washington and much of the market reaction would reverse itself. However, the lost GDP would leave the economy in much worse shape than it is today. Overall, the impact would be directly related to the length of time past the August 2nd deadline it took to reach an agreement.

Scenario 4

In this scenario the U.S. government actually defaults by not making or is late in making its interest payments. This would be totally unimaginable and we don’t think there is a remote chance of this happening. This event would take us into uncharted waters in modern finance.

Financial markets would simply freeze. Every asset class would drop in value. Stocks, bonds and even money markets would take severe hits. It’s even uncertain what commodities like gold would do. An economic recession/depression would surely follow from the total freeze in U.S. credit markets.

A Little of Our Opinion

Depending on how long it takes Congress and the President to reach an agreement, the impact could range from a short-term negative to disastrous. The financial market’s impact will depend on how long this impasse takes to get resolved.

It must be recognized that federal spending must be sharply reduced to stabilize the debt to GDP ratio. As we’ve stated before, this is a spending problem and not a revenue problem. As such, this situation must be confronted from that perspective and there will be some negative economic effect from this deleveraging.

To try and address this issue by raising taxes is counterproductive in our opinion. It’s important to understand that there are three basic inputs to production (GDP): materials, labor and capital. These are not substitutes for one another but instead must be used together. When the government collects taxes or runs up debt, it is consuming capital that would otherwise be available to the private sector and thus retards economic growth.

In the current debate we’ve heard a lot about taking a balanced approach to fixing this crisis. This of course means raising taxes as well as cutting spending. Our objection to this is that taxes are already going up almost a trillion dollars beginning in 2013 due to the healthcare legislation passed last year. We don’t think that adding more taxes in this economic environment is a good idea nor do we think it would help long-term. Clearly government is necessary and must be funded, but to what extent? I’m reminded of the saying that traffic will always fill the roads, meaning that no matter how many times you expand the freeways, traffic will always increase to the road’s capacity. Government spending is much the same way. No matter how much is collected in taxes, politicians will always find a way to spend it – and then some. This is how votes are bought and constituents pleased.

The Bottom Line

We think that scenario 2 is the most likely outcome. We also think that the debt ceiling increase will get finalized at the last minute and maybe even a day or two after August 2nd. Expect the markets to be volatile over that time and the news to be disheartening. We strongly believe it would be a mistake to change or make any investment decisions based on this news. Whatever hedges that could be put in place would be destroyed once a compromise was reached.

You’ll hear a lot of news about our AAA credit rating. While this shouldn’t be taken for granted, the reality is that there is enough demand in the treasury market that it will look through what is clearly a political event and not a true default.

In the end, the markets will trade on the fundamentals of the economy and not the headlines. That’s what we’re focused on when it comes to our clients’ portfolios. We still feel pretty good about the fundamentals.

The Almighty Dollar

2011-06-22T15:40:00.039-04:00

By Charles Webb

A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation - Ross Perot

In April, we wrote an article about this county’s exploding Federal debt problem. This month we’d like to expand on that topic by looking at a closely related subject -the dollar’s steep decline and its implications.

The quality of a country’s debt is directly linked to the value of its currency. The reason for this has to do with a specific type of risk associated with sovereign debt.

There are basically two types of risk when investing in foreign sovereign debt. The first and most obvious risk is credit risk, or the risk of outright default. That is to say that the country simply can’t make the interest payments and can’t repay the debt at maturity. Since most countries can print their own currency, the risk of outright default is very unlikely. The exception to this is if the country is part of an economic union such as the Euro and thus can’t print money at will – i.e. Greece, Spain, Ireland, etc.

The second type of risk associated with foreign debt is currency risk. This is the risk of a decline in the value of the currency of which the debt and payments are being made. It is possible for an investor to lose money on a foreign bond if its currency declines at a rate higher than the bond’s coupon. For example, if a bond pays 4% per year but the underlying currency depreciates at 5%, an investor would cumulatively lose around 11% over ten years. That’s not exactly a risk-free investment and is one of the reasons the international community is so concerned about the persistent decline in the value of the U.S. dollar.

So what causes the value of a currency to decline? There are many factors that lead to changes in the value of one currency relative to another. The biggest one, though, is greatly expanding the supply of that currency.

As we mentioned in the last article, in this electronic age, the money supply isn’t grown by the printing press but done so via the central bank’s open market operations. The current phrase for this is “quantitative easing”. The Fed does this by purchasing bonds (usually their own – i.e. treasuries) in the open market and paying for them by crediting the seller’s bank account.

Since the housing bust and the ensuing banking crisis, the Federal Reserve has attempted to support the economy by pumping billions of dollars into the banking system. These activities are in addition to the government’s fiscal activities or stimulus spending and have greatly expanded the money supply.

The flood of new dollars has created a kind of soft default on our debt that is calling into question the soundness of our Treasury bonds and their AAA rating. Foreign investors have become very concerned about what they perceive as an unstated weak currency policy which is leading to real losses on the trillions of dollars of treasury debt held by foreigners.

So why does this matter to us? After all we’re not taking the losses, it’s the other guy. Quite simply those are our creditors and we depend on their appetite for our bonds to fund our government’s spending binge. At some point, our creditors will lose faith in the soundness of the dollar and demand higher rates on our bonds to compensate for the currency losses. Those higher rates will affect everything from mortgage rates to business loans, not to mention how it will exacerbate the deficit.

A Breif History of the Dollar

Since 1945, most of the world has been on a dollar standard. Today, for emerging markets outside of Europe, the dollar is used for invoicing both exports and imports, it is the intermediary currency used by banks for clearing international payments, and the intervention currency used by governments. To avoid conflict in targeting exchange rates, the rule of the game is that the U.S. remains passive without an exchange-rate objective of its own.

After World War II, the Bretton Woods agreement put the dollar at the center of foreign trade by requiring the U.S. to exchange gold for dollars at the request of trading partner governments. Other countries would hold dollars in reserve to underpin their own currencies. The gold standard imposed discipline on the U.S. and gave everyone else a stable and liquid reserve currency.

The plan worked well until the 1960’s, when U.S. deficits led to a meaningful increase in the money supply. Wary trading partners then began to exchange dollars for gold until 1971 when the U.S. closed the gold window, refusing to trade gold for dollars.

Instead of switching to another reserve currency, the global economy kept on buying dollars. At that point, it was as if the U.S. was given a virtually unlimited line of credit from the rest of the world.

Americans proceeded to borrow more and more in the ensuing years. This addiction to debt crept into every level of society - from federal and state governments, to consumers and businesses. From 1970 to 2009, total debt in this country rose from 170 percent to 350 percent of GDP.

The Dollar Today

So why are foreigners still willing to loan us money? Quite simply, we’re the only game in town. Countries that run large trade surpluses with the U.S. find themselves with ever-growing balances of dollars on their hands. They have to do something with this cash and they find themselves with little alternative but buy U.S. treasuries with those dollars.

The lack of alternatives is the key. If there was an alternative, you would see an immediate drop in the number of investors lining up at the treasury auctions. With fewer interested buyers, rates would be bid up, leading to higher interest rates throughout the economy.

These higher rates would devastate consumer spending, the real estate market and business growth. In addition, the percent of tax receipts required to service $8 trillion of debt rolling over at these higher rates could easily double. This would create a death spiral of higher deficits leading to higher borrowings and yet higher rates and so on.

This is why it’s so important for the federal government to get its fiscal house in order. The United States has benefited greatly in many ways due to its standing in the financial community. The threat posed by our massive deficits that seem to have no end could permanently reduce our standard of living.

The key to maintaining our global prominence rests on the dollar’s reserve status. Because of the uncertainty of our monetary policy, long-term, the rest of the world is actively looking for an alternative. Fortunately for us there isn’t one. At one time it was hoped that the Euro would be become an alternative. Europe’s own debt crisis has dashed any hopes of that and has bought us more time to fix things here. Let’s hope Washington can get their act together in the meantime.

2011-05-26T16:03:00.010-04:00

The Long-Term Care Gamble

By Lori Eason, CFP(R)

Over the last several months, we have received a lot of questions concerning long-term care insurance. Not only are many of us facing increased health care costs now (my health insurance premium is going up 20% this year), but the uncertainty in the coming years makes it extremely difficult to appropriately plan for health insurance costs during retirement.

With the average life expectancy on the rise, it's no surprise that the number of people who will need long-term care at some point in their lives has greatly increased. The Centers for Disease and Control state that the average life expectancy is over 78 years, and that number is a lot higher for those with good genes. The US Department of Health estimates that 70% of people over the age of 65 will require some form of extended healthcare during their lifetime. Although the average length of stay in a nursing home is 2.5 years, 20% will need care for more than 5 years. At an average of $80,000 a year with costs rising at about 6% a year, 5+ years in a nursing home can plow through a retirement portfolio very quickly.

Some of you may be thinking, what about Medicare and Medicaid? I'll briefly explain what type of long-term care these government programs cover, starting with Medicare. While Medicare does pay for some short-term nursing home stays, the requirements to qualify for benefits are very specific and it is not intended for long-term stays. Among the requirements is an inpatient hospital stay of 3 consecutive days or more. One notable illness that often does not meet this requirement is Alzheimer's because the patient is often physically in okay shape, but mentally unable to care for his or herself. If all requirements are met, Medicare pays the full cost of the nursing home for the first 20 days. For days 21 through 100, Medicare covers the cost after the patient pays a daily copayment, currently $141.50. After 100 days, Medicare pays nothing. The average daily cost for a private room in a nursing home is $219.

Medicaid, on the other hand, does cover long-term nursing home stays, but it comes at a hefty price, almost all of your assets (at least on paper) and potentially fewer choices when it comes to the quality of care. While long-term care insurance is for the elderly, Medicaid is for the poor. Medicaid is a combined federal and state program. The federal government provides funds to each state with certain requirements as to whom Medicaid benefits must be offered. However, the states administer the programs and each state has its own additional rules and regulations. No matter what state, there are stringent income and resource limitations. In Georgia for example, the income limit for nursing home eligibility is $24,264 per year and the resource limit is $2,000 in countable assets for individuals, $3,000 for couples. Some notable non-countable assets are your home, one car, personal possessions and assets considered "inaccessible." Most importantly absent from this list are IRAs and other investment accounts.

That being said, there is an entire industry structured to help the elderly get rid of their assets on paper, i.e. gifting to relatives or charities, in order to qualify for Medicaid. But even if you successfully eliminate your assets on paper, there are still quality of life implications of relying on Medicaid. To mention a few potential shortfalls of Medicaid, only certain nursing home facilities accept Medicaid patients and you do run the risk of being moved if your facility decides to stop accepting Medicaid or decrease the number of Medicaid beds. Also, you may end up with a roommate, and not by choice. Lastly, in many situations, home health care is a much more preferable option than entering a nursing home, but this benefit is limited through Medicaid if available at all.

So now that we have established that it's generally not a good idea to rely on Medicare and Medicaid for long-term care, I'd like to turn our focus to long-term care insurance. First off, here at Alder Financial Group, we are big advocates for individuals being self-insured, meaning they reach a point where their portfolio is large enough to cover their family's living expenses indefinitely, even in the event of disability or death. However, with health insurance costs raging out of control, long-term care insurance can certainly help mitigate the financial and emotional cost in the event that an individual needs long-term care. But it does come at a high cost and of course there is no guarantee that the policy will ever need to be used. While everyone's situation is unique, instead of trying to find a policy that will cover all long-term care expenses, I generally recommend figuring out how much you would feel comfortable paying out of pocket for long-term care based on your projected retirement income and purchasing a policy that would cover the difference. If you ultimately need long-term care, even policies that are designed to cover only a portion of your costs will be valuable. This is a way to hedge some of your risk without spending an unnecessarily large amount on premiums in case you don't end up needing long-term care.

The subject of premiums brings up the most unpredictable component of long-term care insurance. The younger you are when you purchase the policy, in general the healthier you are and the lower the premium. According to the American Association for Long-Term Care Insurance, the average buyer is 57 years old and pays $2,150 in annual premiums. But unfortunately, double digit increases are standard. John Hancock recently asked state regulators for permission to raise premiums on many of its long-term care policies by an average of 40%! Many carriers assumed more policyholders would let their policies lapse than actually did which severely harmed their analysis. Two big providers, MetLife and Berkshire, recently decided to stop writing long term care policies.

While some insurers are shying away from long-term care insurance, we have already seen a couple new options surface. In response to customer and agent demand, some insurance companies have designed hybrid policies that combine the benefits of life insurance with traditional long-term care benefits. These policies offer heirs a tax-free payout if the beneficiaries don't use all the money for long-term care. Also, government partnership programs are now offered by many states and they offer individuals an incentive to buy long-term care insurance. For each dollar the policyholder receives in long-term care benefits, the state allows them to shelter one dollar from Medicaid limits.

This is a very turbulent time in the health care industry and we are all unsure of what changes will shake out of the health care crisis. For this reason, I don't think it's a bad idea to let the dust settle before purchasing a long-term care policy if you can afford to wait, but if purchasing long-term care insurance is a big cause of concern for you right now or if you are worried about declining health in the next couple years, now is a good time to do some research on policies. I could write a whole other article on what to look for when buying a policy. As a start, please click here to read an article that highlights the shortcomings to avoid when picking a policy. If you are a client of ours and would like to further discuss long-term care insurance, please let Charles, Alan or I know.

2011-04-21T14:41:00.010-04:00

The Burden of Debt

By Charles Webb

Regardless of political affiliation, everyone should be extremely concerned by the level of debt that is being accumulated by our government. The projected deficit numbers are unprecedented by any historic measure.

Just two years ago, the total debt of the federal government was 69% of our gross domestic product. Last year it was 83%; this year it has risen to 94%. By 2013 or 2014, if we continue current economic policies, it will exceed 100%. And those numbers don't even include the tens of trillions of dollars in future Social Security and Medicare promises that are already with us (future unfunded liabilities).

How bad is it? Last year, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: "Directors welcomed the authorities' commitment to fiscal stabilization but noted that a larger-than-budgeted adjustment would be required to stabilize debt-to-[gross domestic product]."

Delve deeper, and you will find that the IMF effectively pronounced the U.S. bankrupt.

Section 6 of its July 2010 selected-issues paper says: "The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates." It adds that "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14% of U.S. GDP."

The fiscal gap is the present value of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

To put 14% of gross domestic product in perspective, current federal revenue totals 14.9% of GDP. So the IMF is saying that closing the U.S. fiscal gap from the revenue side requires, roughly speaking, an immediate and permanent doubling of our personal income, corporate and federal taxes, as well as the payroll tax. That also assumes those higher rates would have no negative impact on the economy, which of course they would.

So what is the solution? This debate is now raging on in Washington and clearly falling along party lines. On one side of the debate, the Democrats want to raise taxes on wealthier tax payers as a way to slow the deficit. I emphasize slow because the administration has not offered a plan that projects a balanced budget. Instead, there are only hopeful projections that show the deficit becoming more manageable.

The Republicans, on the other hand, believe that by cutting taxes the economy will grow its way out of this pile of debt. In truth, they're both wrong. I would summarize the two positions as tax and spend vs. borrow and spend.

Our problem is clearly in spending. The following table shows a breakdown of the federal budget over the last eleven years.

One interesting line item shown is Net Interest. Interest rates in 2000 were roughly 3 times higher than they are now. Yet the government's interest expense is now 27% higher. This shows you how much the country's debt expense has grown. It also gives you some idea of how bad an increase in interest rates would be on the budget problem. That number alone could easily double in a matter of a few years. The potential increase in taxes on the wealthy (however you want to define that) may simply go towards paying the higher interest cost and make no contribution towards closing the budget gap.

The relationship between economic growth and interest rates poses an interesting problem to a government in debt. The best way to tackle the debt problem is to grow your way out of it. Higher economic activity will lead to higher tax revenues. However, higher economic activity also leads to higher inflation and interest rates. Thus, the government's interest expense rises and consumes much of that additional revenue.

Attacking This from the Top Line

In 2000, federal tax revenues totaled just over 2 trillion dollars. Peak revenues topped out in 2007 around 2.57 trillion dollars. Even after the real estate bust and ensuing financial collapse, tax revenues only declined to 2.1 trillion - higher than any year before 2004.

On the other hand, congress' Office of Management and Budget is estimating expenditures to be 3.8 trillion this year and reaching 4.47 trillion in 2016. There is no way that deficits of these levels can possibly be addressed through higher taxes. By comparison, the total net worth of every billionaire in this country is estimated at 1.3 trillion. You could confiscate every penny of every one of those households and not even cover the deficit of one year.

The following table displays the current sources of tax revenues.

To put these numbers in the proper context, to close the budget gap, individual taxes would have to double, corporate taxes would have to quadruple, payroll taxes would have to more than double, or some combination of the three. Anyone who thinks this is possible or reasonable is simply out of touch with reality.

Tax policy has real economic consequences. It's unreasonable to expect that tax revenues will increase by simply raising tax rates. To be clear - tax rates are not the same thing as tax revenues. The more tax rates go up, the more those subject to taxes shift their resources from productive activities to areas designed to shelter their income. The reverse is true when high tax rates decline.

There is plenty of historical evidence of this reality. The best example of this was when top tax rates were slashed in the nineteen-eighties. Billions of dollars were freed up and directed towards productive activities when the top marginal rates were slashed. So much so that this country was pulled out of one of the worst economic situations ever faced.

When the wealthy shelter their income, they don't invest in things that create jobs. They also don't repatriate overseas earnings. Our comparatively high corporate tax rates are currently keeping billions of dollars in other countries. Simply raising tax rates is counterproductive.

What to Do

In our opinion there is only one way to tackle the deficit. The government simply needs to spend less. The deficits have become so large that these spending cuts are going to have to focus on the largest programs and agencies. This means pushing back the retirement age for social security, wrapping up military operations and getting healthcare costs under control.

We've written extensively about our thoughts on Social Security over the years so we won't rehash that now other than to say that the government needs to get out of the pension business. The wars will eventually draw to an end.

Healthcare is a trickier issue. What we don't think is that pushing millions of people on to Medicaid is going to do anything but bankrupt the states and lead to yet more bailouts. We've also written about healthcare reform so we won't get into that again.

The bottom line is that the biggest programs will have to be radically changed which will take political will. Beyond that, general spending needs to come down and only grow at the same rate as the rest of the country (CPI). It's inexcusable to see the percentage growth numbers in every category from 2000 to now. Keep in mind this was during some of the lowest inflation years in our country's history.

It appears that the market will ultimately force change. Yesterday S&P downgraded the rating on U.S debt. This was an unimaginable occurrence in our lifetime.

Market Flash (March, 2011)

2011-03-15T11:13:00.004-04:00

Japan and the Markets
The news coming out of Japan has become pretty scary over the last few days and the global equity markets have reacted accordingly. As Japanese officials are trying to cope with the country’s worst destruction since World War II, investors are trying to sort what the impact of the world’s third largest economy will be globally. The initial reaction seems to be to sell first and figure it out later. It’s quite understandable that Japan’s near-term GDP is going to be severely affected by these events and the 11% drop in their markets yesterday is justifiable. What is far less certain is how this will affect their trading partners, energy demand, currency markets, commodities and the like.

Adding to the confusion, all of this news is on top of the ongoing chaos in the Middle East. Trying to digest all of this news and information in real-time is, to say the least, a bit overwhelming. Therefore, we think it’s important to step back and look at the bigger picture and not try to assess the impact of every piece of news coming out of Japan hour by hour.

The Big Picture
Near-term, there will certainly be supply chain and distribution interruptions. These will likely cause manufacturing headaches over the next month or two. Japanese domestic manufacturing will likely be slowed considerably throughout the country. This is not just due to the direct damage but also to their reduced power generating capacity. Longer-term, the rebuilding efforts will require massive amounts of materials and equipment. We’ll likely see higher commodity prices of specific goods when those efforts get underway in earnest. Lastly, the Bank of Japan has already promised that it will provide all the liquidity needed to soften the economic blow to Japan.

In addition to these foreseeable events, there will also be a number of significant energy policy discussions that will come out of all this. There’s no way to project the outcome, but surely we’ll hear a lot about alternative energy vs. conventional sources. There will be winners and losers in this debate. Those will be nuclear plant and equipment manufacturers, oil and gas producers and wind/solar firms.

My Portfolio
Beyond the human concerns, the next most obvious question is how this will impact our clients’ portfolios. Our best guess is very little. Last year’s stock market performance was driven by improved earnings and the Fed’s easy money policy. Those two forces are still very much in place. This is the reason we were optimistic about 2011’s potential and still are. There will undoubtedly be a good bit of volatility, both up and down, as the news out of Japan swings from bad to better. Our guess is that six months from now this volatility will have passed and the markets will be refocused on economic matters.

