Doom on the Horizon

The correction is coming, the correction is coming.  Do I sound like Paul Revere announcing the British?  Well, yes, that’s my intention.

Now I could have written this piece six months or even two years ago.  I would be saying the same thing:

           

o   Stay diversified

o   Have enough cash on hand to wait out 2 to 3 years of a down market

o   Buy low, or lower as the markets go down if you have extra cash

o   Don’t pay too much attention to day-to-day movements

o   Look to rebalance two to four times a year.  The calendar is not sacred, but percentages should be.

I have often remembered and repeated Warren Buffet’s advice: “Be fearful when others are greedy; and be greedy when others are fearful.”  The last big downturn 2008-to early 2009 gave me the opportunity to put this strategy into action.  My partner Anna will attest, I was buying on really bad days.   It served me well.

Last year I cut back my asset allocation from 90/10 stocks to bonds to a more realistic 60/40 given I have five years or a little bit less until I plan to start spending some of that money after long years of saving and investing.  I also have about two years of cash on hand for down market investing or spending without touching investment monies.

It’s all drama.  That’s my summary of day-to-day financial news.  The bolder or more dramatic the headline, or the scrolling BREAKING NEWS tag running across the screen, the more I want to turn off the TV, computer, or fold up the newspaper and magazine and throw them away.  Six months later it usually was no big deal.

So why this post?  I want my family, friends, clients, prospects and other allied advisors to be prepared.  You’re the reason I’m doing this. 

o   Don’t get caught up in the day-to-day dramatic news

o   Get out that checklist on an annual basis to cover all your bases (If you don’t know what they are, or don’t have a checklist, email me)

o   Reaffirm your life priorities, not just your financial goals

o   Enjoy the rest of summer.  It’s looking good.

Have a Digital Control Plan

My best friend died two years ago this month.  I still miss him.  But we had a mutual pact: a digital control plan.  A digital control plan is invoked when someone is incapacitated or dies.  A surrogate takes over control of that person’s digital accounts, websites, blogs and files.

I had a sealed envelope and an encrypted hard drive located in my friend’s gun safe eight miles away from my home office.  He had a sealed envelope located in my safe in our garage.

I went to the safe the day after he died, sad as all get out, and retrieved his envelope to hand over to his only child, a 40 year old son I had known since age six.  

My friend grew up with computers and the internet.  He worked in Air Force intelligence and later at the National Security Agency.  He taught me everything I know about computers and the internet up until the time of this death.  He helped me put together my first computer from a Heath kit by instructing me over the telephone.  He was very smart and talented in those electronic ways.

So how can you benefit from best friend’s advice?

1.     Think about who will be your digital surrogate and also have a backup digital surrogate.  Implement a joint plan.

2.     Confirm that the storage is secure and has very limited access.  Provide the same for your surrogate.

3.     Ascertain a safe distance away from each other.  We thought eight miles was enough distance since weather, fire, utility outage and civil disruption were not major factors, in our opinion.

4.     Learn how to encrypt an external hard drive and use it

5.     Use a tamper revealing envelope

6.     Don’t forget to update your envelope contents as often as you change master password(s) and you create/update the external hard drive for offsite storage.  Remember, the bad guys force us to change our passwords a lot more frequently these days.

R.I.P. MSgt. Robert Lloyd, USAF Ret., 1944-2012

Added:

Don’t forget about cloud storage.  I use SugarSync, and Box.com.  Don’t be stuck with one provider.  What happens if your sole provider goes down?  Always have a backup.

Did I Make a Big Mistake With Your Portfolio?

Watching PBS’s National Business Report recently, I saw an interview with Warren Buffet.  Now that kind of interview always gets my attention.  I stopped multi-tasking to pay rapt attention to what he had to say.

Mr. Buffett, the most recognized and successful investor of our times, discussed some of the provisions in his will in his latest letter to clients.

“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.”

Should I treat some retired clients like Warren Buffet is going to treat his widow?

As I pondered this very, very simplistic strategy, I recalled the advice of Rick Ferri, William Bernstein, Charles Ellis, and Larry Swedroe whose wisdom I have followed for more than a decade as an hourly financial advisor. Maybe I was being too complex for some of my clients in the withdrawal phase?

Now, what is too complex, you ask?  Well for starters, we deal with lots of retirees, both single and married, who don’t want to manage their own investments, but also don’t want to pay a manager one percent or more for this task.  They want to pay us an hourly fee instead.

As a caveat, just like Mr. Buffett’s widow, the portfolio is probably not the sole source of income, but still a major generator of cash to live on beyond social security and perhaps a small pension.