We think the more relevant economic news is what’s going on in the Middle East. Oil supply disruptions are of a far greater concern in our opinion. We hope that the Japanese crisis doesn’t take the international focus off the fighting in Libya. Oil prices above $100 per barrel are a more immediate threat to the economic recovery here and in Europe.

As always, we’ll continue to monitor the news and invest accordingly, but for now we don’t see a need to change our strategy. If anything, our goal of emphasizing portfolio cash flow over the last few years should help smooth the returns in times like this as well as directly meet our clients’ monthly income needs.

Modern Day Gold Rush (February, 2011)

2011-02-28T11:41:00.003-05:00

By Charles Webb

The Modern Gold Rush

We're often asked by our friends and clients if we think something or another is a good investment. That something or another is usually a security or asset class that has had a meteoric rise in value the year before. Over the past year, we have fielded a lot of questions about gold. This should be no surprise to anyone who is familiar with what gold prices have done over the past couple of years. Therefore, we felt this would be a good topic for this month's memo.

I think it's first important to discuss what an investment is because that word is used pretty loosely these days. An investment is something that will either provide you income or increase in value. If the investment is something that generates income, it has to have some sort of earnings that generates the cash flow. Investments that increase in value usually have an earnings stream too. That's what makes them more valuable over time. But not all appreciable assets are backed by earnings. Instead, they are scarce in supply and high in demand. Commodities, gold included, are a good example of this. Collectibles are another good illustration of scarce assets with high demand. So if you want to invest in something, it needs to fall into one of these camps - income or appreciation.

Too often money is directed towards things that on the surface look like investments but in fact are something else. Two common examples are insurance and options. These are really risk management tools and not investments. Another area that we see money flow into is various stores of wealth. These assets are parking places for wealth. Currencies are the best example of this and you'll often see money flow into different currencies in times of political turmoil. Precious metals are another popular parking place for wealth.

This is where things get a little confusing because some things are both commodity investments and stores of wealth. So the question of should I buy gold, silver, platinum, etc. really depends on what you're trying to accomplish. If you truly want to invest in gold, you should do so because you think the demand is rising. The question then becomes what is the best way to buy the gold? In our opinion, exchange traded funds (ETF's) are the best way to own it. These are shares issued against actual gold deposits held in a vault at a bank. Probably the least efficient way to own gold would be through the futures market. This is because you don't own the gold but instead own the right to purchase it at some predetermined price over some period of time.

In most cases though, we are asked about owning gold as an inflation hedge. This is more akin to using it as a store of wealth. The appeal here is that it is believed gold's value will change with inflation and thus as a store of wealth, your wealth in gold will rise or fall with inflation. As Americans, our wealth is stored in the U.S. dollar. Your bank accounts are held in dollars. Your stocks and bonds are priced in dollars. Whenever you sell something, you receive dollars. Many people today are worried about the value of the dollar and are looking for something else. Foreigners also own a lot of our currency. They too are nervous.

These concerns arise because of the budget crises and the huge increase in the money supply promoted by the Federal Reserve. In theory, as the money supply is increased, the value of each dollar is diminished. It's simple supply and demand. Over the last few years, we have seen some decrease in the value of the dollar but nothing dramatic. The reason for this is that there has also been a corresponding increase in demand for our currency, keeping things in check.

So we've identified two possible reasons why you might like to store your wealth in gold. The next question is how good is gold at addressing these concerns? As it turns out, gold doesn't do a good job at all. As a reserve currency, there quite simply isn't enough of it to fill the need. Since the beginning of time, it is estimated that 165,000 tons of gold have been mined. At $1,200 per ounce, that is only 6.6 Trillion dollars. That's only a tiny fraction of the value of the worldwide economies.

As an inflation hedge, time and time again, gold's price has shown itself to march to the beat of a different drummer. There is no better example than today. Inflation and interest rates have been at record lows for years. Yet, in spite of this, gold's prices are at record highs. Clearly, something else is driving the price. In addition, it is completely impractical to transfer enough of your wealth from dollars to gold to make much of a difference in your finances.

The thing really driving gold prices is the aspect of gold as a commodity. The consumption of gold produced in the world is about 50% in jewelry, 40% in investments, and 10% in industry. India is the world's largest single consumer of gold, as Indians buy about 25% of the world's gold, purchasing approximately 800 tons of every year, mostly for jewelry. What I believe is the real driver of gold's price lately is the 40% used for investment. This smells a lot like a bubble.

Gold is being bought just for the sake of owning it. Without a corresponding increase in industrial demand, it's reasonable to wonder what will be the underlying support to the price. Through modern finance, it's incredibly easy for large sums of money to flow in and out of any asset. When the crowd moves away from gold, you have to wonder what that will mean for the price.

Like any asset bubble, there will be those who win big. There will also be those who lose big. The problem is you can't research, forecast or model the crowd. At this point you have to ask, is this investing or gambling?

What's Your Number?

2011-01-31T16:02:00.001-05:00

By Lori Eason, CFP(R)

With the recent credit crisis, it has become much more difficult to obtain credit making your credit history and credit score more important now than ever. I have always wondered, what exactly is a credit score? How is it determined? What can I do to improve it? I figured some of you might have similar questions as me so I decided to research the topic and share my findings.

Last week, I decided it was time for me to pull my credit history and make sure there are no signs of identity theft. We have all been warned about the increasing risk of identity theft with technology advancing. It had been over a year and a half since I looked at my credit report and I remember that being a trying process. I had been misled by the ads of FreeCreditReport.com, the ones with the obnoxious lyrics that get stuck in your head! I mistakenly thought that it was actually an easy process to get my “free” report. Everything went fine until I saw a charge of $14.95 on my credit card statement. Of course I called the company and after getting very firm, they agreed to remove the charge. I later found out that other friends of mine had the exact same experience. In fact, there have been multiple lawsuits concerning those advertisements.

This time around, I decided to research the ways to get a copy of my report and came across the Federal Trade Commission’s link to AnnualCreditReport.com. I read about my right to receive a copy of my credit report from each of the three reporting agencies, Experian, Equifax, and TransUnion, once every 12 months due to the Fair and Accurate Credit Transactions Act of 2003. I had heard about this rule before, but didn’t know the best way to go about getting my report. This website was clearly where I needed to be. I chose one agency and looked over my report and everything appeared to be fine. But one thing was noticeably absent from my report, my FICO score. Of course, you have to pay for that feature!

So what exactly is a credit score? It its most general sense, a credit score is a number used by lenders to estimate the likelihood that a person will pay his or her debts. This number not only impacts whether or not you are approved for credit, but can also impact the interest rate you receive when you finance a purchase. The most widely used credit score is the FICO score, an acronym for the creators of this score, the Fair Isaac Corporation. This score takes into account various factors in five areas: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit. Mathematic models are used to calculate a number between 300 and 850. Generally, a score above 650 indicates an individual has very good credit history.

So as I mentioned, there are 5 areas that are evaluated in determining your FICO score. I’d like to give a little insight into what each of these encompasses and which ones have the biggest impact on your score. Payment history is the biggest component, making up 35% of your score. But the definition of a late payment warrants further explanation. The credit bureaus are only notified if your payment is more than 30 days late. Payments that are between 30 and 60 days late can lower your credit score, but the negative impact is generally temporary and only harms your score for a couple months, assuming only one or two payments are that late. Payments over 90 days late severely hurt your credit score and can damage your credit for up to 7 years.

The second biggest component is current indebtedness also known as credit utilization, making up 30% of your FICO score. This is the ratio of current revolving debt (such as credit card balances) to the total available credit limit. It is perhaps the most interesting component. You can improve your FICO score by paying off debt and lowering this ratio OR by applying for and receiving a credit limit increase. Closing existing revolving accounts typically has a negative impact on your score. This is kind of a Catch-22 as it in a way encourages individuals to obtain unnecessary credit and leave inactive accounts open, which is not a very safe practice due to identity theft.

Length of credit history is the third most important component, making up 15% of your total FICO score. This includes time since accounts were opened and time since account activity. A longer credit history provides more information and offers a better picture on long-term financial behavior, which hopefully is a good thing and will help your score! It is impossible for a person who is new to credit to have a perfect credit score and in fact, many new college graduates have a very difficult time getting a credit card or financing a purchase at first because they have no credit. This is one instance when student loans actually help you!

The fourth and fifth components each make up 10% of your FICO score. There are several types of credit and you can benefit by having a history of managing different types. Some examples are installment, revolving, consumer finance, and mortgage. The last component is new credit. Credit inquiries for new credit can hurt your score, but inquiries that were made yourself to check your credit, by your employer for employee verification or by companies initiating prescreened offers of credit or insurance do not have any impact on your credit score. They will still show up on your credit history report. Also, individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in the scores of these types of inquiries. That being said, it is a good practice to avoid opening too many credit cards in a short time frame because such behavior could suggest that you are in financial trouble and need access to a lot of credit. You should especially avoid opening new lines of credit if you are in the midst of buying or refinancing a home or financing some other large purchase.

While the actual formulas used to calculate credit scores are not public information, this breakdown of the 5 components and their allocations was disclosed by FICO. Each of the three credit bureaus mentioned above, Experian, Equifax, and TransUnion, have a slightly different method of calculating FICO scores and thus your score may vary slightly between the three.

To conclude, I definitely think it is a good practice to check your credit history report at least once a year. There are two main reasons for doing so, protection and accuracy. You need to make sure that there are no signs of fraudulent activity and that everything listed on your report is in fact credit you applied for or at least are aware of. Also, it is not uncommon for incorrect information to be reported that could potentially harm your credit. The only truly free and federally sanctioned website for requesting your credit report is www.AnnualCreditReport.com. On any other sites, you really need to read the fine print. The same goes for obtaining your credit score which is not part of your free credit report.

New Year, New Cost Basis Reporting Rules

2010-12-15T15:59:00.003-05:00

By Lori Eason, CFP(R)

2010 has been filled with a lot of uncertainty and chaos surrounding taxes (one year disappearance of the estate tax, expiration of the Bush tax cuts, temporary Social Security tax cut, etc.), but one thing is for sure, 2011 brings big changes with regard to cost basis reporting. I'm sure you all remember the Emergency Economic Stabilization Act of 2008, a.k.a. the "Bailout" bill. This law authorized the US Secretary of the Treasury to spend up to $700 billion to purchase distressed assets and make capital injections into banks. It also introduced various tax provisions, one of which comes into effect January 1^st, 2011, the new cost basis regulations. These rules will drastically change the way cost basis is reported to the IRS and affects brokers, financial advisors and investors in a major way.

The new provisions will be gradually phased in over the next three years, with stocks leading the way in 2011. Brokers will be required to keep track of cost basis for stocks acquired after January 1, 2011 and form 1099-B will be expanded to include this data as well as classify whether a gain or loss was short term or long term. As you know, 1099s are sent to both the taxpayer and the IRS, so the purchase price of securities sold reported on your tax return will now have to match what was sent to the IRS. This is the same as how currently the total securities sales amount on your tax return has to match the proceeds from sales figure on your 1099. Until now, the IRS has never had a broadly reliable way to confirm cost basis and could only detect misreported cost basis info through an audit. These changes are expected to generate more than $6 billion in additional tax revenue over the next 10 years. Cost basis reporting on mutual funds, ETFs and Dividend Reinvestment Plan shares is set to be phased in on January 1, 2012 and reporting on all other securities, including options and fixed income investments, will be phased in on January 1, 2013.

It is important to distinguish between covered and uncovered securities. Covered securities in 2011 are stocks purchased on or after January 1, 2011. Brokers are only required to report cost basis info on covered securities on the 1099s sent to the IRS. However, many brokers, including Charles Schwab, have decided to provide all cost basis info they have available (for covered and uncovered securities) on 1099s sent to clients to avoid confusion as to why some securities show cost basis and others don't. Taxpayers must realize that it is still their responsibility to report cost basis info for all uncovered securities to the IRS because brokers will not be doing so.

Just because the burden of reporting cost basis is shifted from the taxpayer to the broker does not mean everyone else is off the hook. At the time of sale, the person placing the trade must select which tax lot is being sold. The selection must be made between the trade date and settlement date, generally 3 days, and once made, it cannot be changed. In the event that no tax lot is specified, the IRS requires a default tax method be used - First In First Out (FIFO) or Average Cost, if eligible. One of the most cumbersome requirements is that brokers must immediately file corrected tax forms with the IRS when they receive corrected information. As many of you are aware, corrected 1099s can greatly delay tax filings and cause multiple amended returns.

The concept of keeping track of cost basis info and choosing tax lots at the time of trade is not new to us. We have always traded in a tax efficient manner and therefore chosen the most prudent lots to sell. Our portfolio management software keeps track of cost basis information and whenever we receive assets transferred into a taxable account, we have always made an effort to get the most accurate cost basis information available from the client. For those of you who have accounts managed by us, you shouldn't notice any significant changes from your end except the 1099 you receive for 2011 in early 2012 will include cost basis info. These figures should match the information contain in the Realized Gain and Loss report we send in January. For those of you with accounts not managed by use, it would be wise for you to educate yourselves further on these changes and understand how your brokerage firm's trading policies will be affected.

While brokers have had 3 years to prepare for the changes about to take place, it would be very optimistic for us to assume this transition will happen smoothly. As mentioned above, the legislation will take place in 3 phases with stocks, the simplest type of investment, being Phase 1. Things get much more complicated down the road when fixed income securities such as asset backed bonds become subject to the new rules in 2013. As always, the devil is in the details.

To Convert or Not to Convert, That is the Question (November, 2010)

2010-11-29T13:08:00.009-05:00

By Lori Eason, CFP(R)

Since the dawn of 2010, there has been a lot of talk about the expiration of the Bush era tax cuts. Among the cuts is the disappearance of the $100,000 Roth conversion income limit for this year only. This means that you can opt to pay taxes on your traditional IRA balance over the next two years in exchange for tax free withdrawals during retirement. For months I have read article after article portraying this opportunity as an easy decision and sure way to save money on taxes, but in reality there are many changing variables that greatly affect the benefits to conversion.

The logic behind the conversion for investors is to pay taxes now at a sure rate before taxes increase. But today’s tax rates are not low and adding the additional income created from the conversion to a taxpayers ordinary income can easily push them into a much higher tax bracket. So why would someone volunteer to pay taxes now when they could be deferred to a later date?

There is no argument that it only makes sense to convert if you have funds available to pay the taxes outside of your IRA. Otherwise you would reduce the potential tax free growth on that amount, defeating the purpose of the conversion. But even if you have enough cash flow or taxable savings to pay the tax bill, you have to consider the opportunity cost of using that money to pay taxes when it could be invested and earning a return.

The decision to convert depends heavily on what your goals are with your IRA. If your primary goal is to leave as much money as possible to your heirs and you don’t need any IRA funds for your retirement, a Roth conversion is probably a good idea for you. You would escape the Required Minimum Distribution rules which require traditional IRA owners to take a minimum calculated amount from their IRA annually beginning at age 70 ½ and therefore pay taxes on those withdrawals. In addition, the benefit of tax free withdrawals is passed on to Roth IRA beneficiaries who then take the non-taxable withdrawals over their life expectancy.

For the rest of you who plan on using your IRA to at least partially fund your retirement, the decision requires a lot more thought. One big unknown factor that can greatly sway the results is life longevity. It can take many years to make up for the amount of taxes you have to pay now and the lost potential earnings on those dollars. This is where the opportunity cost arises. As an example, if you convert a $200,000 IRA, it can generate a combined federal and state tax bill as high as $80,000. Not only has your savings been reduced by $80,000, you also lose all the future earnings that that $80,000 could have ever made. In order for the conversion to be a good idea, the sum of the taxes not paid on Roth withdrawals would have to add up to more than the opportunity cost. The way the math works out, the longer your time horizon, the longer the Roth has to catch up. For this reason, if you are already retired or within a few years of retirement, it is unlikely that you’ll benefit from converting. If you live long enough to see it, the Roth IRA will eventually pull ahead of the traditional IRA, but this is assuming Roth withdrawals are never taxed.

This brings me to the last, and in my opinion, most important point I am going to make: what guarantee do we have that congress is not going to change the rules on tax free withdrawals from Roth IRAs down the road? Imagine this: 20 years down the road, the deficit is still huge, republicans and democrats are still fighting, and tax receipts from traditional IRAs are declining because the government in effect collected those back in 2010 through conversions. It is not inconceivable that they would look toward all these privileged retirees who have diligently saved and already paid taxes on their traditional IRAs and are withdrawing hundreds of thousands of dollars each year…tax free. That sounds like an easy place for the government to pocket some much needed revenue. Maybe it would be a good idea to means test the tax free benefit, only allowing those who withdraw under a certain amount each year to avoid taxes. We have certainly seen these sort of games played in the past (Social Security) and I wouldn’t put it past our government.

I don’t find it a coincidence that during these times of unprecedented deficit and uncontrollable federal spending, these conversions are so highly promoted, after all how rosy does an extra $662 billion in tax revenues look to the government? While I can see why it makes sense to covert to a Roth IRA in very specific situations, in most cases the cost and political risks just don’t seem to outweigh the benefits.

What's This Foreclosure Mess? (October, 2010)

2010-10-15T13:06:00.003-04:00

By Alan Gaylor

It is impossible to watch the news these days without hearing stories about our country’s continuing real estate bust and the resulting wave of foreclosures. The number of foreclosures in the US hit 1.65 million in the first half of this year. That is an increase of 8% from the same period a year ago, and a 5% decrease from the previous six months. As one would expect, with this many people losing their homes, there has been a lot of talk about finding a way to keep these people in these homes by restructuring their loans and instituting a foreclosure moratorium. In addition, there has also been a lot of controversy surrounding the foreclosure process. A big part of this controversy pertains to who owns the loan and thus who should be initiating the foreclosures. On the surface, this would seem to be an odd problem to be faced with. To understand how this came about, you have to first understand the modern mortgage process.

Many years ago, homebuyers would borrow money directly from their bank to finance their home. The bank would make the loan and the homeowner would directly make mortgage payments to the bank. The bank would hold the home as collateral and keep the loan in their portfolio for the full term of the note. Nowadays, bank and mortgage brokers originate loans but do not keep them. They package these loans and sell them to investors in a process called securitization. This is where the government entities Fannie Mae and Freddie Mac and Wall Street come into play. They group hundreds of similar loans together to create a mortgage backed bond. These bonds are then sold to investors in the private market. Typical investors are mutual funds, insurance companies, pension plans, individual investors (our clients included), etc. It takes so much money to finance all the homes in this country that mortgage backed bonds is now the largest segment of the bond market, currently 9 trillion dollars.

Most people think that the financial institution they make their payment to is the same company that holds their mortgage. In most cases, this is just the loan servicer and instead the homeowner’s debt is part of a mortgage pool and is owed to the bondholders. This confusion lends itself very well to politicians with an agenda and the media who likes to portray this as a “Main Street” verses “Wall Street” issue.

There is no dispute that in almost all cases, foreclosures have been initiated on homeowners who have defaulted on their loans making this a “failure to pay crisis” rather than a foreclosure crisis. In fact, a lot of the mortgages have been past due for more than a year, or in some cases, two years before foreclosure proceedings occur. The controversy surrounding the foreclosure process involves how the paperwork was filed when the loans were securitized and procedural errors during foreclosure. In either case, these are mere technicalities slowing down the inevitable and preventing the property from being owned by individuals who can afford it.

As painful as the process appears, we need the foreclosures to continue before we can move forward as a country. These losses are felt throughout the economy and not just by the banks. Property values in general will not begin to recover until this large inventory of distressed properties are back in the hands of responsible owners. The longer it takes to turn over the property, the bigger the losses. There are real expenses associated with holding property such as insurance, maintenance and taxes.

Another fallacy is that the banks and Wall Street are the ones bearing the brunt of these losses. In reality, these losses are being felt by almost all the citizens of the country directly as taxpayers and indirectly as investors and pensioners. So far the taxpayers are on the hook for $213 billion to bailout Fannie and Freddie. These two government-backed mortgage finance companies own or guarantee over half of the $12 trillion U. S. mortgage market.

There are many structural changes that will take place in the mortgage market as a result of this crisis. Underwriters will have an incentive to have higher underwriting standards, there will be fewer types of loans available, borrowers will be subject to higher credit standards and home ownership will be less viewed as a right, all changes that will be very helpful and need to take place. What is not helpful is for Washington to continue to demonize the very mortgage market participants, bankers and investors that make housing affordable in this country.

What's a Fiduciary and Why Should I Care? (September, 2010)

2010-09-15T10:43:00.000-04:00

You may have heard the term “fiduciary” thrown around during the current financial crisis. Over the past few years, the financial services industry has been plagued with scandals surrounding so called “financial advisors.” People such as Bernie Madoff have certainly tainted the term “financial advisor” by taking advantage of trusting investors and putting their own greed and corruptive practices ahead of the wellbeing of their clients. Recently there has been a lot of talk about the Dodd-Frank law, more commonly known as FinReg, which President Obama signed in July. Designed to protect consumers, this bill is widely considered the most sweeping regulatory overhaul since the Great Depression. But similar to the health care bill, the details in the 848 pages are clear as mud. Buried in the bill is a new requirement that charges the SEC with the task of determining if brokers should be held to a higher “fiduciary duty” standard.

So what does “fiduciary standard” mean? This standard requires investment advisors to act and serve a client’s best interests with the intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment advisory to render advice which was not in the best interest of his or her clients. Currently, brokers are held to a lower standard and must only ensure that the investment they are recommending is “suitable” for the client, but are not required to choose the “best” option. As you can imagine, defining the words “suitable” and “best” is no easy task and there is definitely a lot of grey area. The SEC was given 6 months to conduct a study to determine what new regulations will come into effect.

Contrary to brokers, Registered Investment Advisors are already required to adhere to the fiduciary standard which was laid out in the Investment Advisor Act of 1940. Registered Investment Advisors are individuals or firms that are in the business of giving advice about securities and are registered with the SEC or a state’s securities agency, depending on size of the practice or firm. Our firm is a Registered Investment Advisor currently registered with the SEC.

So now that we have distinguished brokers and unregistered financial advisors from Registered Investment Advisors based on the requirement to adhere to the fiduciary standard, we can further differentiate those RIAs that fall into the “Fee Only” category and the list becomes much smaller. Fee Only advisors are compensated solely by the client and do not receive any compensation that is contingent on the purchase or sale of a financial product (i.e. no commissions). Going with a Fee Only advisor is the best way to eliminate conflicts of interests and should not be confused with fee-based which is commonly used by brokers and denotes they are paid both ways, by fees and commissions. Alder Financial Group has been a Fee Only Registered Investment Advisor since our creation in 1996.

Last month, we joined the National Association of Personal Financial Advisors (NAPFA). We have written in the past about our affiliation with the Certified Financial Planner and Charter Financial Analyst organizations and want to share a little about this organization and our reason for joining.

Created in 1983, the National Association of Personal Financial Advisors is the nation’s leading organization of Fee Only comprehensive financial planning professionals. Many of you are probably familiar with consumer advocate Clark Howard. For those of you not familiar with him, he can be seen on CNN and has a syndicated radio program that provides helpful insight, advice and warnings to consumers on a wide array of issues. Clark consistently recommends seeking a Fee Only financial advisor and has recognized NAPFA as a good resource for choosing an advisor. He has a link to NAPFA.org in the resource section of his website.

You may be wondering what a firm must do in order to join NAPFA. While there are different levels of membership, the top level of membership is a NAPFA Registered Financial Advisor, which is the level we chose to pursue. To become NAPFA registered, a financial advisor must meet certain educational and professional requirements.

First and foremost, a NAPFA Registered Financial Advisor must adhere to the fiduciary standard and must be compensated by Fee Only. From an education standpoint, the advisor must have at a minimum a Bachelor’s degree and have a broad-based education in financial planning. As of January 1, 2010, NAPFA requires the Certified Financial Planner (CFP) credential which both Alan Gaylor and I currently hold. While the CFP Board requires at least 30 hours of continuing education and NAFPA tacks on 30 hours more, requiring a total of 60 hours. The advisor must also have at least 3 years of comprehensive financial planning experience.

Candidates to become a NAPFA Registered Financial Advisor must submit a comprehensive financial plan for peer review. The financial plan must address a number of financial planning issues including income taxes, cash flow, retirement planning, estate planning, investments and risk management.

When Alder Financial Group was created in 1996, we primarily defined ourselves as investment managers. Over several years of experience, we have realized that our clients have come to rely on us for comprehensive advice in many different areas of their financial lives from mortgage refinancing to wills, not just investment management. In fact, their investments serve as the means to achieving their long term personal and financial goals. A comprehensive financial plan serves as a road map for investing and without it the investment process can become directionless and unfocused.

Joining the National Association of Personal Financial Advisors is just another way for us to continue to better serve and demonstrate our commitment to our clients. I hope it gives our clients peace of mind knowing that we will always be their advocate in a world crowded with conflicts of interest and lack of objectivity. Working in our fiduciary capacity, we will continue to hold ourselves to higher standards every chance we get.

ETF's and Mutual Funds (August, 2010)

2010-08-15T10:39:00.003-04:00

Here at the Alder Financial Group, we use a wide array of financial instruments in client portfolios. Two of the most common are mutual funds and exchange traded funds, or ETFs. While they share many similarities, there are also a few very important distinctions between them. We think it’s important to make sure our clients understand the securities that we are buying for them and some of the reasoning behind them.

Mutual funds and ETFs are both “pooled investments”. These pools contain several different stocks, bonds or other securities depending on the goal of the fund. By owning a mutual fund or ETF, investors have the ability to create diversified portfolios essentially made up of hundreds of securities without the hassle, risk or expense of owning the securities individually.

Mutual Funds

The very first mutual fund was founded in 1926. They really began to take their modern form in 1940, with the passage of the Investment Company Act of 1940. In the 1960s, the idea of these funds blossomed. By the end of that decade there were about 270 mutual funds in existence with $48 billion in assets. The first modern index mutual fund was created in 1976 and is now known as the Vanguard 500 Index Fund. Today, it has over $100 billion in assets all by itself. As of October 2007, there were over 8,000 mutual funds in the United States with combined asses over $12 trillion.

Most mutual funds don’t charge commission for buying and selling, so investors have used them as a place to put small amounts of money, and money they plan on moving somewhere else soon. Their lack of commissions also makes them good for the technique known as “dollar cost averaging” since there is no penalty for purchasing often.

Some mutual funds have minimum investment amounts as high as $50,000. This can be a big obstacle for small investors who don’t have that sort of money to spend. The mutual funds we use here at Alder, in most cases, have a minimum investment of $1 so everyone is eligible for them. It is also possible to own a fraction of a share of a mutual fund, so they are ideal for “filling in the holes” in an account. For example, you may need $100 of small cap stocks. The small cap ETF may cost $75 per share and the small cap mutual fund may cost $15 per share. We will buy one share of the ETF and $25 worth of a small cap mutual fund to finish filling the allocation. In this case we will buy 1.667 shares of the mutual fund.

Most mutual funds are “managed”. This means that they have a team of analysts and fund managers whose goal is to outperform a certain benchmark. This mandate is very difficult to do, and most mutual funds underperform their benchmark. Actively managed mutual funds also carry higher expense ratios, which directly impact the performance the funds. Paying the fund managers, analysts and marketing the fund are all included in these expense ratios. Most of the mutual funds we use here fall into the “index” category. Their purpose is to mimic a benchmark like the Dow Jones Industrial Average, or the S&P 500 Index. These funds are managed by computers, so their expenses are very low and they usually perform exactly the same (within a percentage or so) as their target benchmark.

Mutual funds are structured differently from ETFs. When investors buy a mutual fund, the managing company takes that money and buys shares of the stocks that will make up the underlying assets in the fund. Alternatively, when an investor sells a mutual fund, the fund company has to sell shares of the underlying stocks to raise cash to give to them. This causes two problems for mutual funds. Eventually, as a mutual fund becomes more successful and popular, they will run out of good investment choices. As the good investment choices run out, the fund managers are forced to make worse and worse decisions and the performance of the entire fund suffers. This is one of the factors that contribute to the poor performance of some mutual funds. The same is true when fund owners sell their shares. The managers of the fund must select which securities they are going to sell, which affect the performance of the rest of the fund.

The structure of mutual funds also has an important tax impact. Since the fund managers must sell stocks in the fund when investors sell back their mutual fund shares, the fund incurs taxable capital gains on the securities that they have sold for a profit. These capital gains are passed on to the rest of the owners of the mutual fund. It is possible to still have a big tax bill on a mutual fund, even in a year that the fund itself has gone down in value.

Mutual funds came be very helpful if they are used properly. Investors are best served by using index mutual funds as a portion of their allocation in certain asset classes. By using the strengths of mutual funds (their lack of commissions, and flexible position size), investors can get the most out of their portfolios.

Exhange Traded Funds

The first exchange traded fund was established in 1989. It was only sold for a short period of time before a lawsuit halted its trading in the U.S. The first major, successful ETF in the US was the Standard and Poors Depository Receipts (ticker SPY). It was released in January of 1993. SPY became very popular and in 1995, its sibling MidCap SPDRs was released (ticker MDY). ETFs have continued to become very popular. As of May 2008, there were over 680 ETFs with combined assets of over $610 billion.

Exchange traded funds function similarly to normal stocks. They can be bought or sold at anytime during the day when the stock market is open. They share several other attractive advantages with stocks. Just as with common stock, an investor is allowed to short an ETF, betting on its price going down. Most ETFs are also eligible for options trading. This allows investors to use the myriad of options strategies available to stocks on the diverse sectors and indexes that ETFs follow.

ETFs are structured in a special way. Fund companies buy huge “pools” of the stocks they wish to hold in an ETF. Then, they issue shares of the pool, the ETF itself. These shares in the pool are bought and sold in stock exchanges like normal stocks. Investors buying and selling ETFs have no impact on the pool of underlying assets. For every sale of a share of an ETF, there is a corresponding buyer. Since this transaction is separate and distinct from the underlying assets of the ETF, investors don’t have to worry about getting a tax bill for capital gains passed on to them from the fund company (in most cases).

Unlike some mutual funds, there is no minimum investment in ETFs; it is possible to purchase one single share if you want. However, you are limited to purchasing whole shares of ETFs (unlike mutual funds, where partial shares are allowed). This can lead to positions that are either slightly smaller or slightly larger than you would like due to the price of the shares. Also, while it is possible to purchase a very small number of shares of an ETF, the commission you will be charged for them may make this approach disadvantageous. This may soon be irrelevant because brokerage houses are starting to offer tiny or even free commissions for trading the most popular ETFs.

Another consideration with ETFs is that they distribute their dividends in cash. This creates the need for a good investment plan, so you know where to invest the cash that you accumulate in your accounts over time.

ETFs and mutual funds both have important roles in your portfolio. ETFs are extremely valuable for their liquidity, tax efficiency and versatility. Mutual funds are also very useful because they are free to buy and sell in small amounts. If you are one of our clients, the next time you are looking at your statement or quarterly report from us, you can easily pick out the mutual funds because most of the ones we currently own have 5 letter symbols that end in “x”. The ETFs have 3 letter security symbols. If you would like to learn more about these securities feel free to contact me any time.

Social Insecurity 2 (July, 2010)

2010-07-15T10:38:00.000-04:00

To recap last month's article, we took a look back at Social Security's creation and how it has evolved into an overly burdensome and fully inefficient program. The taxable wage base has skyrocketed from $3,000 to $106,800 and the Old Age and Survivor's tax rate has more than tripled, but still the "Trust Fund" is scheduled to be depleted in 2037. This supposed Trust Fund has been used as a mechanism to fund all sorts of government expenditures through purchasing federal bonds that will someday need to be redeemed. Where the cash will come from at the point benefits owed exceeds tax revenue (2016) is a mystery to us all!

So how long will we keep pouring money into a program that cannot survive in its current state? Social Security reform has been heavily debated with all political parties agreeing that something must be done, but the agreement stops there. Of all the proposals out there, only one really seems to make sense and that is privatization. I am going to take a look at the meaning of privatization, the main concerns and objections as well as the alternatives.

Privatizing Social Security would mean allowing each individual to invest and manage their own account, rather than allowing the federal government to do so in a collective pool for everyone. Based on the annual salary limits and tax rate, young to middle-aged workers are faced with the prospect of receiving retirement benefits that represent between 0-1.5% return on their lifetime contributions. I am positive the private market could easily beat that level of return and we wouldn't have to worry about the government's mismanagement! To add a little clarity to the privatization debate, I'd like to address some of the main concerns that have been put forth thus far.

Private accounts are too risky. Let's be clear about one thing; accounts are not risky. It's the investments in the accounts that are risky. To that end, beating the current 1% you're getting from Social Security doesn't require taking on any risk. This myth is spawned from the belief that Social Security is currently investing in Treasury Bonds that are yielding bond market based returns. Accepting this at face value, which in and of itself is hard to do, then why are we only offered retirement payments that equate to an average annual return of 1%? Those supposed long-term bonds should be yielding around 6%. Does this imply that the government is charging a 5% management fee on their bond fund or are they investing in some sort of special 1% Treasury bond that is sold only to the Social Security Administration? If every bit of Social Security tax you and your employer paid went into a private account and was invested in Treasury bonds (the very same bonds the "trust fund" claims to own), you would retire with 3-times the amount of income currently offered. Although we don't think they should be excluded, the argument that private accounts are too risky is easily defused by removing equity securities as an option for private account investment.

Privatization is too expensive. If the Feds were to get out of the retirement planning business, the cost would be enormous. The process would require weaning the government off the Social Security tax revenue over many years. This is precisely why most reform proposals only involve redirecting a small portion of the tax dollars into private accounts - they have to start small. Be assured that the long-term goal of the reform movement is to eventually have all withholdings directed into private accounts. To help fund this transition younger Americans would have to be willing to forego any benefits that they have accrued so far. This is why the superior long-term prospects of stock-based returns are being discussed so much. It is hoped that the chances of higher returns will be enough to entice young Americans to opt-out of the current system. This is where the real success in transitioning will occur. It is the future liabilities of these young people that add the highest costs.

Another point to keep in mind about some of the cost figures being tossed around is that none of this is going to occur overnight. The alarmists will loosely throw around trillion dollar figures without providing the framework by which that will come about. These costs that the government will have to expend will take generations to be fully realized. Keep in mind that the cost of Social Security on its current path will be far greater than the costs of transitioning to privatization. The really frightening figures become evident when you look at waiting to fix the system when it is near collapse. If people are truly afraid of the costs of reform, they should be pushing for a faster overhaul of the system rather than none at all.

Social Security is the only income for many seniors. Under no circumstances is anyone even remotely contemplating changing anything about the system that would affect current retirees. To imply otherwise is nothing less than dishonest. Paying for the current retiree obligations are the least expensive liabilities that the program faces. It is the youngest participants (individuals in their 20's and 30's) that pose the greatest risk to solvency. One point of irony here is that a system designed as a safety net for seniors has become so burdensome that it will most certainly be the major cause of poverty among retirees in the future due to its mismanagement.

This will only enrich the financial services industry. This argument appeals to the conspiracy theorist. Although it might seem a little self-serving because our firm falls into this category, this argument is just plain silly. It's a little like saying we shouldn't have electricity because the power company may make money on it. While it is true that privatization would be a huge boost to the financial services industry, that doesn't mean that anyone would be forced to use their services. As we've discussed earlier, simply buying Treasury bonds (a totally free transaction available at www.savingsbonds.gov) would provide you with higher returns than you're currently getting from your Social Security contributions.

People can't be trusted to make wise investment decisions. This comes from the big government camp. These are the people who think that every problem, real or imaginary, can be fixed with a government program. This is mostly a philosophical argument. We would respond by saying that this government program has had 70 years to get it right, and has yet to do so. Let's try something different.

All kidding aside, it is true that there are a great many poor decision makers out there. By definition, that's why we need some form of forced savings program. The objections to the current system arise from the mismanagement of those funds and not by its existence. Any program that would involve private accounts would be tightly controlled and would have limited investment choices for those funds.

Now that we have taken a deeper look into privatization, let's consider the alternatives. While there are many proposals that keep an entirely government run system, they all fall into two categories: they either raise taxes or cut benefits.

Three common proposals for increasing tax revenue include raising the Social Security taxable wage base which is currently set at $106,800, increasing the payroll tax rate and raising taxes on Social Security benefits. I think I made how I feel about raising Social Security taxes clear in last month's article so I won't harp on it again here!

There are a variety of ways to cut Social Security benefits. One way would be to increase the retirement age. Supporters suggest that as life expectancy increases, workers will be able to work longer. While this may be true for some workers, we all know that the older we get, the greater the chances for disability and other health issues. Another proposed way to reduce costs would be to reduce the Cost of Living Adjustment. The COLA is the percentage by which benefits increase year to year. Without the COLA, retirees would continuously lose purchasing power. Supporters of the current system have also proposed indexing benefits to prices rather than wages since prices increase more slowly than wages. While all these proposals would help with the Social Security shortfall, they are all at our expense and offer us nothing but a lower standard of living in retirement.

I hope that I've been able to hit the high points in this debate and that you have found this informative. This issue obviously hits close to home for us and we think it is far too important to have this decision based on which special interest group or political party can spin it the best.

Our belief is that if a financial account is truly yours, at a minimum, it should:

Be in an account with only your name on it.

Regularly provide a statement that values the account in today's dollars.

Contain investments that can be sold close to the price quoted on the statement.

Here is one last thought on private accounts; under the current system, we are all subject to a stealth estate tax, regardless of wealth. It is currently impossible for your Social Security contributions to be passed on to your heirs because there is no value associated with your benefits. With private accounts, you would have this ability because there would be an identifiable account with your name on it. This would particularly help the least wealthy in our society. And most notably, the government would not be allowed to confiscate what is rightfully yours upon your death.

Social Insecurity (June, 2010)

2010-06-15T10:14:00.003-04:00

This month I decided to write on a topic that affects everyone and is a cause for great concern: Social Security. While I could write a 12 month series on the subject, I am going to narrow it down to just two! A fix to this unsustainable program is long overdue.

The other day, I received my most recent Social Security statement along with a flyer entitled “What young workers should know about Social Security and saving.” The words I read were infuriating. In big, bold print, the flyer presents the question: “Will Social Security still be around when I retire?” Of course their answer is “Yes.” but it is followed by the fact that the Social Security Board of Trustees now estimates that based on current law, in 2037, the Trust Funds will be depleted. Just last year, the year of depletion was 2041. As a 26 year old, I’ll be 53 when the Social Security program estimates that it cannot pay all scheduled benefits, still several years away from my full retirement age which is to-be-determined. I know that I am definitely on the younger end of the spectrum of workers paying into the Social Security system, but that is irrelevant. No matter what age or political affiliation, every American should be concerned with the logic behind this program and the direction it is headed.

First, let’s take a moment to define what this “Trust Fund” actually is. Most people think of a trust fund as an account with money in it. Social Security uses this term to describe the balance of taxes taken in verses benefits paid out. Over the years, Social Security has taken in about 1.2 trillion dollars more than it has paid out. This money has been used to purchase bonds of the federal government. The interest earned on these bonds has been paid back to the Trust Fund in the form of yet more bonds. As of the end of 2009, the Trust Fund now holds 2.5 trillion dollars worth of these bonds.

This whole process of course is absurd. You can’t lend or borrow money from yourself. The reality is that this excess cash that the government has been receiving over the years has simply been spent. Therefore, the source of the money used to pay the monthly Social Security benefits currently comes from that month’s payroll taxes. It is estimated that in 2017 we will reach the point where Social Security outflows are greater than payroll tax inflows. This is really when Social Security becomes insolvent. The 2037 date mentioned earlier is when the scheduled benefit payments will even consume what is in this supposed Trust Fund.

Reading on in the flyer I received, I am reassured that just because the trust fund will depleted does not mean that my benefit payments would disappear. There should still be enough funds to pay about $760 for every $1,000 in benefits scheduled. If I’m going to receive less benefits, that means I should pay less into the system, right? No way. As you will see in a moment, there has been a severe upward trend in taxes paid since origination of the Social Security system. But tax increases alone would not be anywhere close to enough to make Social Security sustainable. There has also been a lot of talk about changing the indexing of benefits to include all years instead of just the highest 35 years and raising the retirement age, both of which decrease the benefits we receive without lowering our tax burden, clearly a lose-lose situation for every taxpayer. Not to mention the government thinks it is acceptable to tax up to 85% of the Social Security benefits some retirees receive after they have already paid taxes on that income.

Let’s take a quick look back at Social Security in the beginning. It was signed into law by Franklin D. Roosevelt in 1935 as part of the New Deal. Its main components are Old Age, Survivors and Disability Insurance, with Disability only accounting for a fraction of the tax revenue and expenditures as one has to be pretty much desolate to qualify. It is important to understand that the system today has little resemblance to the system 60 years ago. One of the biggest, and worst, changes in the management of this program occurred when the LBJ administration and Congress merged the Social Security tax receipts into the general fund of the Federal government in 1968. This was done to mask the size of the increased spending and budget deficits of the Federal government.