We usually offer a recommendation of three to eight index funds or exchange traded funds tied to indexes as part of a withdrawal strategy that includes three years of federally insured cash (think CDs and high yield savings accounts)  for short term withdrawal.  That way, our clients don’t have to worry day to day about the stock and bond markets.  (Think Ukraine and its impact on the markets lately.)

So, to my conclusion, I think maybe I’m going to recommend reducing the number of holdings for some retirees who fit the situation described by Mr. Buffett.   Recently, Dr. Jim Dahle in his blog The White Coat Investor reported on a physician couple who had only invested in an S&P 500 index fund for the past 10 years and have done extremely well.  Now that might not work for all of our retirees, but it did give me more information to digest and encouraged me to surface this strategy with some of our clientele.

So what do you think we should do?  I look forward to your comments.

Personal Finance Book For Dr's Tops Best Seller List

“The White Coat Investor – A Doctor’s Guide to Finance and Investing” by Jim Dahle, MD, should make many wirehouse brokers and life insurance agents shake in their boots.   You can quote me on that.

If there was ever a book that needed to be provided to every physician, dentist, veterinarian and other highly paid professional right out of expensive postgraduate school, this is the one.   The author, an Emergency Room physician, can be faulted for quoting some fly by night financial advisor, “This is the book I’d like to force feed physicians and other ‘white coats’” by that would be me so I will refrain from dissing the endorsements that are made on the inside flyleaf or back cover, but they are impressive, in my humble opinion.

The foreword is by William Bernstein, MD, author of “The Four Pillars of Investing” -the book I have most recommended to clients for over ten years.  This book by Jim Dahle ignites my enthusiasm to recommend it any potential high-income professional to read at the beginning of their career just as much as I have done with Bernstein’s book.  And then the author goes on to thank Rick Ferri, my favorite financial author, for providing him advice and approval.  I knew it was a must read even before I started.

If you’re not a medical student or physician in your residency, you can lightly pass over a couple of the 16 chapters, but don’t be too blasé about the topics of student loans, getting into medical school or budgeting.  These topics are close enough for many would-be professionals who have to borrow for their education that it makes these chapters worth reading.  The chapters are short, so a 4-hour read for the whole book is a possibility.

Why do you think this physician spent the time and money to write this book?  It’s self-published after all, so you know he put his own money on the line. I’ll tell you why, in my opinion.  Doctor Dahle observed the racket that likes to separate the hard earned money from the postgraduate school trained investor/saver by appealing to their ego and fear or greed.

Most purveyors of financial products and many money managers use techniques honed after decades of trial and error to capture their prey.  They know about human behavior and use it to their advantage, and the author lays that out in clear detail. Now, don’t get me wrong. This ER doc doesn’t lambast all of these so called financial advisors, only the most outrageous.  His examples, and stories from other doctors, detail experiences and how to live the good life without falling victim to high priced products and services that make more money for the sellers than the buyers.

Spoiler alert.  Early in the book Dahle tells his readers to “live beneath your means”.  He goes on to outline how graduate level living and paying off debt and saving early for significant goals are the keys to success.  I couldn’t have said it better or clearer.  The charts and graphs that are included do a good job of reinforcing the understanding of key concepts.

This book not only covers investing but taxes, loans, getting into medical school, estate planning and asset protection.  I will be buying copies of this book in bulk, not only to save money, but also to save my clients money and you can quote me on that, too.

It’s a short read as personal finance books go and contains notes and links to his blog and works by others on germane topics at the end of each chapter.  I’m going to highlight several well-written blogs of his when I pass out this book.

Thank you, Doctor Dahle.

BREAKING NEWS: MAINSTREET SOLD TO NEXT GEN. PLANNER

Dear Clients, Friends and Colleagues:

For several years, you’ve probably known that Anna Sergunina was my exit strategy.  In 2008, we developed a plan to transition to the next generation slowly or, worst case scenario, immediately in a crisis.  Well, the crisis has not happened (thank you very much), but phase two is being implemented slowly, but not too slowly.

On January 1^st Anna purchased all the remaining 95% of the shares in our corporation that she did not own and is now the owner of the business.  I’m the only employee.

We outsourced some of our detail work to registered paraplanner Kathy Watkins in Chicago and some of the administration, including initial client contact, appointment setting and follow-up to The Intelligent Office (IO) in Washington, DC.  Karen and Kyna are the two most common contacts you are dealing with at IO.

Anna is actively searching for CFP® planners to join us both here on the east and west coasts.  I will be the trainer.