Another major change over the years has been in the level of wages that are subject to Social Security taxes. The original limit when the system was started was $3,000. This means that the employee and employer only paid SS taxes on the first $3,000 the employee earned per year. In addition, the tax rate was only 3% (1.5% each). This limit was not put in place to give the wealthy a break. Instead, it was created to establish a sensible link between the amount paid in and the benefits paid out for an individual. Although the income cap and tax percentage rate were periodically raised, there was still a reasonable relationship between the amount one received from disability, survivor or retirement benefits and the lifetime taxes paid. In 1970 this limit was $7,800 and the tax rate was 7.3%. It is interesting to note that between wage limit increases and tax rate increases, the total annual taxes paid increased 2.5 times during the 1960’s – the first sign of trouble.

Year	Wage Limit	Old Age and Survivor’s Tax Rate
1950	$3,000	3%
1960	$4,800	5.5%
1970	$7,800	7.3%
1980	$25,900	9.04%
1990	$51,300	11.2%
2000	$76,200	10.6%
2010	$106,800	10.6%

After Social Security was merged into the general fund the program became nothing more than a tax collection tool for every other expense in the federal budget. There is no better evidence of this than the fact that the cap today is $106,800 with an applicable tax rate of 10.6%. President Obama has proposed raising the income cap and has said “the nation's "most regressive tax" needs to be revamped to increase revenues to the retirement fund and spread the burden of paying for the program more evenly.”

When I flip over the page of the flyer, I am lectured on the need to save and invest as Social Security is only meant to replace about 40% of annual preretirement earnings. As a financial planner, I fully appreciate the benefits of saving and encourage everyone to do so. That being said, I have to make the following point. Study after study has shown that if a person saves 10% of all income over their working years, he or she will be able to retire comfortably. Between my employer’s contribution to Social Security on my behalf (which could be paid to me in salary if not owed to the government) and my contribution, I am “saving” 10.6% per year, but I’m only supposed to receive 76% of 40% of my preretirement income. The math just does not work out in my favor! And by the way, I am saving this money into the general funds of the federal government which is then used to fund all sorts of government expenditures.

I’ve grown up being told not to count on Social Security being around when I retire, but NOTHING has been done to correct or even mitigate the forthcoming disaster. So what is the solution? One word: privatization. And no, that does not mean trusting your retirement to the whims of the stock market! Why would anyone think it is a good idea for the government to manage money when they currently have a 1.3 trillion dollar deficit and can’t seem to stop spending? Stay tuned as next month I will discuss privatization and its criticisms as well as other proposed alternatives.

When Emotions Take Charge (May, 2010)

2010-05-15T10:13:00.001-04:00

There’s no debate that the past year and a half has been a challenging period not just for Americans, but for people around the world. We have seen volatility in the stock market that rattled the confidence of even the most risk tolerant investors. September of 2008 began a two month range of extreme volatility during which the Dow experienced its largest one day point loss, one day point gain and largest intra-day range, closing at a six year low of 7,552 in November of 2008. While we have come a very long way since then, the so called “Flash Crash” on May 6^th, where the Dow closed with a 348 point drop after falling as low as 999 points intra-day, reminded us of the looming unpredictability in the markets. While there have been numerous economic and political reasons for such volatility, we can’t ignore the role emotions, such as fear, play in large market swings.

An increasingly popular field in the finance arena is behavioral finance, a combination of psychology and finance to explain why people make seemingly irrational decisions regarding money. Just take a look at the lottery. Millions of people purchase lottery tickets hoping to hit the big jackpot. Logically, it does not make sense to buy a lottery ticket when the odds of winning are overwhelming against the ticket holder (about 1 in 150 million). Most economic and financial theories assume that individuals act rationally and consider all available information when making decisions, but many researchers believe that this is not the case and the incorporation of psychology can help explain many stock market anomalies, bubbles and crashes. Let’s take a look at a few examples that reveal patterns of irrationality in the way people arrive at decisions when faced with uncertainty.

First let’s consider the Prospect Theory which proposes that investors fear losses much more than they value gains. Studies have shown that if an investor is offered the choice of a sure $50 or, after the flip of a coin, the possibility of winning $100 or winning nothing, he or she will most often choose the sure $50. However, if that same person is offered the choice between a sure loss of $50 or, after the flip of a coin, the possibility of losing $100 or nothing, he or she will likely choose the coin toss. Applying this to the stock market, investors willingly remain in a risky stock position hoping that the price will bounce back because they do not want to realize the loss. People are willing to take more risks to avoid losses than to realize gains.

Continuing with the example of a coin toss, another theory, know as the Gambler’s Fallacy, suggests that individuals often erroneously believe that the onset of a certain random event is less likely to happen following an event or series of events. For example, if you flip a coin 20 times and it lands on heads every time, it is common to think that the next one will likely land on tails. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future. The same goes for choosing numbers on a lottery ticket or pulling the handle of a slot machine.

Human beings tend to fear being left behind in the event of a market upturn. According to the Herd Effect, people tend to mimic the actions (rational or irrational) of a larger group. An infamous example is the bursting of the dot.com bubble in 2000. Herd behavior leads to greed in bubbles and fear in crashes. Fear during crashes such as Black Tuesday of 1929, Black Monday of 1987 and on a smaller scale the 2010 Flash Crash led to massive sell offs.

Although there are many more theories pertaining to behavioral finance, I’d just like to mention two more. The concept of Confirmation Bias proposes that investors tend to look for info that supports their previously established opinion and decision. This leads to overvaluing the stocks of currently popular companies. Along those same lines, the Neglected Firm Effect suggests investors tend to undervalue stock of overlooked companies. This also relates to the Herd Effect: if no one else sees value in this company, why should I?

You’ve all been told the key to making money in the stock market is buying low and selling high, but investors repeatedly do the opposite: they watch a stock go higher and higher until they can’t take it anymore and they buy. As the stock falls, they watch it go lower and lower until they can take no more and sell. I feel strongly that there is enough evidence to prove that investors are not always rational and emotions do come into play in making financial decisions, especially when losses are involved. In 1969, a psychiatrist came up with a 5-Stage process people go through in dealing with grief. Recently this process has been applied to investors coping with the current global financial crisis. The five stages of grief are denial, anger, bargaining, depression and acceptance and I will briefly show how I would assign recent economic events to this process.

During the denial stage, people tell themselves “this isn’t happening to me.” The denial stage of the global financial crisis probably began in late 2007. After the housing market peaked in 2006, home prices had began to decline and people debated whether or not we were in a housing bubble. Subprime lending had skyrocketed over the past 2 years and some people began questioning whether or not there was a mortgage problem brewing. While there were some defaults and foreclosures, many companies still had high earnings expectations and for the most part investors were convinced that any downturn would be temporary.

The denial stage is followed by the anger stage when we ask ourselves “why me?” People often begin to play the blame game. From late 2007 through late 2008, the market faced a deep and steady decline. The blame shifted to many different groups including mortgage brokers (too lenient of lending policies), mortgage holders (took out more than they could afford), regulators (loose regulation), the Fed (lax monetary policy), and Wall Street speculators among others.

The third stage is the bargaining stage during which we have realized that there is a problem and are trying to fix it before things get out of control. I think we entered this stage in late 2008. In September of 2008, the government stepped in to rescue GSE’s Fannie Mae and Freddie Mac to address a capital deficiency and to try to calm the markets. This was followed by a series of bailouts including AIG, the auto industry, Citigroup, and BOA. The Federal Reserve continued lowering the federal funds rate. Unfortunately the economic downturn continued.

The next stage is depression which is characterized by feelings of hopelessness, self pity and mourning. We most likely entered this stage around Spring of 2009 after the Dow closed in March at its lowest level since Spring of 1997. Unemployment had sharply increased and companies engaged in unnecessary mass layoffs as they feared the direction the economy was heading. Those who were laid off feared how they would pay their bills, perhaps most importantly their mortgage, and those who had jobs feared they could lose theirs at any moment.

Acceptance is the final stage of the grief process and is when people begin to deal with reality. I believe that we are currently in this stage and have been since fall of 2009. The market has begun to rebound significantly and unemployment along with other aspects of the economy has stopped getting worse.

In summary, after examining these five stages of grief and how they can be applied to the global financial crisis of 2007-2010, it seems obvious that human emotions do affect the way we perceive the economy and what we do with our money.

So if it is human nature to let emotions play a role in financial decisions, what can you do to lessen the negative effects this can have on your portfolio? Here is one simple answer: have an investment plan and stick to it through thick and thin. In many cases this also means hiring an investment manager. An investment manager can be an unemotional third party that will help prevent you from acting on your impulses. On the contrary, sales people such as brokers benefit financially by catering to investors’ emotions. This is due to the way that they are compensated.

The dust seems to be settling from the major market downturn we have been facing. If you do not have an investment plan or question the one you have, there has never been a better time than now to address those concerns. If you know someone who could benefit from a second opinion, ask them to call us for our free portfolio consultation. More information is available on our website at http://www.alderfinancial.com/PortfolioReview.htm.

Inflation 3 (April, 2010)

2010-04-15T10:12:00.000-04:00

Welcome to the final installment in my series about inflation. As I've mentioned before, inflation is the "silent killer" of portfolio value, and is very important for investors to understand. Inflation is a phenomenon that has existed since the advent of money, thousands of years ago. It will continue to be a force into the future, probably as long as we still measure value in currency. This month, I will be bringing the series to a close with some thoughts about the practical impact inflation has on a portfolio and a few strategies that investors use to combat inflation's effect.

As I've mentioned several times, inflation eats away at the value of your money in silence. If you keep $100,000 under your mattress, in 10 years with 2% inflation (the approximate, long term average) it would have the same value as about $82,000 today. You would lose $18,000 in purchasing power without losing a dime of your money! This fact is what leads financial advisers to caution strongly against leaving your money "under the mattress" or in low yielding savings and checking accounts for long periods of time.

Fortunately, there is good news for investors. There are several strategies and securities that can be used to minimize the effects of inflation for everyday investors.

Younger investors who own mostly equity (stock) type instruments don't need to worry about inflation. Over time, the earnings of the companies they own will increase with inflation, and this will be reflected in their stock prices. As we have seen over the last several years, stocks may not increase for years at a time but in general earnings should increase with inflation.

Another common "hedge" against the effects of inflation is commodities. Commodities are raw materials such as oil and gold that can be bought in the financial markets. They can also be bought in the form of diversified funds that track the price of multiple commodities at once. The value of commodities is measured in dollars. As dollars have less and less value, the number of dollars needed to value a certain amount of commodities goes up. Buying commodities negates the effects of inflation by exchanging your money for an asset that isn't affected by the change in value of currency. Later, you can sell the commodities for an increased price since dollars have been depreciating due to inflation.

Other strategies have to do with investing in foreign currencies. The theory is that since inflation doesn't have the same impact everywhere in the world, investing in the right foreign currency will lessen the impact inflation has on your portfolio. This is difficult to do because it involves projecting interest rates and inflation rates in the U.S. as well as the country in which you plan to invest.

Finally, the most common way investors can mitigate inflation is through U.S. Treasury Inflation Protected Securities, or TIPS. TIPS work like normal bonds; they have a purchase price and pay interest. The principal is adjusted to account for CPI periodically and this indexes it to inflation (approximately). One problem with TIPS is the way they are taxed. The gains on principal are taxed even before they are realized (the so called "phantom tax"). Even so, TIPS can be an excellent way to minimize inflation effects on part of your portfolio.

Inflation is a very important topic for investors to understand. It must be accounted for and kept in check because it has the ability to diminish the value of a portfolio over long periods of time. There are several techniques for diminishing the effects inflation will have on a portfolio, but there is no real "silver bullet". Using a variety to techniques will yield the most effective inflation strategy.

I hope you've enjoyed this series. Inflation is a very complex topic and there are entire fields of study devoted to it. Although this has been more of an overview than an in depth study, I hope you have learned a little bit more about inflation, its causes and what investors can do to mitigate its effects. If you are interested in learning more, there is a wealth of information and statistics on the internet, or feel free to contact me at any time.

Inflation 2 (March, 2010)

2010-03-15T10:11:00.000-04:00

This is the second installment of my three part series about inflation. Last month, I spoke generally about the basics of inflation. I mentioned that inflation is the gradual increase of prices over time. It leads to an erosion of wealth, since your dollars will buy smaller and smaller amounts of goods and services. This month, I will talk about the main theories about why inflation occurs.

Economists have several different views about the causes of inflation. I will be covering the ideas that fall in the Keynesian and Monetarist schools of thought. Keynesian economics is attributed to John Maynard Keynes. He was an economist in the early 1900's who had a major influence on modern economic thought and theory. Keynes believed that the supply of money in the system does not directly affect inflation, but that inflation is driven by other pressures in the economy. He was a proponent of government intervention into markets to smooth the effects of business cycles. He has several different theories about the cause of inflation.

The first is the so called "demand-pull inflation." As citizens and governments buy more goods and demand more goods, the price of those goods goes up. This causes the government to increase spending when the economy is sagging in hopes of "inflating" economic activity. Demand-pull proponents tend to see fiscal policy, government spending, as the solution to controlling inflation.

"Cost-push" is another inflation theory. This theory assumes that as the price of an input increases, a firm will raise the final price of the good to cover costs. An example is a beet farm. If the cost of fertilizer goes up, the farmer will raise the final price of beets. While the previous theory called for an increase in demand to push inflation, this one deals with a decrease in supply causing prices to go up. When those two forces work together, prices can sky rocket. We experienced something similar to this here in Georgia after Hurricane Katrina hit the Gulf Coast, our number one supplier of gasoline. Expecting shortages, people bought as much gas as possible and hoarded it (demand went up). These two complimentary forces shot prices up as high at $10+ a gallon in some areas.

The final Keynesian theory is called "built-in" inflation. This theory is similar to cost-push, but is much more cyclical. Workers demand more money in wages, therefore firms raise the price of the goods they sell to cover the increases. As more firms do this, workers can no longer afford the goods they normally buy (since the prices are all going up), so they demand more wage money. As you can see, this is a never ending cycle; workers think they are getting richer, but price increases negate their raises.

The last major theory about the causes of inflation is attributed to the "monetarist" point of view. Monetarists believe that monetary policy (actions by the Federal Reserve) is the most effective way to fight inflation The monetarist theory suggests that inflation is caused by the easing of credit, which in turn increases the amount of money in the economy. The more money there is available, the easier it should be to obtain credit. However, the increase in money also leads to increases in inflation. In the 1950's, Milton Friedman became the main opponent to Keynesianism and the main advocate of monetarism, influencing individuals such as Federal Reserve Chairman Ben Bernanke. Currently, the American Federal Reserve follows a modified form of monetarism.

Economists have been debating the cause of inflation for decades (and longer!). These are the most prevalent theories from the last 100 years or so, but it is surely only a matter of time until the next new theory comes around. Like many other things in science and academic fields, there is a continual search for evidence that clearly points to one cause over the others.

Next month, I will be wrapping up this series with a few ideas about the impact inflation has in a practical sense on an investor's portfolio. I will also include some strategies that are used to mitigate the effects of inflation.

Inflation 1 (February, 2010)

2010-02-15T10:10:00.000-05:00

We all can agree that health care has been a very hot topic over the past year. In the forefront of discussion is Medicare, which has somehow become the “poster child” for public health care in the United States. Because Medicare will affect all of us one day, it is important that everyone understand the benefits available, the rules for enrollment, and the financial concerns with the program.

First, I’d like to start out with a general overview of Medicare. The Social Security Act of 1965 created Medicare to provide insurance for people over 65. There were originally two parts to Medicare, Part A and Part B. Part A provides hospital and skilled nursing care coverage and is paid for by the government as long as the insured has 40 or more quarters of Medicare-covered employment. It is financed mostly by the Medicare tax of 2.9% split between employer and employee. There is a deductible of $1,100 per year.

Part B covers physicians and other out-of-hospital expenses. The insured person contributes to the cost through a monthly premium, currently $96.40 with a deductible of $155 per year. If you receive over a certain level of income or if you miss your initial enrollment period (discussed later), your premium may be higher. Medicare pays for only 80% of approved charges which often differ from actual charges. For this reason, some doctors refuse to accept Medicare, and this will only worsen if Medicare cuts reimbursement rates as proposed. Medicare Advantage plans are private plans that can help supplement Medicare benefits for an additional premium and are referred to as Part C.

In 2006, Part D, a prescription drug discount plan, became effective. This part has received a lot of attention lately as Congress and the White House have expressed plans to plug the large “doughnut hole.” The “doughnut hole” refers to a gap in coverage for drug costs between $2,830 and $4,550. After a $310 deductible, Medicare pays 75% of drug costs up to $2,830, then nothing until over $4,550, at which point it pays 95%.

So now that you know the gist of what benefits Medicare provides, let’s look at the rules for enrolling in the program. When an individual turns 65, he or she is eligible for Medicare. These days, many seniors are choosing to work past 65 and keep employer health benefits, which can limit your access to Medicare if you are not careful. So here are the rules for enrollment: If you are enrolled in Social Security, you are automatically entitled to Part A and B and a Medicare card will be mailed to you about 3 months before your 65^th birthday. If you aren’t receiving Social Security, you can enroll up to 3 months before your 65^th birthday and no later than 3 months after. If you fail to enroll during this initial enrollment period, you will have to wait until the general enrollment period which is January through March and coverage will not begin until July 1^st. Additionally, the cost of Part B may go up 10% for each 12 month-period that you could have had Part B but didn’t take it and this rate increase is permanent.

There are a few common trap seniors fall into when in comes to Medicare enrollment. One is not checking to see whether their company’s plan requires them to sign up for Medicare Part B upon turning 65. Secondly, some people receiving retiree medical benefits are unaware that the eight-month deadline applies to them. One last trap involves Cobra, a federal law that allows workers to temporarily stay enrolled in an employer’s health plan. If you miss your initial enrollment period, you will have to wait until July of the year you enroll for coverage. Some retirees have chosen to go with Cobra during the gap in coverage only to find out that the Cobra coverage is considered secondary to Medicare. Be sure to research the facts when it comes time for you to consider enrolling in Medicare.

I can’t discuss Medicare without acknowledging the severe financial strain it has on the government. Medicare spending accounts for a large portion of federal spending, trailing behind only Social Security and defense. Program spending is projected to grow around 8% annually. The Medicare Hospital Insurance Trust Fund is projected to be depleted by 2017. The Medicare Report shows that the HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent), or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon.

That being said, the new Senate health care bill proposes a Medicare cut of $500 billion. What will Medicare cut, because clearly, something has to give? The first place to cut would be fraud, which is estimated to be around $60 billion a year. One has to be skeptical on this point. If eliminating fraud was so easy, why hasn’t it been done before now? Even after eliminating fraud, a lot of cuts still need to be made and they have to come from somewhere.

In conclusion, Medicare is a very beneficial program for senior citizens, but it does have many pressing concerns that endanger its sustainability in the future. In fact, Medicare is in even worse shape than Social Security which is also on a bad track. Until the issues with Medicare are resolved, I think it is best that the government focus on Medicare’s shortcomings before instituting yet another public option.

Need to Know: Medicare (January, 2010)

2010-01-15T10:08:00.000-05:00

Will Santa's Sleigh be Light This Year? (December, 2009)

2009-12-15T10:07:00.000-05:00

The stock market opened 2009 very poorly, but the economy has been showing signs of life over the past months. As you can imagine, the retail industry has been holding its breath this Holiday Season. Consumer spending makes up about 70% of the U.S. economy, so December is a particularly informative time about the state of the economy. With only a week to go until Christmas, this year’s numbers have been mixed.

Consumer sentiment has been at record lows throughout the year. With unemployment reading over 10%, Americans have been worrying about their own homes, jobs, and the prospects of a “jobless recovery.” This uncertainty understandably causes people to spend less. When home values and retirement accounts decline, consumers also tend to cut back. A recent CNN poll found that 49% of people will be spending less than last year, and 39% will be spending the same as last year, with the remaining 12% spending more. Charities are also being hit, with 51% of respondents saying that they will be giving less this year, as well. In an effort to save, many families are focusing on spending time together and less on presents this year.

The news might not all be bad, though. The retail numbers in November were better than expected with sales growing by 1.3%. Bargain hunters are pushing sales with 42% of shoppers expecting to buy from discount stores. After holding back for several months, many shoppers are finally releasing some of their pent-up demand. It also seems that this year shoppers are procrastinating more than in the past. According to the National Retail Federation, on average, people had finished 46.7% of their holiday shopping by the second week of December, the lowest since 2004. Retailers are looking forward to a big push by these last minute shoppers this weekend, with December 19^th being the busiest shopping day of the year, traditionally.

The official results will come out at the beginning of next year, and it is too early to tell if shoppers will be keeping a tight grip on their wallets this holiday season. This new era of frugality can be good for consumers if the habits they start this year carry over into the future. One positive is that the number of shoppers buying gifts on credit cards (with money they pontentially don’t have) has gone down slightly since last year. As we all know, overextension of credit is a main contributor to the mess our economy is trying to get out of. Let’s all hope our country as a whole and consumers individually have learned lessons from the past couple of years and that our economy will continue to recover throughout 2010.

Gobble 'til You Wobble

2009-11-18T15:07:00.001-05:00

by The Alder Financial Group Staff

Thanksgiving is a wonderful day to spend time with family and friends, relax while watching the Macy's parade or football, and last but not least, enjoy really good food. In light of the holiday season, we would each like to share one of our favorite Thanksgiving recipes. I am sure you all have your own traditions, but if you get the urge to try something new, here are a few Alder suggestions.

Black-Eyed Pea Succotash With Creole Mustard

Shared by: Alan Gaylor

This recipe is for those who like a little something different for Thanksgiving dinner. The vinaigrette gives this vegetable mixture a little spice. It has become one of my favorites over the years. Plus, it is great to save for the next day's meal.

Ingredients:

6 cups water

1 1/3 cups dried black-eyed peas (about 8 ounces)

1 tsp salt

1 bay leaf

1/4 cup unseasoned rice vinegar

1 1/2 tbsp Creole mustard

1 tbsp honey

5 drops hot pepper sauce

6 tbsp extra-virgin olive oil

1 16-ounce package frozen corn kernels, thawed, drained

1/2 cup finely diced red onion

1/2 cup thinly sliced green onions

1/3 cup diced red bell pepper

1/3 cup finely diced green bell pepper

Directions:

Combine 6 cups water, black-eyed peas, salt, and bay leaf in large saucepan. Bring to boil. Reduce heat to medium-low and simmer until peas are just tender, stirring occasionally, about 35 minutes. Drain well; discard bay leaf.

Whisk rice vinegar, Creole mustard, honey, and hot pepper sauce in medium bowl to blend. Gradually whisk in oil. Season vinaigrette to taste with salt and pepper. Mix in black-eyed peas. (Black-eyed pea mixture can be made 1 day ahead. Cover and refrigerate).

Mix corn, red and green onions, and bell peppers into black-eyed pea mixture. Season succotash to taste with salt and pepper. Serve at room temperature or warm over medium heat until heated through if desired.

Yield: 10 servings

-By Alan Gaylor, CFP®

Onion Pie

Shared by: Charles Webb

It clearly isn't a dessert and if I had told my kids what the dish was called when they first tried it, they never would have touched it. They love it though and so do I. This casserole-like dish is something my mom has made for years and is always a hit with anyone who tastes it.

Ingredients:

Crust:

2 tbsp melted butter

1 stack Ritz crackers (crushed)

Filling:

2 large Vidalia onions (thinly sliced)

2 eggs

1 cup milk

3/4 cup sharp cheddar cheese (grated)

2 tbsp butter

1 tsp salt

Pinch of pepper

Directions:

Crust:

Mix butter and cracker crumbs and line in a pie pan.

Filling:

Saute onions in butter and place in pie pan. Mix eggs, milk, salt and pepper and pour over onions. Cover top with cheese. Bake in a preheated oven at 325 degrees for 30 minutes or until custard is set.

Yield: 8

-By Charles Webb

Apple Cranberry Casserole

Shared by: David Chambers

My family first started using this recipe when we discovered it at my 1st grade Thanksgiving Luncheon. It has become a staple of our holiday season, and I hope you enjoy it as much as we have!

Ingredients:

Casserole:

1/4-1/2 cup sugar

2 cups raw cranberries

4-6 apples - peeled, cored and sliced

Pam and 2 qt casserole dish

Topping:

1 cup oatmeal, uncooked

4-6 tbsp butter, melted

1/2 cup brown sugar

1/4-1/2 cup pecan bits

Directions:

Preheat oven to 350 degrees. Lightly spray casserole dish. Make 2 layers of apples, cranberries and sugar in casserole dish. Combine topping ingredients. Sprinkle over fruit. Back 45-60 minutes.

Yield: 8-10

-By David Chambers

Lemon Blossoms

Shared by: Lori Eason

I chose to share one of my favorite dessert recipes. Last holiday season, I discovered Lemon Blossoms and they have been a hit everywhere I've taken them. They are great if you plan on having a party or several people because the recipe makes 5 dozen!

Ingredients:

Cupcakes:

18 1/2-ounce package yellow cake mix

3 1/2-ounce package instant lemon pudding mix

4 large eggs

3/4 cup vegetable oil

Glaze:

4 cups confectioners' sugar

1/3 cup fresh lemon juice

1 lemon, zested

3 tbsp vegetable oil

3 tbsp water

Directions:

Cupcakes:

Preheat oven to 350 degrees. Spray miniature muffin tins with vegetable oil cooking spray. Combine cake mix, pudding mix, eggs and oil and blend well with an electric mixer until smooth, about 2 minutes. Pour a small amount of batter, filling each muffin tin half way. Bake for 12 minutes. Turn out onto a tea towel.

Glaze:

Sift sugar into a mixing bowl. Add the lemon juice, zest, oil, and 3 tbsp water. Mix with a spoon until smooth. With fingers, dip the cupcakes into the glaze while they're still warm, covering as much of the cake as possible, or spoon the glaze over the warm cupcakes, turning them to coat completely. Place on wire racks with waxed paper underneath to catch any drips. Let the glaze set thoroughly, about 1 hour, before storing in containers with tight-fitting lids.

Yield: 5 dozen

Underwater Atlanta (October, 2009)

2009-10-15T10:05:00.000-04:00

When meteorologists announced a flood watch in the metro Atlanta area on September 21^st, I don’t think any of us could have imagined the havoc this flood would wreak. Over just a few short days, we received nearly 20 inches of rain. Water reached the roofs of many houses and submerged many neighborhoods in several feet of water. Sweetwater Creek, which runs just west of the city and is a large tributary to the Chattahoochee River, crested over 8 feet higher than the previous record. It was shocking to see that within a couple hours, the flood watch turned into a disaster area with people stranded at home or work, cars washed away, roads and schools closed and houses damaged beyond repair. When I left for work that morning, there was no water in my backyard. By 3:30 in the afternoon, I could only see the tips of my 3 foot picket fence. I was very fortunate that the water never came close to reaching my house. As I sat glued to the TV that Monday worried about all the people affected, one of the first things that came to my mind was “Wow…I bet most of these homeowners don’t have flood insurance.”

Shortly after the major flooding began, the phone lines were jammed with homeowners panicking and inquiring about their homeowner’s coverage. To their dismay, they were told that standard homeowner’s policies will not cover losses from flooding. There are many different forms of homeowners insurance, but the most common form provides Open Perils coverage on the structure and Broad Form coverage on the contents.

Open Perils coverage means all threats are covered unless they are specifically excluded. This is the most comprehensive form of coverage. Broad Form covers a limited list of named threats. Some of the threats specifically excluded are earth movement, war, neglect, nuclear hazard, ordinance of law and perhaps most importantly, water damage caused by any water that enters the home from outside. Not only does this exclude damage from floods but it also excludes coverage for sewer back-ups since the water entered from outside the structure. It makes no difference whether the water entered above or below ground. The exception from this is if the water entered as the result of some other damage. An example of this would be if a tree fell on your house, put a hole in the roof allowing the rain to come in. Homeowners can insure against some of the excluded threats through endorsements or riders that expand the coverage. Flood insurance can be purchased separately for an additional premium.

While flood insurance is definitely a necessity for some homeowners, it does have some limitations. In order for flood losses to be covered, two or more acres of normally dry land or two or more adjacent properties must be partially or completely flooded. The maximum coverage limit for a residential property is $250,000 for the structure and $100,000 for the contents. Basement improvements such as finished walls, floors, ceilings or personal belongings are not covered. The national average premium for flood insurance is $540 but for those who of us who live in a flood zone, the numbers are dramatically higher (mine is $1300) and FEMA has just announced that rates will soon go up between 8-10%. Flood insurance should be considered by every homeowner. For those living in low to moderate flood risk areas, premiums are only a couple hundred dollars a year which would definitely be worth it if a flood ever hits your area. Just like any other insurance, it is a risk tolerance decision.

Only those who live in a flood zone and receive financing from a federally regulated lending institution are required to carry flood insurance. Flood zones are determined by the Federal Emergency Management Agency (FEMA) based on the 100 year flood standard which means that the flood elevation has a 1% chance of being equaled or exceeded each year. Over a 30 year mortgage, the estimated chance of a flood is about 26% in these areas. According to the U.S. Geological Survey, the recent flood in metro Atlanta was a 500 year flood with only a .2% chance of occurrence in any given year. That being said, the majority of homeowners choose to forgo flood insurance under the assumption that flooding will never affect their home. The truth is, about 25% of all flood insurance claims come from low to moderate flood risk areas.

So why do homeowners policies exclude flooding? When a flood occurs, several homes are generally affected and the losses can be too catastrophic for the private insurance industry. Flood insurance is fraught with adverse selection, meaning the majority of those who buy flood insurance do so because they live in areas at high risk for flooding. For this reason, the government has stepped in and since 1968, the National Flood Insurance Program has made federally backed flood insurance available to property owners who live in eligible communities. Eligible communities are those that pledge to adopt and enforce land use control measures that guide development away from flood prone areas. Many people mistakenly believe that only those who live in flood prone areas are eligible for federally backed flood insurance. The truth is that anyone living in an eligible community can purchase flood insurance.

With the estimated damage in the Atlanta area around 500 million dollars, tragically, many homeowners will find that their home will be a total loss. Times like these remind us all why insurance is so important, even if you don’t think a certain situation will ever happen to you. I guarantee most of these homeowners didn’t think so either.

Market Update (September, 2009)

2009-09-30T10:04:00.000-04:00

I think we all should take a moment for a collective sigh of relief: We have averted a possible financial catastrophe in 2009. The economy is finally showing signs of improvement while the stock market continues to shrug off less than positive news and climb higher. Though September is typically the worst month of the year for the stock market on a historical basis, there is no denying the many examples of a recovering economy. While many areas of the economy are still hurting, I wanted to take this opportunity to highlight a few areas of business that suggest a rebound may be underway.

The Housing Market: As the original catalyst of this recession, there will be no general recovery without a recovery in the housing market. So it is quite comforting that sales of existing homes in the United States in July rose 3.2%, which was more than forecast. This marked the sixth straight month of increasing home sales, thus reinforcing the view that the housing market is steadying. Compared to July of 2008, sales in the same month this year were up 13%. These are very encouraging statistics that suggest the housing market has bottomed out and is slowly improving. Though August numbers will not come out for a couple of weeks, low borrowing costs and declines in prices will continue to entice buyers into the market.

Manufacturing Sector: Companies in the manufacturing sector are major employers of the middle class, and an economic recovery will hinge on the middle class trusting their job security and therefore spending again. Fortunately, across various areas of manufacturing such as factory expansions and car sales, there have been encouraging signs of a turnaround. Last month, the manufacturing sector grew for the first time in 19 months. As of now, the manufacturing index sits at 52.9, a number which exceeded forecasts and is the highest level since June of 2007. A score of 50 is the dividing line between expansion and contraction, which means that factories have finally crossed into an expansionary phase. The manufacturing sector is the backbone of an economy, so this is certainly uplifting news.

The cash-for-clunkers incentive will not exist to help September’s numbers, and the manufacturing index is likely to show a slight dip this month as a natural reaction. However manufacturing sectors have been improving around the world, not just in this country. China’s factories expanded more in August than in any of the previous 16 months, which means the country expects other large nations such as ours to have the means to import their products. In addition, European manufacturing shrunk by the least amount in over a year, which suggests stabilization as well. In a world with a highly globalized economy, improvements in other countries are likely to positively impact the United States too.

Mergers and Acquisitions: While individual mergers and acquisitions may seem somewhat unimportant to the broader economy, the frequency of these arrangements is actually a great predictor of an economic recovery. There has been a recent flurry of M&A announcements such as the Walt Disney Company purchasing Marvel Entertainment for $4 billion a few days ago. These deals are signs of economic health since they show the purchasing company’s confidence that the investment will prove profitable as the consumer returns to stores. Acquisitions also demonstrate the acquiring company’s ability to pay as well as value in the company being purchased. The M&A market has been barren for almost a year, so these large deals may signal a bottom for this market.

Of course we are all familiar with the bank mergers as well since many of us have witnessed the name of our bank change. While no one likes to see his or her bank fall into the arms of another due to financial woes, the vast majority of the newly formed banks have been steadily paying off TARP money. This week, Bank of America offered to repay part of its bailout money, and Wells Fargo followed a day later to announce that it intends to return $25 billion in federal money. Since the government will only allow banks with improved capital bases to pay back TARP funds, these announcements indicate that banks have become much healthier in the recent months.

Stock Market: The fear and volatility of the spring now seems like a bad nightmare and the stock market has woken up to a nice rebound. The S&P 500 has posted a 48% return since the 12-year low on March 9th. While the recent run-up may have been a bit too much too fast, stock valuations are returning to more normal levels and investors are opening their wallets to buy the stocks of the companies that keep our country running.

Earnings announcements in the past couple months have been encouraging, and more than 74% of companies in the S&P 500 beat 2^nd quarter earnings expectations. Analysts set very low bars for these companies since everyone feared the worst, so beating these expectations was not a difficult feat. However we are all still relieved to see so many companies displaying resilient earnings data. The second quarter’s losses were less than the first quarter of this year and almost every analyst expects the current quarter to extend this trend. In fact, many companies are expected to post a profit (go figure!) As the financial statements start to look healthier, stocks are likely to climb higher.

Labor Market: To envision the coming recovery in the labor market, one only has to look at the trends in the GDP. In the first quarter of this year, the GDP contracted a scary 6.4%, but the second quarter saw a contraction of only 1.0%. The current quarter is expected to post a GDP growth of 1.6%, and with growth comes jobs. But the jobs will not come quickly or soon. The labor market is usually a lagging indicator since companies hesitate to add workers back to the payroll before they are sure that the improvements will endure. However, the labor market is already showing signs of life: The number of people filing for unemployment claims fell last week by 4,000 to 570,000. Though unemployment is likely to remain around 10% for a few more months, strong earnings and a growing economy will begin to bring unemployment down to acceptable levels.

In these markets and others, we are seeing signs that the economy is slowly recovering. I do not suggest that we are completely out of the woods, but it is certainly nice to see an abundance of positive news after months of struggle. It is important to remember that the economy still has many hurdles to clear and problems to solve. But hopefully the widespread fear of early 2009 will become a distant memory and companies will begin to take risks, hire workers, and invest again.

Healthcare Mythbusters (August, 2009)

2009-08-20T10:03:00.000-04:00

I'll start by saying that I do believe our current health care system needs reform; specifically, the rules governing health insurance and the link between personal behavior and cost. I strongly think that we are on the wrong path and headed for disaster with the current health care bill proposed by Congress. After reading the first article, you now know a little bit more about this bill, so let's take a look at some of the statements the media and political "talking heads" have been feeding us.

"Over 45 million Americans lack health insurance." This statistic has been cited in many sources over the past few years, including political speeches by Hilary Clinton and President Obama. While this statistic comes from an annual report by the Census Bureau, it is misleading and misunderstood. When you take a closer look at this figure, nearly 10 million of this number are not U.S. citizens. Of the remaining 35 million, more than 17 million make over $50,000 a year, with half of those making $75,000 or more. These people could afford insurance, but choose not to pay for it. About 9 million of the uninsured already qualify for government health insurance programs, but haven't bothered to take the time to enroll. This leaves about 8 million U.S. citizens actually uninsured for reasons out of their control. It is clear that those pushing for a major government intervention in health care have been distorting this 45-million statistic to boost their cause. Why should we uproot our entire system that is functioning for 97% of the American people to benefit 3%?

"Nobody is talking about cutting Medicare benefits." Medicare is already projected to run out of money by 2020. The House bill proposes to reduce projected increases in Medicare payments to providers by more than 500 billion over the next 10 years. This will happen as baby boomers turn 65 and increase Medicare enrollment by 30%. With less money and more patients, the only option will be rationing care. According to the Congressional Budget Office, only an estimated 1% of the cuts will come from eliminating fraud, waste and abuse, leaving 99% for cutting access to care. An advisory committee will be appointed to recommend a benefits package based on standards set in the law. In addition, the bill specifically states that the government plans to eliminate some Medicare Advantage plans as a cost saving measure. 22% of all Medicare patients are currently enrolled in Medicare Advantage plans which allow seniors to buy supplemental Medicare coverage through private insurance companies. President Obama has called Medicare Advantage a wasteful subsidy for the health insurance industry and he has even proposed eliminating the entire program.

"The health care reform will not increase the federal deficit." On June 16th, the Congressional Budget Office determined that the health care reform bill proposed would cost 1.6 trillion over 10 years. This figure took many people aback, including some of Mr. Obama's fellow democrats. The White House quickly responded with a proposal for Medicare cuts. In response to this proposal, the CBO projected that we would possibly see 2 billion in savings in the second decade, a number that pales in comparison to the cost. Supporters of the reform have said that while it will increase costs and deficits in the first decade, it will make up for them in the long run, a process President Obama refers to as "bending the curve downward in coming decades." Last week, the CBO delivered another devastating blow when it stated that it does not believe current bill bends spending down. In fact, they estimate that annual growth in outlays will be 8% while annual growth in revenues will be 5%. Simple math tells us that the deficit will increase.

"Tax increases will only affect the very wealthy." President Obama has vowed to implement this health care plan without raising taxes on the middle class. Just this week, both Treasury Secretary Timothy Geithner and economic adviser Larry Summers stated that they cannot rule out higher taxes on the middle class as part of the health care overhaul. From his presidential campaign up until now, Mr. Obama has vowed to only increase taxes on those making over $250,000. Most people in this country don't realize that a tax increase on the wealthy will affect them negatively. If the government raises taxes on high income individuals, experience shows that an increase from 35-45% would change the behavior of these individuals in ways that lower their taxable income, shifting the tax increases burden to the middle class. Also, many of these "wealthy" individuals are business owners. With an increase in taxes, they will be forced to raise prices, cut jobs, and lower pay, all of which harm everyone. With income taxes aside, President Obama has already broken his pledge not to increase taxes on the middle class by increasing the federal excise tax on cigarettes and by backing the cap and trade legislation which equates to an energy tax on every person in America.

"If you like your current insurance, nothing changes except your costs will go down by as much as $2,500 per year." Rachel touched on the idea that the government can't fairly compete with other insurers. How will the Humana's of the world lower their premiums while hospitals charge them more to compensate for lower government reimbursements? How will an employer be able to walk away from the government's offer if the premiums are artificially lower than what he currently pays to privately insure his employees? As employees lose their jobs and are forced to use the public option, illegal aliens are automatically covered, and the average consumer is forced into the public option by rising prices, we will soon all be covered under one big federally run health care plan with costs out of control and life altering decisions made by the government. Back in August of last year when Mr. Obama was campaigning, he said, "If I were designing a system from scratch, I would probably go ahead with a single payer system." All this talk of a public option among the private insurance plans is just paving the way for a single payer system in the future.

In conclusion, I'm slightly optimistic that Congress has delayed the vote on the bill until after summer recess. Hopefully during these next few weeks, we the public will continue voicing our dismay with the current bill and prove to Congress once and for all that there is no place in the United Sates for socialized health care.

Healthcare Bait and Switch (August, 2009)

2009-08-15T10:01:00.001-04:00

Congressional politicians must think we're stupid. This is the only explanation for the new healthcare bill currently being considered on Capitol Hill. It's filled with deceptive and unrealistic assertions that even a child could easily debunk. The legislation attempts to bait us with the offer of a public healthcare insurance option while carefully hiding provision after provision designed to strip our freedom of choice, rob billions from Medicare, and allow the takeover of the healthcare industry. Our Congressional "leaders" hope we won't notice. Well I sat down and read this colossal 1,000 page bill to determine the truth, and what I found is disturbing.

The claims of the public option proponents are quite ambitious: Costs will be significantly reduced! Every American will be insured! If you like your current plan, you can keep it! The quality of your care will not change! This all sounds great, but these will not happen for one simple reason: The government does not compete, it legislates. The government does not have to worry about the bottom line, which is obvious from our trillion dollar deficit. The government can operate at a loss into oblivion, while private insurers cannot. So when a politician goes on TV and claims that the government is just offering another option to "compete" with the hundreds of other private plans, that politician is knowingly lying to you.