My plans are to work full time for the next few years, but at some point I will stop taking on new clients and just help the new planners with their new clients.  I will continue to service existing clients as long as they have confidence in my skills and I’m able to provide answers to their questions and help them make good financial decisions.

I will continue my blog and my radio show and my tweets. Thank you for a wonderful 12 years as the founder and owner of MainStreet Financial Planning. I couldn’t have done it without Anna, and now she can’t do it without me (or at least that’s what I’m telling myself).

Sincerely, Jim Ludwick                               

Watch Anna's video announcement: http://goo.gl/KXby0E

Press Release: http://t.co/KJKn61TrPV

Why didn't I do that good? Investors want to know...

It's a new year and all the investment results are in.  I keep seeing 30+ percentage point increases for several assets classes and mutual funds for the year just past.  You probably do too.  Now everyone is wondering why their accounts didn't go up 30 percent and why some of the funds, namely bond funds, went down in value.

Attention: An account or total holdings is NOT an asset class. That's all your eggs in one basket.  Today's big winner is liable to become a big loser in a correction mode.

Bonds and bond funds got repriced lower by the market last year just like houses did a few years ago.  Everyday, custodians must mark securities as if they were sold at the end of the day, what price would they fetch.

When interest rates rise, then the value of the bond or bond funds currently held are not worth as much to a buyer since new bonds just being issued pay more that the bonds or bond funds you hold that feature a lower interest rate.  I know that's a long sentence. Sorry.

The same holds true for other asset classes or mutual funds that weren't as popular last year.  Gold funds, mining funds, energy funds didn't do as well and were sometimes worth less at the end of the year.

My old boss, Ken Fisher, said it best: If investors want more of a stock (mutual fund) then the price goes up.  If they want less of a stock or mutual fund, then the price goes down.  Investors have alternatives to where their money is currently deployed.

Remember the sage adage, "Buy low, sell high"?  Well now might be the time to implement by re-balancing.  I know its hard to sell last year's winner since we assume it will continue to go up, and buy last year's loser assuming it will go down some more.  Both opinions could be correct.

However, over time, it appears that the market is self correcting and usually does it at some surprise point no one can predict in advance.  Re-balancing to a target percentage has proved to be soundest strategy over longer periods of time, say five to ten years.

If you'd like to read up more on this philosophy, then we recommend Charles Ellis' "Winning the Loser's Game" 6th edition, and William Bernstein's "The Four Pillars of Investing" second edition.

So be happy that a lot of your holdings went way up last year and that you are ahead of your target percentages for the past five years.  Don't dwell on the losers so much that you miss an opportunity to dollar cost average a bargain if it still is a viable asset class.

Good luck.  We all will need it this year.

Plan Ahead. Did I say plan ahead?

October 15^th has come and gone.  If that wasn’t an important date for you this year - congratulations.  Your lack of focus on October 15^th probably means your 2012 taxes were not filed at the last minute deadline this year.  But look out.

Next year could be different.  That wonderfully misnamed “Taxpayer RELIEF Act of 2012”, actually passed and signed into law January 2, 2013, is waiting to surprise you.  A previous tome ridiculed the 1984ish naming of things (double speak) to mean something other than what it really is, but we can’t help ourselves from

pointing it out once again.

The point of this message is that now is the time to start learning and calculating your tax consequences for this year while you can still do something about them.  I hope you desire to reduce your taxes to the lowest allowed by law.  That’s going to take some work this year as a lot of rules and limits have changed.

So what can you do between now and the end of the year to lower your 2013 tax bite?  Here’s my three simple suggestions:

1.     Take your tax preparer out for breakfast or lunch.  Tell him or her you’d really like to pay the lowest amount possible this year and that you’d appreciate any suggestions.  If you don’t ask, you don’t get, my father frequently reminded me.   It applies here.

2.     Look at your taxable securities investments and see what your gain/loss position is at the moment.   Do you have any “carryover” losses from last year?  Could you sell something now at a loss and buy it back 31 days later to offset some gain you might recognize if you sold one of your big winners and then bought it back again.  This is a technique we call raising your basis, or increasing the number that you have to report to the IRS as your purchase price.  Sound confusing? Well, a short reminder that your author gives advice by the hour on this particular topic.

3.     Charitable gifts.  How about gifting some stock or mutal funds to your church or other favorite charity?  Instead of giving cash, giving appreciated stock helps you avoid the capital gains tax and moves your tax bill slightly lower versus gifting cash and then claiming a deduction.

So there you go.  Wake up and take some action today.  It will be 2014 before you know it and one of these ideas takes you 31 days or longer to fully implement. Get moving.

Are you planning ahead this year? Comments?