The legislation allows the government to mandate any reimbursement rates it wishes and force hospitals to take on these patients, even at a loss, which is already the case with Medicaid. Hospitals can tell a private insurer with such low rates to get lost, but not the government. So guess who pays for these patients? You do, because of cost shifting. This is where the hospital must charge private insurance patients more in order to make up for the low reimbursement rates of government insured patients. Now imagine that millions more people are added to a public option in which the government can mandate reimbursement rates of only 70% of the cost? Your private insurance premiums must go up to compensate. Period.

The government will not compete because it doesn't have to. Maintaining a positive cash flow is not necessary and never has been. They will just keep borrowing to fund the losses. But we cannot run trillion dollar deficits forever, so the government will have to reduce healthcare costs eventually right? Wrong. The Congressional Budget Office (CBO) has already admitted that there will be zero cost savings until 2020, and then only $2 billion. That's only .006% of the cost of this bill! Only a politician would spend $1.5 trillion to claim a savings of $2 billion.

This bill has no suggestions for reducing the actual cost of providing quality care. So on page 29 of the bill, Congress admits that healthcare will be rationed instead, especially for seniors. The bill mentions Medicare 439 times, but is careful to never say exactly what changes will take place. To avoid having to give specifics, it simply establishes a new committee that will have one year to unilaterally dictate how Medicare will be altered indefinitely to fund this new public option. So our politicians are voting for Medicare modifications that aren't even clearly defined.

As an added bonus to help curb the massive costs of this legislation, the bill includes a provision to control doctor's wages. Specialists will be particularly affected. I believe that a person who sacrifices his or her entire twenties to attend medical school while incurring hundreds of thousands of dollars in student loans deserves to be well compensated. The government apparently does not agree, and as a result, fewer qualified individuals will pick this important profession.

Another worrisome point in this bill is that insurance companies will no longer be allowed to write new individual policies or change existing ones. We are constantly being told that the government plan is just another "option", so there is no real worry! This is only half true, and the proof is in section 102 of the bill. Let's say you have Plan A with insurance company X. If the government does not approve of Plan A, you must get supplemental insurance immediately. If Plan A is acceptable, you may keep this coverage as long as the insurance company still offers it. The catch is that no insurance company may offer you a new private policy or sign you onto any existing plan that you were not already subscribed to when this bill was enacted. You may not pick private plan B, C, or D to replace your original plan A, ever. Therefore if your plan is dropped, you don't have insurance, you want a different plan, or your employer (current or new) doesn't offer insurance, you have no choice about your coverage. You must accept the government plan. Insurers are only allowed to offer government-participating individual plans from this point forward, so the result will be a new market place with only employer plans and the government plan. Yes, you may keep your current insurance, but hopefully you really like it because you may never choose any other private plan.

Since the goal of this legislation is to ensure that every person in the country obtains healthcare insurance, the bill provides for a 2.5% income tax on any individual who does not have insurance as a way to encourage the uninsured to seek coverage. How will the government know exactly who these people are? Congress answered this problem by adding a provision that requires every person in America to carry a National Healthcare Insurance ID card. If a person arrives in a hospital but does not have a National Insurance ID, the hospital must report this person to the IRS so the tax may be applied. Healthcare will now be married to the IRS, and you will have to prove to the IRS that you have sufficient insurance every year to avoid the punitive tax. Of course illegal aliens and people reporting low incomes, even those who make plenty of unreported income in tips or cash wages, are exempt from the tax but enjoy a specific provision in the bill granting them free healthcare.

I could go on for hours about all of the hidden provisions in this monstrous bill. Instead, I will offer a few suggestions in lieu of the public option: Allow people to purchase insurance across state lines so they may find the best plan available, thus increasing competition and spreading risk. Allow small businesses to join together to create larger employee pools and thus lower the premiums for each person. Or when a person is laid off or fired, give that person the option to keep the same plan that he had with the employer and just pay the premiums himself. Let individuals shop for health insurance like they shop for car insurance, choosing options they need and excluding those that will never matter to them. Allow insurance companies to fully penalize those who make bad lifestyle choices, such as smokers and the obese, instead of splitting the high costs between these people and those who make positive choices. Actually having to pay for the high costs of bad lifestyle choices may encourage more people to kick bad habits and become healthier.

All of these reforms would improve the healthcare industry in a positive manner. A public option is not the answer to our healthcare problems. Costs will continue to rise while our access to quality care may be irreversibly changed. With my healthcare, I'm not willing to take that chance.

Support our Troops (July, 2009)

2009-07-15T09:59:00.001-04:00

With the 4th of July near, I felt it would be a good time to pay tribute to the many soldiers that defend our country every day. War is a hot topic these days, but as we all know, freedom does not come free. Whether or not you agree with the current foreign policy, it is important that we all support our soldiers. I've always been grateful for the brave men and women who serve to protect our country. However, "Support Our Troops" took on an even stronger meaning for me when my 19 year old brother shipped off to Parris Island for Marine Boot Camp this past February. He graduated in May, and seeing all those young men in uniform at the graduation committing to protect our country was an amazing experience. I couldn't be more proud of my brother.

Almost everybody knows of somebody who is serving overseas. All too often, we want to help but we're not sure what to do or how we can make a difference. Even something as simple as walking up to a military uniformed person to shake his or her hand and say "Thank you for serving our country" goes a long way. Here are some others ways you can show your support to our troops and their families:

Cell Phones for Soldiers: This is a really neat program started by a couple of kids in Massachusetts. How many of you have old cell phones lying around that you will never use again? A company called ReCellular will take your unwanted phone and turn it into a prepaid phone card with 1 hour of use for soldiers serving abroad. They have drop-off locations all over the U.S. Visit http://www.cellphonesforsoldiers.com/locateDropoff.asp to find one near you.

Letters: This is no new concept, but I don't think we fully comprehend how much letters mean to soldiers. They need to know that we are thinking of them and proud of them. If you know somebody overseas, take a few minutes to tell them how much you appreciate what they are doing. If you don't know anybody currently deployed, there are programs that send your letter to a deserving soldier. Two such programs are www.amillionthanks.org and www.anysoldier.com. If you really want to make them smile, include some funny jokes or comics or a newspaper clipping of positive things they are doing overseas. You can even send emails at www.amillionthanks.org.

Operation Baghdad Pups: This organization's quote "No Buddy gets Left Behind" is a good summary of their mission. While serving overseas, some soldiers come across abandoned dogs with a low chance of survival and decide to raise them. As the soldiers care for the dogs during their stay, a strong bond forms and they can't bear the idea of leaving the dog behind when they return home. If you are a dog lover, it's not hard to understand how comforting the companionship of a dog would be while living in a war zone. To find out how you can help, visit http://www.baghdadpups.com/.

Care Packages: There are a couple of ways to go about sending a care package. United Service Organizations (USO) allows you to sponsor a care package for as low as $25, while each package contains both needed and requested items valued at $75. You can learn more at https://www.uso.org/donate/custom.aspx?id=565&. If you would like to make your own care package, here are some good items to include:
- Beef jerky
- Power Bars (one of my brother's favorites...they get very tired of military MREs!)

- Prepaid phone card
- Instant drink mix
- Lip balm
- Mini games
If you don't have someone in particular to send one too, there are several organizations that will forward your package on to a soldier such as http://www.give2thetroops.org/.

Operation Homefront: While all of the other suggestions have been for the soldiers themselves, they all have families they have left at home. Many of them have gone abroad because it was the best way they knew to care for their spouse and children. Operation Homefront has chapters all over the United States that help military families in need. Please visit http://www.operationhomefront.net/ to find out ways you can help.

I hope everyone has a wonderful, fun-filled 4th of July holiday, but that we also take a moment to honor those protecting us. For the time being, my brother is in San Diego at the School of Infantry and out of harms way, but I know there will be a time when he will be one of the brave men serving overseas. I hope there never comes a day that he asks himself if what he is doing is appreciated.

Iran and Iraq: A Tale of Two Economies (July, 2009)

2009-07-14T09:58:00.001-04:00

For the past couple weeks, we have all been captivated by the protests occurring in Iran. It has been difficult to turn our eyes from videos of brave men and women risking their lives to insist that their voices are heard, even as the regime releases violence on its own people. While some people understandably find the news of these peaceful protests and the ensuing government crackdown difficult to observe, I personally find great hope in the displays of bravery, compassion, and determination among the protesters. As the people of Iran finally stand up against one of the most suppressive governments in the world, the rest of the Middle East has been making economic strides, particularly in Iraq. Even though the Iranian protests may not result in any change in the regime in the near future, the government of Iran is on precarious ground versus other Middle Eastern countries making economic progress.

The Iranian government under President Ahmadinejad has grossly mismanaged the Iranian economy. Iran’s Central Bank recently reported the projected rate of inflation to be 23.6% in the next year while economic growth has slowed consistently for the last four years. With a disproportionately young population, the unemployment rate has climbed from 10.5% four years ago to 17% now. The Iranian economy was booming a decade ago, so why are these numbers unexpectedly getting worse, even after the surging oil prices of 2008? The answer may be found in this interesting fact that the United States government may also want to examine before it heads down a socialist path… Ahmadinejad is a pure populist with a policy of spreading wealth as much as possible. His staunchest supporters are the poor since the President has consistently increased government handouts. So as you watch the protests raging in the streets, remember that these protesters are generally the more educated members of Iranian society and the future of that country. Without these people creating wealth instead of Ahmadinejad simply spreading the current wealth around, the country will continue to deteriorate economically and soon there will be very little wealth left to spread to the poor.

The population of Iran has become disenchanted with their government for many reasons, but one major reason may be the Iranian people looking next door to Iraq. As they watch their neighbors have honest elections, reduced violence, and an improving economy, many Iranians may be questioning why they are denied such progressions. The Iraq National Investment Commission announced on May 31 that it expects the country’s gross domestic product to grow by 7% this year, even during a global recession. This positive number is the result of the Iraqi government performing an about-face on many economic issues. For example, the government has opened its six super-giant oilfields for the first time in 30 years, and at the end of June it will auction off foreign contracts to produce crude oil for the next 20 to 25 years from Iraqi wells. For the first time in decades, the government is welcoming foreign investment in its energy industry, and oil companies are clamoring for the opportunity. Also, Iraq has turned its focus to improving infrastructure by approving bigger budgets, but has found that the country lacks engineers to carry the projects out. So on Monday, Iraq urged scientists and engineers who fled the country amidst violence in the last six years to return home to help rebuild the economy. Across the border, engineers and scientists in Iran have already begun wondering why their country does not value them so highly and may start to leave. Unlike Iran, Iraq has finally realized that to keep these entrepreneurs and educated citizens, the economy must function properly. Last year, Iraq’s Finance Ministry began drafting law necessary for Iraq to join the World Trade Organization. The idea that Iraq may join any civilized world-wide organization is a gigantic step forward. With economic recovery and growth, foreign and domestic investment will increase. This was already seen in May of this year as a total of 745 Iraqi companies registered with the Ministry of Trade, which resulted in a 62% increase in the total number of registered firms in the country in only one year. Iraq certainly has its domestic problems, such as a dwindling water supply, but an increase in business is likely to help find solutions to these problems.

While much of Iraq is still in a dire economic situation, investment should help Iraq’s economy find new footing and spur growth. This is in stark contrast to an Iranian economy that continues to slide. This is certainly the tale of two economies, seemingly headed in completely opposite directions. And no one is watching this tale more closely than the protestors in Iran.

CFA and CFP (June, 2009)

2009-06-15T09:56:00.000-04:00

The monthly memo was designed not only to share our thoughts on certain issues but also to keep you informed of new developments within our company. In that light, we wanted to share some important things going on at The Alder Financial Group this spring.

All of us here feel it is very valuable to continually increase our industry knowledge. Besides industry seminars, conferences and continuing education workshops, we also strive to obtain specialized credentials. While there are many available designations, this month’s article focuses on the two we feel are the most prestigious: CFP® (Certified Financial Planner) and CFA (Certified Financial Analyst.) These are highly sought after designations requiring substantial dedication to acquire either of them. One of our principals, Alan Gaylor, has held the CFP® designation for many years, and Lori also took the CFP® exam in March. Rachel just took the Level I CFA exam this past Saturday. Studying for these exams has been a very important part of our lives in the past year, so we hope this Monthly Memo gives you some insight into these two important designations that we have been pursuing.

As some of you already knew, I have been studying for the CERTIFIED FINANCIAL PLANNER™ Two weeks ago I received the highly-anticipated letter in the mail informing me of my score. Words can not express the feeling I had when I read the first line: “Congratulations, you have passed the CFP® exam.” All my hard work and long hours of studying definitely paid off! exam which I took in March.

Rachel has also been diligently studying for a difficult exam, the Level I CFA test, which she took on Saturday. There are three levels of exams that must be passed to acquire the CFA designation, so Rachel has a few more years of studying in her future! Since we’ve both been consumed with studying this year, we figured it would be a good time to shed some light on these two designations, what they mean, and their importance in the industry.

CFP®

I’ll start by giving you the basics on what it takes to become a CFP® Certificant. There are six prerequisite courses you must pass to be eligible to sit for the exam. These include Financial Planning, Insurance and Employee Benefits, Investment Planning, Income Tax Planning, Retirement Planning and Estate Planning. It generally takes an individual a year and a half to complete all six. The exam itself is a rigorous 10 hour exam taken over two days. The exam seeks to assure the public that the CFP® Certificant is able to apply financial planning knowledge to real-life situations. Upon passing the exam, you must prove that you have a Bachelor’s degree and 3 years of full-time, relevant financial planning work experience. Every two years you must renew your certification which requires 30 hours of Continuing Education. This assures that CFP® designees are continuously educating themselves in the area of financial planning.

So what is the importance of obtaining the CFP® designation? The key point of the CFP® The amount of time and effort required to achieve the designation ensures that all holders have demonstrated a high level of commitment, ethics, and professionalism. Certification prepares financial planners to meet the ever-changing needs of their clients and focus on long-term relationships. The term “Financial Planner” has recently become very widely and loosely used, but when you see the designation CERTIFIED FINANCIAL PLANNER™, you now know this person is subjected to the standards of the most recognized and respected financial planning organization in the world. designation is to further the knowledge and study of comprehensive financial planning.

I’ll now turn it over to Rachel to describe the CFA designation.

CFA

The Certified Financial Analyst designation is possibly the most difficult certification to acquire in the finance world with at least three years of exams and a passing rate of only 35% for the first level. More than 50,000 financial analysts around the world took the Level I exam this past weekend. When I took the test on Saturday with 700 other candidates, it was definitely nerve-wracking to look around and realize that only about 245 of us would pass! However, after studying for eight months, I felt well-prepared. I am very proud of both Lori and myself for dedicating ourselves so fully to studying, and I know it made all the difference for both of us. The CFA Institute will not release my score until the end of July, so I am beginning the long and anxious wait to find out if I passed!

There are a total of three levels of exams that must be passed to be awarded the CFA designation. For the first CFA exam, there are eighteen subjects that most be known in acute detail. These subjects include Financial Statements, Portfolio Management, Ethics, Fixed Income Investments, Equity Investments, Derivatives, and Economics, just to name a few. The Level I exam is offered twice a year, in June and December. The Level II and Level III tests are only offered once a year, in June, and these tests cover those eighteen subjects and others in even more detail. Since the pass rates for Level II and Level III are also very low, it is rare for a candidate to pass each test on the first try and it is very common for a candidate to need four to five years to pass all three exams. This requirement of constant dedication for numerous years is one major reason for the difficulty of these exams. Candidates must keep their eyes on the prize, even if the prize is many years away!

The CFA Institute maintains a high focus on ethics at each level, and being awarded the CFA Charter means the charterholder is committed to the highest ethical and professional ideals. While the curriculum at each level ensures that the candidate understands complex financial computations, the CFA Institute is more concerned with determining that each CFA Charterholder understands the deeper interpretation of these computations within the context of the individual portfolio, the industry, and the world economy. The CFA exams are comprehensive in scope, and the CFA Institute hopes to assure clients and prospective clients that a CFA Charterholder has committed him or herself to thorough and extensive knowledge of all pertinent financial subjects.

Since acquiring the CFA designation requires years of effort, it will be quite a while before I may join Lori in saying that I achieved my goal. However, I will not let this deter me and I hope to report in two months that I get to move on to Level II! In the mean time, I want to congratulate Lori on her achievement… she showed an uncommon commitment to studying for the CFP® test and all of us at The Alder Financial Group are proud of her for achieving her goal!

Get Away (May, 2009)

2009-05-15T09:54:00.001-04:00

The warm weather we have had lately has been a reminder that summer is near! I’ve decided to share some ideas for weekend getaways in the southeast. Everyone here at The Alder Financial Group has contributed to share personal experiences of places we have been and would recommend to you. Here they are in no particular order:

St. Simons Island, GA

http://www.explorestsimonsisland.com/

St. Simons Island is a seaside community located on the Georgia Coast. Of course the beach is the biggest attraction, but the pier is also a great place to spend the day. Many locals fish for shark on the pier and there is a lighthouse and a playground nearby as well. There are several fun shops and restaurants. One of my favorite places to eat is Mullet Bay, but to be honest, I haven’t found one restaurant that I don’t like! For some good southern cooking you can check out Barbara Jean’s, and for quality seafood in a unique atmosphere, make a reservation for the Blackwater Grill. Bennie’s Red Barn is another popular restaurant and has been serving since 1954, making it the oldest privately owned restaurant on the island. After eating, you should stop by Sweet Mama’s candy shop. If gambling is your thing, the Emerald Princess is a casino cruise that goes out into international waters for about 5 hours daily. Lastly, if you like to golf, the island is famous for its beautiful courses run by the Sea Island company, which also runs The Cloister on St. Simon’s sister island right next door.

Fairhope AL

http://www.cofairhope.com/index.php

Fairhope is a city located along the cliffs and shoreline of the Mobile Bay in southern Alabama. It is known as a romantic small town with storybook charm. Downtown you will find many shops, boutiques, cafes and art galleries, and Fairhope is a great place to walk around and shop for antiques. The Fairhope Municipal Pier is a beautiful place to visit and features restaurants, duck ponds and an award-winning rose garden. As far as accommodations go, there are several cottages and guest houses, some on the bay with private piers. If you really want to pamper yourself, the Grand Hotel Marriott Resort, Golf Club & Spa is picturesque and would be a great escape. And very close to the Grand, you will find the Wash House Restaurant, which is in an old wash house building adjacent to a plantation house for a true southern experience. Beyond the experience, the Wash House’s fresh seafood is also outstanding.

Nashville, TN

http://www.visitmusiccity.com/

If you like country music even a little bit, you will love visiting Nashville, TN. Music Row is a street on which you can listen to talented live musicians any time of day. Many country stars began at bars on Music Row, so you may be one of the first to hear a soon-to-be celebrity! The historic Ryman Auditorium, built in 1892, offers interesting tours. The Wildhorse Saloon is a popular spot to stop in for lunch or dinner and maybe stay for a concert. A few minutes away from downtown, you will find Opryland, which is a must-see. The Gaylord Opryland Hotel and Convention Center is more than a hotel, it is a beautiful dome with indoor gardens, shopping and restaurants. There is much more to see in Nashville such as the Country Music Hall of Fame and the General Jackson Showboat, making it impossible to see it all in one weekend. Just pick a couple things that sound good to you and don’t forget to relax at least for a little while!

Gatlinburg / Pigeon Forge, TN

http://www.gatlinburg.com/default.asp

http://www.mypigeonforge.com/

You can rent an amazing cabin secluded in the beautiful Smokey Mountains for a reasonable rate, and many come equipped with Jacuzzis, pool tables and other features you can choose from. There’s nothing like sleeping in and then heading to town for a big pancake breakfast at one of the many pancake houses around town. If you like trout fishing, or would like to try it for the first time, you can fish in the Great Smoky Mountains National Park. In Gatlinburg, there are several distinctive shops, original restaurants and museums on the main strip in the downtown area. Just 15 minutes away, Pigeon Forge is full of fun attractions, especially for kids. If you have kids or enjoy amusement parks yourself, Dollywood features rides, a water park, shows and much more. The Dixie Stampede is a one-of-a-kind dinner attraction that is enjoyable for all ages, complete with special effects and stunts performed with cattle and horses.

Lake Guntersville, AL

http://www.alapark.com/lakeguntersville/

If you enjoy the outdoors, Lake Guntersville State Park, located on the banks of the Tennessee River in Northeast Alabama, would make for a great mini-vacation. Lake Guntersville is the largest lake in Alabama and fishing, boating and eagle watching are all popular sports there. For lodging they have something for everyone: a nice resort, rustic cabins or a scenic campground. If you live in the Atlanta area, stop on the way to Lake Guntersville for an afternoon in Mentone, a small town situated on Lookout Mountain in Alabama. It is a quaint town with bed and breakfast inns, cabins, campgrounds, and breathtaking waterfalls and trails. If you like horseback riding, the Shady Grove Dude Ranch offers a waterfall trail.

Charleston, SC

http://www.charleston.com/

http://www.patriotspoint.org/

For you history buffs, Charleston is right up your alley. As many of you may already know, Charleston is home to the USS Yorktown and other military ships that are now open for tours. The ships are located in an area called Patriots Point. Here you will also find war planes and museums. You can also take a tour of Fort Sumter which is the island fort where the Civil War began, and the ferry ride to get to the fort is also a treat. Charleston is not only a historical town… It’s a great city to walk around, marvel at the beautiful houses and shop. At the beginning of Market Street there is a huge open air market surrounded by great restaurants and shops. Last but not least, there are several spacious beaches characterized by white sand and clean water.

Asheville, NC

http://www.biltmore.com/

By far the most popular site to see in Asheville is the Biltmore Estate, which was built around 1895. Along with the astonishing house, the estate features gardens, a winery, a farm and much more. May is famous for the Festival of Flowers which includes live music, springtime dining specials and shopping. If you can’t make it till July, the Bele Chere festival is one of the biggest outdoor festivals in the Southeast. If you plan your trip in the fall, the Grove Park Inn hosts a gingerbread contest every year, and the winner is flown to New York City and featured on Good Morning America! Asheville has events and festivals planned year-round, so choose one that suits your interests.

Marriott Shoals Hotel & Spa, AL

http://www.rtjgolf.com/resorts/shoals/

If you are a golfer, The Robert Trent Jones Golf Trail in Alabama offers some of the finest public facilities in the South East. The one we want to highlight today is one of Alan’s favorite getaway ideas. Tucked in the northwest corner of the state lies the RTJ course on the banks’ of the Tennessee River in Muscle Shoals. It comes complete with two courses, the Fighting Joe and the Schoolmaster, that are highly ranked by Golf Magazine. The picturesque facility seems like it is in the middle of nowhere, but it is really not that far from Birmingham or Memphis. After a long day of golf, The Marriott Shoals Hotel & Spa complex is just a short drive across the river. One of the resort’s best features is Alabama’s one and only revolving restaurant, the 360 Grille, which offers beautiful views of the Tennessee River and Florence. The resort has two saltwater pools, the outdoor one featuring a cave and water slide for kids. If you still have some free time, the Tennessee River is famous for small mouth bass fishing.

Madison, GA

http://www.madisonga.org/

This historical area is located 1 ½ hours southeast of Atlanta and is the largest historic district in Georgia. It was spared by Sherman’s Army during the civil war because it was the hometown of a pro-Union Senator. There are several unique restaurants downtown along with many shops. Madison is known for its Bed and Breakfast inns that were converted from homes built in the 1800s. There are also some 17^th century homes you can tour such as Heritage Hall. If you like the outdoors, Hard Labor Creek State Park is nearby and offers many trails and a lakeside beach with swimming from May to September.

These are just a few ideas of many for you to consider. I could have gone on for pages on some of these cities, so I encourage you to do your own research as well! And if you decide to check out any of these places, be sure to let us know…. We have many more suggestions for things to do in each town! No matter how busy you may be, I hope everyone can find the time for a vacation this summer, even if it is just a weekend getaway. Bon Voyage!

Spring Cleaning (April, 2009)

2009-04-15T09:51:00.001-04:00

As the stock market does some spring cleaning of its own, we wanted to suggest some unique ideas for your spring cleaning this year! Even if you don’t do a complete spring cleaning each year (and I must admit that I do not do a thorough job each spring either), I do have a few ideas for organizing your life. These are easily implemented ideas that really can change your life by making each day a bit easier, and they can help you save money too! Here are ten unique organization ideas:

1) Take your to-do list into the 21^st century with a digital voice recorder. For only $16, you can buy a small Sony voice recorder that will fit in your pocket or purse and will hold 8 hours of recorded notes. These voice recorders are an ingenious way to de-clutter your mind and convert mental notes into messages that you can listen to at the end of the day. You can also record ideas, thoughts, and musings, which can be a very calming practice. (Look for model Sony ICD B120 for a low cost choice.)

2) Have each member of the family choose their favorite color, and stick with it. This is the key to serenity in a house with children… buy each person’s necessary items such as toothbrushes in one consistent color. You will never again wonder whose toothbrush is missing or whose book bag is in the middle of the living room floor! Color coding your family can take a lot of hassle out of your life.

3) Turn mismatched socks into dusters. Every house ends up with socks that have no match, so instead of tossing these socks or saving them in case the mate magically reappears, slip one sock on each hand and start dusting!

4) If you have children or grandchildren, eliminate dust mites or other bad germs living on your kid’s stuffed animals and toys by placing them in the freezer overnight. The germs and dust mites will die, stuffed animals will last longer, and this is good for your children’s health too.

5) Spring clean your PC! Throughout the year, everyone accumulates applications, documents, and programs on their computers that are no longer used. These idle programs slow your computer, steal memory, and clog your desktop space. Instead, try Revo Uninstaller to eliminate unnecessary programs and applications. Revo Uninstaller is free, and it is much more effective and faster than Window’s uninstaller. Also, if you are tired of a slow-booting PC, try Startup Delayer. This is another free piece of software that allows you to choose certain programs to load later, therefore reducing the simultaneous loading of every program on your computer each time you boot up.

6) Post a stain chart in your laundry room or the kitchen. Print this stain-removal chart and keep it handy so you will always know exactly how to treat any type of stain from ink to red wine.

7) Invest in a few unkillable indoor plants. Anyone in this office will tell you that I am a death sentence for plants, and within the first 6 months of working at The Alder Financial Group I managed to almost kill every plant in this office before Charles had to step in and save them. I just can’t seem to keep plants alive! I either water them too much or not enough. But there are a few plants that even I can keep alive, and I have found that the Cast Iron Plant, Philodendrons, and Snake Plants are almost indestructible. They are a great way to brighten up your home for spring.

8) Throw away or give away all but 2 bottles of each kind of toiletry in your bathroom. I am guilty of one major cleaning crime… I insist on keeping every moisturizer, shampoo, and makeup product I have ever accumulated in my entire life. However, once a year I have to throw away all but 2 of each product simply to keep my life sane. I have to admit that there is no need for me to keep 17 half-used bottles of shampoo sitting in my bathroom! Each year, try to purge as many half empty bottles as you can.

9) Set up a paper center near the front door. Every time you bring in the mail, magazines, or paperwork, choose one of three paths: file, shred, or re-locate. Keep a file cabinet with a section for bills, correspondence, and other categories in the same location you typically open your mail. File right then to help de-clutter your life. Also keep a shredder in the same place to get rid of unnecessary paper immediately. If the paper needs to be re-located to another room in the house, such as a magazine for living room reading, go ahead and re-locate it. In such a digital world, the amount of paper coming into the average household is still overwhelming but is manageable.

10) Stand your shirts on end. I tend to wear the same 20 or so shirts over and over, mainly because I cannot see the other shirts I own in the bottom of my drawers! A good tip I have found for eliminating this problem is to fold your shirts in half one more time and then stand them up in the drawer. This way you can see all of them and get to the one you want easily.

I hope these tips help you organize your life this spring. As our economy and the stock market purge unnecessary clutter, it is a great time to do the same in our own lives.

Budget Doesn't Have to be a Dirty Word (March, 2009)

2009-03-15T09:47:00.000-04:00

Most people cringe when they hear the word “budget.” They think of words like confining, restrictive and penny-pinching. Like diets, budgets are often started with the best of intentions but are quickly dismissed when the going gets tough. The truth is, a budget is essential to any sound financial plan and it is often avoided simply because we don’t like to think about how much we spend. Sometimes it is mind-boggling to see how much little luxuries like dining out and entertaining add up to over the course of a year. It is important to remember that the object of a budget is not to eliminate all unnecessary expenses, but rather to live within your means.

Maybe a better term for a budget is a spending plan. It is nearly impossible to sit down and plan out exactly what expenses you will have each month. But what you can do is identify fixed expenses that don’t vary much from month to month such as your mortgage, car payment, and insurance premiums. Subtract this number from your net take-home pay and the result is your discretionary income, the money that you are free to spend however you wish. This type of plan is flexible and allows you to adjust your monthly allocations to your changing wants each month. As long as you stay within your discretionary amount of money, you are living within your means. So if the opportunity arises to go on a weekend getaway, it is fine to go, but this means that you need to avoid discretionary spending somewhere else. You must prioritize. People get in trouble when they expect their paycheck to cover everything they want, and when it doesn’t they turn to their Amex or Visa, which is a bad idea.

In fact, overextension of credit is what got our economy in the mess it is in now. Ways to save are on everybody’s mind. We’ve found a few ideas around here that you may find beneficial as well:

Home phone - Over the past several years, the use of cell phones has skyrocketed. Even those of us who refused at first to own a cell phone have given in. While we can’t seem to live without cell phones, many of us don’t want to part with your home phone for one reason or another. Did you know that you could be saving hundreds of dollars each year by using Voice Over IP? T-Mobile now offers a service that adds a home phone line (you can keep the same number) to your cell phone bill. Sorry AT&T, your glory days are over. You avoid paying junk fees twice and pay as low as 10 dollars a month for you home line. There are other companies that offer this Voice Over IP service as well. Several of us in the office have been using this and have been very impressed. The quality is no different than a traditional phone line and included are all the calling features of a cell phone (caller ID, voice mail, free long distance, etc.). If you have broadband internet service at home, Voice Over IP is a very good option to consider.
Generics – How many of you are apprehensive about buying generic prescriptions because you are worried about the quality? The FDA requires generic drugs to have the same quality as brand-name drugs. Be sure to ask your physician or pharmacist if there is a generic brand available for any medicines prescribed to you. Also, pharmacies at some stores such as Kroger and Walmart have extensive lists of generics for as low as $4, so before you fill your prescription, check to see who has the best price. Publix has a list of 8 antibiotics that you can get for free with your prescription. This “generic over brand” concept applies to over-the-counter medicines as well. Before you buy Excedrin, read the label of the knock-off version and you will see that they have exactly the same active ingredients, for a much lower price.
Car Maintenance – Any oil change station will tell you that you should get an oil change every 3,000 miles. The truth is today’s car manufacturers usually recommend oil changes less frequently. Sometimes these can be as long as 5,000 to 7,500 miles. Check your owner’s manual for the recommendation for your car and you will probably be surprised. When it actually is time to get an oil change, almost all of the well-known service centers offer online coupons. When you get your oil changed, 9 times out of 10 they insist on changing your air filter. It is really easy to change your own air filter and save on the labor charge. A final suggestion is to keep your tires inflated at the right pressure to prolong their life, get better gas mileage, and get better control and traction. Also, rotate your tires as recommended in your owner’s manual for longer life. Some national tire center chains will even offer free rotations in an effort to get your business when you do need new tires.
Unnecessary fees: With a sound spending plan in place and proper organizational skills, there is no excuse for returned check or overdraft charges. However, mistakes happen and if you do get hit with an occasional fee, try calling the company and charming them with your niceness and remorse for this one-time slip up. Many companies that you have a good history with will waive the fee which is worth the few minutes you spend on the phone with them. One of the benefits of having a long relationship with a business is that they value you as a customer. Many companies such as cell phone, banks and credit card companies depend on have low customer turnover rates. They will often bend over backwards to keep a long term customer. Many of these businesses have a department solely designated to customer retention. If you don’t get the answer you want, hang up and call the 800 number again. You’ll likely find a representative who is willing to help. And speaking of unnecessary fees… if you signed up for a service to get the introductory rate but now that rate is scheduled to increase, call the company and mention that you are considering switching companies. Often, they’ll want to keep you and extend the introductory rate for a few more months.
Utilities – A programmable thermostat can adjust the temperature in your house automatically when you’re away or asleep. While you can find them for as low as $70, they will save you twice that much on your power bill each year. Florescent light bulbs can save you $60 in electricity per bulb and last ten times longer than conventional bulbs. Putting weather strips around the frames of your doors can save about $30 per year. With these minor adjustments, not only will you save money, but you will also do your part in going green.

Now that you have new ways to save and possibly a tax refund coming your way, what are you going to do with your excess discretionary income? Hold off on buying the big flat screen that is now 60% off. If you have any credit card debt, eliminating it should be the first thing you do with extra money. If your card charges 20% of your balance in interest, you might as well throw that money in the trash can.

Second, do you have an adequate emergency fund? A family should have between 3 and 6 months of expenses available in cash-like investments in case something unexpected occurs. This fund should be separate from the investments you have saved for retirement or future expenses. Third, how much are you saving? In theory, those working should be saving 10% of your income. Now I know that may seem like a lot and if it’s not possible to save that much, don’t get discouraged. Just save what you can. A good way to ensure that you are saving is to set up an automatic draft and treat it like any other bill.

If you are still looking for productive ways to use discretionary money, paying a little extra each month towards your mortgage or car note really goes a long way. Any extra money goes directly toward principal, reducing the amount of interest you pay and the time it takes to pay it off. For example, on a $100,000, 30 year 5% fixed mortgage, an extra $50 a month will save you over $18,500 in interest and cut your term by 5 years! Prioritize these extra principal payments to the highest interest rate debt first.

Lastly, don’t forget to reward yourself. You work hard and deserve a treat every now and then, just don’t get carried away!

I hope you will find the ideas in this article useful. While budgeting is not anyone’s favorite topic, having financial security and knowing that you are living within your means should go a long way in bringing you peace of mind, even in turbulent times.

Market Flash Commentary

2009-02-26T16:09:00.000-05:00

Testing New Lows

As I sit here and write, the major stock market averages are nearing the lows set back in November. There is no mistake as to what is driving this latest down move. For several weeks the markets have been deluged with bad news and uncertainty.

Among those concerning topics are the massive stimulus bill, the second half of the TARP program, unemployment data, near-term deflation, long-term inflation, constrained lending, foreclosures and more. With each new headline there follows some quick analysis in the media. The problem with most news outlets is that each topic is only afforded five minutes or a couple of columns of coverage. It’s important to realize that most of the concepts that are driving the negative market sentiment right now are very complex issues that are well above the head of most reporters and surely take longer to explain than five minutes. In many cases these media reports are highly political publications ripe with misinformation.

In our effort to keep our clients informed, we wanted to take this opportunity to cut through the clutter and share with you our thoughts on the three most important components of the recovery efforts.

The Stimulus Bill

The federal government has just enacted the largest spending bill in the history of the nation. In addition, governments around the world are enacting their own stimulus programs. Ultimately, the goal of any stimulus plan is to fill the void in GDP left by the reduced spending by businesses and individuals. There are numerous problems with these programs.

First, it’s difficult to gauge the appropriate size for a spending package. In theory the level of government interaction should be just enough to offset the private sector shortfall. This is about impossible to measure. You’ll hear a lot of debate about whether or not the plan is too big or too small.

Another issue is that all spending is not alike. Ideally, you would want to inject money in a way that would encourage job creation in the private sector. This is the action that will have a lasting effect. Transfer of payments, where the government simply takes money from one entity and gives it to another, is not helpful in creating sustainable GDP.

The stimulus bill wasn’t written by economists, but instead was written by politicians. As such, there is a lot of wasted money being thrown around. The wasted money, which I estimate to be about two thirds of the package, may have a simulative effect in the short term but once those monies are gone the hole in the GDP will reappear. This is one of the lessons from the New Deal era. Temporary spending will only postpone the inevitable.

Hopefully, the economy will show signs of recovery before much of the money is spent in 2011. We then would have the chance to withdraw that portion. Either way, any benefit from this bill won’t likely be felt until late this year or early next year.

TARP II

The markets are looking for immediate help, and we believe the second half of the bank bailout is where it will come from. The current downdraft in the stock market can be traced back to the latest round of TARP planning, or lack thereof. There has been such an absence of guidance as to how the remaining funds will be used that banks and investors have been left paralyzed.

It is important to understand that this legislation and funding is separate from the stimulus bill. The first round of TARP financing was originally meant to buy troubled debt. As we have written many times in the past year, there is a lot of sound reasoning behind this idea. Removing this debt from the balance sheets of financial institutions and creating an active market in these securities would help the overall markets considerably.

For various reasons, the first round of TARP money ($350billion) was instead directly injected into banks via the purchase of preferred stock of those banks. This action was not necessarily gratuitous but it was not in keeping with the original proposal made to Congress.

Since then questions have been raised about the effectiveness of the first half of TARP funding and what the new administration plans to do next. So far only goals have been announced. We have yet to be shown a plan.

There has been such uncertainty that no one even knows what to call the program anymore. The latest version is the Term Asset Backed Securities Loan Facility (TALF). This name implies that the Treasury Department is refocusing its efforts on jumpstarting the market in asset back securities including those backed by student loans, mortgages, and credit cards.

We believe that of all the recovery plans floating around, this one stands the best chance of really making a difference. For one thing it is the least politically influenced. It is also being crafted by economists in consultation with the private sector.

Hopefully a definitive plan will be announced within weeks. Assuming the market likes what it hears, we would expect a strong short-term rally in equities once a plan is put in place.

Housing Foreclosure Bailout

Dealing with the rising housing foreclosures has also become a hot potato. The debate crosses philosophical, economic, and political lines. Our guess is this aspect of the stimulus debate will ultimately have the least amount of influence on a recovery.

Foreclosures may be on the rise, but still 93% of mortgages are just fine. With nine out of ten people acting responsibly, it’s hard to imagine a bailout of those who are in over their heads to get much political traction. Our guess is that any legislation in this area will be limited in scope.

It is estimated that there are an annual 2 million new homes needed in this country due to demographics. Housing is the one area that will fix itself given time. As prices come down demand will rise. We’re already seeing this in some areas of the country that have experienced the biggest declines in prices.

We don’t agree that everyone who is “upside down” on their mortgage will just walk away from their home. Developers and speculators would be far more likely to default, but they represent a relatively small percentage of property owners.

In Conclusion

Last year we summarized the economic environment as one in which the entire globe was deleveraging. Nothing has changed from then. Virtually every development we’re experiencing today can be attributed to a world downsizing. Individuals and businesses are reducing their debt, spending less, and saving more.

The short-term result is a swift contraction in GDP, and the fallout will be fewer items manufactured and bought. Demand for long-term assets will be temporarily depressed as assets backed by debt are unloaded.

These effects are unavoidable. The government’s job should be to help ease these effects, but they cannot make them go away. We pray that the government’s activities don’t saddle the economy for years to come with the unintended consequences of spending billions of dollars.

We are far less concerned with the Federal Reserve’s activities. While they have greatly expended their balance sheet, the Fed’s actions are far more short-term in nature and can be easily removed as economic conditions improve.

Contrary to the terminology loosely thrown around in the media, the Fed is not spending billions of dollars. They are, in fact, investing billions of dollars or guaranteeing billions of dollars in securities. They are also being paid dividends and interest on those monies. The Fed has openly said that it expects to earn money on its investments. Today Bank of America made a $402 million dividend payment to the government on their TARP preferred shares.

I find it amusing and a little disingenuous to hear politicians talk of “investing” in education, job training, and the like when they are really spending money. But when the government does actually invest in something such as TARP assets, it is referred to as spending.

Unlike TARP, the stimulus bill is plain and simple spending. The only hope to get something in return on those dollars is if the spending spurs developments that will increase future tax revenue. We’ll see.

The media and the government tell us that the American people are causing this “meltdown” by reducing their debt, saving more, spending less, and accumulating cash. Is this really a bad thing? As a nation we are acting more fiscally responsible. We haven’t done that in a long time and it’s a shock to the system. You have to wonder if the solution is for the government to then fill the void by acting irresponsibly.

Yes, this shift towards saving more and spending less has caused short-term economic pain. Let’s try to minimize the current pain while the country goes through rehab, but let’s also hope this responsibility trend continues. We’ll be much healthier in the long run.

Market News

2009-02-26T16:02:00.000-05:00

A Year of Change

2008 will certainly go down as a year of change. Whether it is by choice politically or forced financially, things will definitely be different as we move forward. 2008 will also be remembered as the year that permanently changed Wall Street.

We would sum up 2008 as the year in which the U.S. received a massive margin call. Across the economy, wary lenders demanded that borrowers put up more collateral or sell assets to reduce debts. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer.

The aftermath has left us with tighter lending standards, a financial system under-capitalized, and trillions of dollars worth of securities (at issue) that no one seems to be able to correctly value. The result is a slowing global economy that hasn’t found a bottom. Throughout most of the year stocks proved remarkably resilient to the bad news. That changed dramatically in the fourth quarter.

Going through the numbers, all of the major stock averages were down substantially at the end of the year. The S&P 500 was off 38%, NASDAQ down 40%, Dow Jones 30 down 33% and the Russell 2000 off 34%. European and Asian markets fared even worse, declining between 45 and 50%.

As we’ve written over the past year, bonds didn’t offer much of a hiding place either. Most issues saw their prices decline as risk was re-priced in the market place. There is still no market for a wide range of asset-backed bonds. Even the normally boring municipal bond market took a hit when the bond insurers lost their AAA ratings. Treasury bonds were the only exception to this retraction as invertors sought safety over anything else.

Many lessons can be learned from the experiences of last year. Among other things, those lessons include the dangers of excessive leverage, the interdependence of our financial institutions, the importance of transparency in the markets, and the unintended consequences of government policies.

It is yet to be seen how the regulatory landscape will be changed as a result of the past year, but it surely will. There are two observations that can be made regarding the financial system regulatory environment. The first is that it is highly unlikely that government regulations can keep up with the speed of evolution in the markets. Some of the most significant trading venues today were only niche markets a few years ago. Secondly, it is unclear how many of these problems can be legitimately attributed to a failure to regulate.

Government’s never ending desire to get bigger would have us believe that the solution to avoiding this kind of pain in the future is increased regulation. However, it’s interesting to note that if you were to rank the severity of problems in the system, you would find that the most affected companies and industries are also the most regulated.

We believe systemic changes in the financial markets are what is most needed, not increased oversight. An obvious and necessary change is for investors to require issuers of asset-backed bonds to continue to have some culpability after the securities are sold. Underwriting standards would be greatly improved. Also, markets that are large enough to pose an economic threat should be transparent and have a central clearinghouse that would allow others to gauge the inner dealings. Accounting rules should better address how to handle pricing securities that don’t have a liquid market.

These are not necessarily regulatory changes in oversight, but instead are changes to the way Wall Street does business. These types of changes do need to be initiated through legislation. There are plenty of oversight rules in place. The problem seems to be how well the overseers are doing their job, which leads us to the next subject – scandals.

Show me the Money

Times of stress always expose the weaknesses in a system. So it goes with the current market crisis. Among all of the bad news in the financial markets, one of the most shocking developments was the self-disclosed Ponzi scheme run by Bernard Madoff. The reported 50 billion dollars in losses was yet another blow to the already shaken markets. Not only are these losses the largest ever of this type, but they impact an amazing array of individuals and institutions.

One of the more surprising elements of this case was the apparent failure by the securities examiners to catch this scheme in the twenty-plus years it continued to grow. Throughout those years there were a number of clues that something was amiss. The most obvious clue was the remarkably consistent returns by the fund. These supposed returns spanned both good times and bad. This time period included the collapse of Long Term Capital, the global currency crisis of the mid 1990’s, and the bursting of the tech bubble in which the overall market lost half its value. During those same times the fund reported double-digit returns year after year. This incredible performance is what allowed the fund to attract so many assets.

The secretive nature of the fund’s investment techniques led other managers to question the ability of Madoff to generate such consistent returns. Several people went so far as to raise these questions directly with the securities regulators only to be dismissed. Now that the scam is out in the open, fingers are being pointed in every direction.

How could this have gone on for so long? While the details are only now emerging, there are two factors which could account for the ability of Madoff to deceive so many people. First, investor greed led many people to suspend their critical thinking because they wanted to believe that this was easy money simply there for the taking. Secondly, Madoff owned both the fund management company and broker/dealer that held the accounts. This meant that he was both reporting the performance and generating the statements to back up those performance claims.

The two lessons from this scheme are: 1) The importance of asking hard questions when your investment manager is always making money regardless of the market conditions, and 2) the need for checks and balances in monitoring your portfolio performance.

You should always be concerned when your managers’ performance is radically different than their benchmark over time. This means they are doing something very different than that benchmark. While this can be good when the benchmark (aka, market) is going down, that strategy should not work when the benchmark is going up. Conversely, a strategy that is greatly over-performing in up markets should get clobbered in a down market. Managing risk should be accomplished through asset allocation and not changing strategies within an asset class. When investors see this, they should be prepared to ask a lot of questions and get specific answers. Your investments should never be a “black box”.

Never underestimate the need for checks and balances. Whether it is intentional or not, mistakes can happen. You should always know what controls are in place to protect your assets and accounts. A good example in our business is the role of the custodian, which for our clients is Schwab. We report positions, performance, trades, etc to our clients at least every quarter. What we send out can be independently verified by the statements and trade confirmations our clients get from the custodian. In the Madoff case, his company was generating both, which as you can see is a major conflict of interest.

We reconcile our portfolio balances and activities to Schwab’s reports every day using software that is completely independent from theirs. So if there is ever a difference, our staff indentifies why and what to do about it the same day. While rare, the differences are almost always due to timing of payments. We adhere to the principle put forth by Ronald Regan as he would say about arms treaties, “trust but verify.”

Another troubling aspect of the Madoff case is the fact that no one really knew what his fund owned. Even the other investment advisors directing their client assets to him didn’t know what his fund was doing or what investments it owned. As investment managers ourselves, we cannot imagine putting our clients in that situation. This is every bit as egregious as Madoff’s thievery. Unlike Madoff and the many financial advisors who kept their clients in the dark, we believe it is important for you to understand the strategies we are employing and know what securities you own.

So What Do I Own?

We attempt to send out commentaries and articles on a regular basis because we want you to understand the activity occurring in your portfolio as well as the securities it contains. You may have noticed a few consistent investments in the core area of the equity portion of your portfolio, and we want to alleviate any confusion as to what these core mutual funds and exchange-traded funds are designed to achieve. Some focus on capturing the broad market while others are more focused.

While each client’s personal situation is different, we include these few common investments and strategies in almost all of our client accounts because they are broadly diversified and thus less volatile. However, we want to stress that we do not use “cookie-cutter” accounts in which each portfolio contains the same investments in the same amounts. We simply include these investments as the backbone of your portfolio due to their well-diversified nature and then structure the rest of your portfolio around these investments based on your individual circumstances. The exposure to these holdings will vary from one client to the next, as it should, but we still wish to take this opportunity to explain exactly what these common investments are and what they seek to accomplish.

SNXSX – Schwab 1000 Select Index Fund

Indexing is an important component of any diversification strategy, and that is what this mutual fund from Schwab is accomplishing. The Schwab 1000 consists of the 1,000 largest companies in the United States, and the index is designed to be a measure of large-cap stocks. What is large-cap and why would you want a large-cap mutual fund? Market capitalization is a measure of public consensus on the value of a company, so bigger companies carry the investor sentiment that these companies will continue to survive and thrive. Large cap companies also became large for a reason, usually attributable to significant competitive advantages and domination in their respective markets that will most likely continue. Therefore, your equity portfolio is heavily weighted in large-cap indexed assets because these stocks are proven strong performers.

We chose this particular large cap mutual fund because it has very low fees and high diversification across a very large number of companies, thus reducing risk. You might wonder why we chose a fund run by Schwab, but the company that operates the fund is generally unimportant because the fund is not actively managed by a portfolio manager. In other words, the fund owns a set of stock and the fund changes value as the stocks it owns change value. No one at Schwab or any of the other following companies are buying or selling securities in the fund each day. This is a positive situation because it means you do not have to rely on a portfolio manager to perform. You must simply rely on the companies contained in the fund to perform.

MDY – Standard and Poor’s MidCap 400

The large, mid, and small-cap indexed components in your accounts can be seen as the building blocks of a diversified equity portfolio, and this S&P MidCap 400 exchange-traded fund is the main mid-cap element. We use MDY because it carries the inherent advantages of being an ETF; low fees and simple trading rules. This particular ETF consists of 400 mid-cap companies chosen based on their size. While mid-cap companies have proven their worth and are still quite large relative to all companies in the country, they are smaller than their large-cap counterparts and thus carry slightly more risk. However, with higher risk comes higher reward, and this mid-cap holding tends to outperform large-cap holdings during periods of growth. But even with this somewhat increased risk due to smaller companies, this ETF avoids company-specific risk by diversifying across many mid-cap companies.

SWSSX – Schwab SmallCap Index Fund

The final portion of your main equity holdings will be this small-cap indexed fund. This fund invests in 1,000 of the largest stocks that can still be classified as small-cap. Many of the stocks in this category will eventually grow to be re-classified into the mid-cap and large-cap groups. While this mutual fund carries more risk than the large or mid-cap holdings, the fund is sufficiently diversified across 1,000 companies, thus reducing the risk intrinsic to investing in small-cap stocks. While we wish to avoid the high risk of investing in individual small-cap companies, we take advantage of the high possible returns of small-caps by investing in this well-diversified fund.

DLN – WisdomTree LargeCap Dividend Fund

Like the Schwab 1000 fund, this ETF also focuses on the large-cap portion of the stock market. However, the WisdomTree LargeCap Dividend fund chooses companies based on their dividend rather than their size. Basically, WisdomTree looks at the total universe of stocks, and then chooses 1,200 with steady and high dividends. Then, WisdomTree takes the top 300 large-cap companies from this list, resulting in a group of well-known companies with high dividend payouts. The fund accomplishes two goals; it includes only large-cap and thus less risky stocks, but it also provides a healthy cash flow due to substantial dividends. Investing in dividend-paying stocks has historically proven to be a winning strategy in the stock market because dividends have historically made up half of the market’s total return. This fund allows us to capitalize on that strategy without exposing your portfolio to the risk of individual companies.

DON- WisdomTree MidCap Dividend Fund

This ETF is very similar to the WisdomTree LargeCap Dividend fund, except it focuses on the mid-cap portion of the market. It operates by again looking at the list of 1,200 dividend-paying stocks, removing the 300 stocks included above in the WisdomTree LargeCap Dividend fund, and then taking the next large chunk of stocks that would classify as mid-cap size. These companies have reliable dividends and the ETF is diversified across more than 600 companies.

DES – WisdomTree SmallCap Dividend Fund

Again, this ETF follows a dividend philosophy, but it contains small-cap stocks from the list of all high-dividend paying stocks. While any small-cap fund is more risky than the mid-cap or large-cap holdings, the fact that these stocks can afford and are willing to pay a dividend despite their small size is a great sign of financial strength. Therefore, we believe this ETF will provide the opportunity to receive income through dividends, reduce the risk that might be present in other small-cap stocks, and potentially make larger gains than are possible with large or mid-caps.

DWM – WisdomTree Dividend Index of Europe, Far East Asia, and Australasia Fund

This is a dividend-weighted fund that includes dividend-paying companies in the industrialized world outside of the United States. It is comprised of over 2,300 companies from 21 countries, including 16 developed European countries, Japan, Australia, New Zealand, Hong Kong and Singapore. As you can see, this is a highly diversified ETF with the intention of gaining international exposure while reducing the risk of adverse events in individual countries. While the fund contains large, mid, and small-cap companies, 70% of the companies are large-cap. Thus, the fund includes the most successful companies from each of the countries. We believe diversifying outside of the United States is a smart idea because it reduces the risk of being invested in only one country, and it also allows investing into foreign markets that are expanding.

EFA – MSCI Europe, Australasia, and Far East Asia Fund

This indexed ETF is very similar to the WisdomTree international dividend fund, however the MSCI Europe, Australasia, and Far East Asia (EAFE) fund includes companies based on size rather than dividends. It consists of companies from the same 21 countries as the WisdomTree fund, but it simply ranks companies based on size and chooses the largest. This fund also avoids emerging markets, and it is well diversified. While we could have chosen to only include the WisdomTree fund or the MSCI fund, we chose to include both a dividend-weighted and capitalization-weighted international fund in our accounts to attain increased diversification and less risk.

EPP – MSCI Pacific ex-Japan Index Fund

This ETF is unique in that it diversifies your portfolio into the Far East pacific regions of the globe. It includes companies from 9 countries: China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. So why does the fund exclude Japan? The simple reason is that the fund is attempting to focus its attention more southward than Japan, but also Japan is included in many other MSCI international funds and this fund provides an opportunity to diversify away from Japan. While this fund is more risky than the very large and extremely diversified global funds listed above, the MSCI Pacific ex-Japan ETF provides an opportunity to get invested into a region that shows great growth potential.

ILF – S&P Latin America 40 Index Fund

So what about this side of the globe? We are diversified in the western hemisphere as well. The S&P Latin America 40 ETF represents major companies from the Mexican and South American markets. The index draws from the four major Latin American countries: Argentina, Brazil, Chile, and Mexico. South America has recently shown great growth, and as these markets become more developed and industrialized, they will grow even more. We chose this particular fund because it includes only the very largest 40 companies from a region that could otherwise be more risky. These 40 companies are the strongest members of their respective segments of the market in Latin America and South America.

SDS – UltraShort S&P 500

The UltraShort S&P 500 exchange-traded fund is one of our most important hedging devices because it seeks to provide the opposite of the S&P500, times two. So, the ETF attempts to protect against losses on your core equity holdings by returning twice the opposite of the market. For example, if the S&P500 moves down 3% in one day, the UltraShort fund moves up approximately 6%. SDS is a great hedging tool during difficult market times because it moves upward as the general market posts losses. SDS alleviates some of the downward pressure on your equity portfolio.

Summary of Portfolio Positions

In response to the difficult economic conditions this year we have made significant changes to our equity allocations. First of all we have greatly reduced our equity allocation overall. Next we have reduced or eliminated the company specific risk by moving away from individual stocks and using indexed ETF’s. Lastly, we have spread our equity exposure around the globe to help reduce the volatility of any one currency.

Of course, the previous equity descriptions do not include the fixed income allocations present in our client portfolios, such as bonds or alternative fixed income. These also serve to reduce volatility and provide income during these difficult times.

What's up in Washington? (February, 2009)

2009-02-15T09:46:00.000-05:00

What is really going on in Congress and the White House? In the past year, the word "change" has become the most overly used word in the English language. But what change will actually occur and how will it affect your life? President Obama made over 800 campaign promises... it is impossible for him to deliver on every one of those promises in only four years. But however you feel about the new administration, some things are about to change. I have sifted through the media muck to highlight the probable affects of this new administration and our new Congress. I am pleased to present the top 10 ways Washington will affect you in the next few years:

1) It’s all about the ice cream. Now what does that mean? To explain, I will simply relay a story that I received as an email forward. This story was first told by a teacher in the Nashville area:

"The most eye-opening civics lesson I ever had was while teaching third grade last year. The presidential election was heating up and some of the children showed an interest. I decided we would have an election for a class president. We would choose our nominees. They would make a campaign speech and the class would vote.

The class did a great job in their candidate selections. Both candidates were good kids. The day arrived when they were to make their speeches. Jamie went first. He had specific ideas about how to make our class a better place. He ended by promising to do his very best. Every one applauded. He sat down and Olivia came to the podium. Her speech was concise. She said, "If you will vote for me, I will give you ice cream." She sat down. The class went wild. "Yes! Yes! We want ice cream."

A discussion followed. How did she plan to pay for the ice cream? She wasn't sure. Would her parents buy it or would the class pay for it? She didn't know. The class really didn't care. All they were thinking about was ice cream.

Jamie was forgotten. Olivia won by a landslide.

Every time the government offers ice cream, fifty percent of the people react like nine year olds. They want ice cream. The other fifty percent know they're going to have to feed the cow and clean up the mess."

Unfortunately, this story sums up the first big change coming out of Washington... Some people will get ice cream and the other half will be left cleaning up after the cow.

2) Tax relief for some and pain for others. The Obama Administration plans to keep the estate tax even though it is scheduled to expire in 2010. This will hurt wealthy people, since the wealthy are the ones with an estate to tax. However, the White House has included a series of tax cuts in the $850 billion stimulus plan which you may be able to take advantage of.... a tax credit of $500 per worker or $1,000 per working couple. Those tax breaks would phase out for individuals making more than $75,000 a year and for couples making more than $150,000 a year. The stimulus plan also intends to add $70 billion in tax cuts for middle-class taxpayers stuck paying the Alternative Minimum Tax. And finally, President Obama has expressed a desire to wait to implement his tax hikes on the wealthy, which is a good sign. But the tax increases will come eventually, probably in 2010 once a recovery is underway.

3) Overhaul of the healthcare system. There are so many billions of dollars earmarked for healthcare projects that I cannot even begin to list them now. But in the end, Medicare and Medicaid are set to expand by over $100 billion. Also, the Administration wants all Americans to have access to healthcare... even those with pre-existing conditions. This is equivalent to crashing your car into a tree and then calling Allstate for insurance coverage of that wreck. In reality, you cannot buy an insurance policy on something you have already wrecked... unless it is your body and you are poor enough to qualify for it. The private insurance companies may not be able to afford these costs, so patients with pre-existing conditions could end up on a government funded program.

4) Your energy bill will go down! But this is after $59 billion in spending on energy and our power grid with benefits not being seen until 2011. However, an updated power grid and energy system would strengthen our nation's competitive advantages.

5) A more competitive public school system for our children. Now this is a cause I can get behind. The President has supported pay-for-performance public schools. Our schools would greatly benefit if our best teachers were nicely compensated... because other teachers would find an incentive to work harder and become better teachers too! He also supports the rights of parents to decide which schools their children attend.

6) Breaks for businesses, but mostly for losing companies. While I cannot understand the thinking behind only rewarding those who are failing, I'll take what I can get. The stimulus plan includes a provision to allow money-losing companies to carry current net operating losses back 5 years instead of 2 to reduce tax liabilities in previous years (and maybe get some money back now!) Loss carrybacks are similar to loss carryforwards, except companies apply their net operating loss to preceding years instead of subsequent years’ income. For example, if a company had a loss of $1,000,000 this year but had a gain of $1,000,000 five years ago, the company could apply this year’s loss to the gain five years ago and wipe out the tax liability five years ago. Since the company paid taxes back then, the company should get a refund. The stimulus plan will also offer relief for companies investing in new plants and equipment as well as those hiring youths and veterans. Any stimulus for business is crucial right now.

7) "Cut taxes on all Americans making under $250,000 a year." Not exactly. When the Bush tax cuts expire in 2010, taxes will rise on everyone and probably settle around Clinton-era levels. And the $250,000 number is probably going to be lower, but no one knows exactly what it is going to be.

8) The South becomes the new Detroit. While the stimulus bill has preoccupied most people’s minds lately, I have not forgotten about the bailout of GM and Chrysler. The magnification of such major problems in Detroit served to also magnify the success of car manufacturers in the South. An interesting development that has already been under way in recent years is the South’s new role as host to foreign-owned automobile plants. But foreign-owned does not mean foreign workers, and the car companies that call Georgia, Alabama, Mississippi and other Southern states home employ thousands of Americans. In fact, two-thirds of foreign cars are actually built in the South in nonunion shops where it costs at least $2,000 less to build each vehicle than it does in Detroit. And to make matters worse for the Big Three, GM supports 400,000 retirees while Toyota only supports 700 because the Southern autoworkers are a fairly young population. But there is good news… GM, Chrysler, Ford, and Congress are catching on! The South is the place to be to build vehicles due to a small union presence, lower taxes, and a welcoming attitude towards automobile plants. The South is becoming the new Detroit, which is a boon for small Southern towns that are supported by automobile plants.

9) The government enters the hedge fund business. TARP could be renamed “The United States Hedge Fund” because it would more aptly describe what the bailout money is accomplishing. Hedge funds borrow short, lend long, and hope to make money off the spread between the short and long rates, which has become the government’s new business. While this is the first time the government is truly “investing” directly in securities, neither the government nor the media will be calling it that. Even though we are told that every other spending program in this country is an “investment” in our country’s future, TARP does not get the golden title of “investment” that every other entitlement program gets. Instead, it is an ugly “expense” with the taxpayers footing the bill. In actuality, all of the programs are expenses and we foot the bill for every spending program. But expenses are necessary evils, and hopefully the investment in our banking sector will pay off.

10) The need to dodge traffic cones. The government’s new New Deal includes huge infrastructure spending that won't really begin to affect the economy until 2010. But get excited about dodging lots of traffic cones! From bridges to water slides, construction cones will be everywhere. And that is about the only way the new New Deal will affect you until these projects approach completion in 2011 and 2012. But once they are completed, our infrastructure, particularly bridges, will be much more stable.

It is important to remember that we have elected a president, not a king. Congress makes the laws and The President in fact only has two major powers; the ability to veto and send the troops to war. So, the real success of the Administration hinges on the success of the new Congress and the ability to keep special interests at bay when important bills are proposed. Every single one of the ten points above falls outside of the power of the President, and therefore we should be much more watchful of Congress. President Obama has shown an admirable desire for bipartisanship in Congress, and I think we all commend him for that. He appears to truly want the best for America, and I remain hopeful that he and Congress will make the best choices for our ailing economy and for each of you.