Financial adviser's motives, expertise, methods crucial to managing your wealth

good article if you're looking to find a financial adviser.
http://http://www.washingtonpost.com/wp-dyn/content/article/2010/05/29/AR2010052900289.html

Financial adviser's motives, expertise, methods crucial to managing your wealth
By Bob Frick
Sunday, May 30, 2010; G03
Why do so many of us who seek advice about money shy away from asking the hard questions of financial advisers? Maybe because money is such a taboo subject -- after all, survey after survey finds that given a choice to discuss sex or money, more of us feel comfortable with pillow talk.
But understanding your financial adviser's motives, expertise and methods is crucial to managing your wealth and will certainly help you sleep better during turbulent financial times.
First check an adviser's qualifications and references. Then ask these key questions:
Do our goals match? If an adviser works solely or partly on commission, you might have a problem. You can never be sure whether the investments the adviser is buying for your portfolio are the best he can find or the ones that generate the largest fees. When an adviser wants to swap a few mutual funds in and a few out, is he doing so to improve your performance or because he needs to score more commissions to make a car payment?
The simplest way to unite your goals with those of your adviser is to pay a fee tied to the size of your portfolio -- say, 1 percent of assets per year. When your portfolio goes up, and only when it goes up, so does your adviser's compensation.
Other methods that avoid conflicts of interest are to pay for advice by the plan, by the hour or by an annual retainer. But those don't provide as much incentive for your adviser as a plan linked to assets.
How much will your services really cost me? Your adviser's fee is only a part of your costs. If your adviser trades securities often, brokerage commissions can add up. And maybe your adviser likes mutual funds or other investments with high annual expenses.
Get an accounting of total annual fees and expenses for the adviser's typical portfolio. A thrifty adviser can find plenty of cheap mutual funds and exchange-traded funds and won't trade often, keeping the annual cost of your portfolio to well below 1 percent of assets (not including the adviser's fee).
How do you measure performance? This is definitely a question to ask upfront. At your annual checkup, your adviser can pull out all kinds of measures to make his performance look better than it really is. Decide what standards you're going to use before turning over a penny. Be sure to ask current and former clients how their portfolios performed.
Here's our suggestion: Your portfolio should do at least as well at the market averages. So the portion of your portfolio in big U.S. companies should at least equal the performance of Standard & Poor's 500. Likewise, the portions in small-company stocks, foreign stocks, bonds and so on should equal or better their market-average doppelganger.
Equaling the averages is a no-brainer; all your adviser has to do is invest in index funds. In fact, many advisers follow just that strategy. At any rate, studies have shown that your mix of assets is far more important in determining performance than the choice of individual funds or securities.
What do you know about me? Many advisers use a "portfolio in a box" approach -- that is, they figure that if you're of a certain age and generate a certain amount of income, you should hold investments X, Y and Z.
But the past decade has taught us that we all come with biases that affect our comfort level with investments and their performance. For example, some of us love risk, while others despise it. Plus, we put different priorities on different goals.
A good adviser will ask you questions to divine your attitudes toward risk, different types of investments, your need for security and your priorities. Many will have you fill out questionnaires on those topics, although advisers should combine the surveys with heart-to-heart discussions.
The payoff for spending time on such discussions is a portfolio that reflects those variables.
Do you time the market? Most advisers who try to time the market won't admit to it, at least not in those words. Timing the market means trying to predict future movements of asset prices and moving money in and out of markets to take advantage of those predictions. Relatively few investors have done so successfully over long periods. If your adviser were one of them, she would probably be running a multibillion-dollar hedge fund.
By asking an adviser about her investment strategy and how it changes with developments in the markets, you'll discover whether she's a closet market timer. Watch out for an adviser who says, for example, that she thought foreign stocks were getting pricey so she shifted clients' money from overseas shares to commodities. Wholesale changes of that sort rarely pay off, and, if they're done poorly, your portfolio could shrink faster than an igloo on Hawaii.
Do you take a holistic approach? You might want your adviser just to manage your money. That's fine. But to really take advantage of a pro's expertise, you want someone who is versed in estate planning, insurance and a host of other areas that work best when orchestrated together. That includes estate planning, life and long-term-care insurance and investing for college.
How can you help me transition to retirement? Making money grow is just half the challenge. A good adviser should lay out a strategy on how you'll reduce risk in your portfolio as you approach retirement age, even if retirement is years away.
The adviser should have a plan for setting up various buckets of funds to meet your retirement income needs, including short-term liquid assets for immediate cash; fixed-interest investments, such as CDs or bond ladders, that you can use to replenish your cash bucket as needed and to shield you from having to sell stocks in a down market; and long-term assets invested for growth in a well-diversified portfolio.
-- Kiplinger's Personal Finance

How much to save to reach $1 mill by age 65

This is how much you would need to save each month to accumulate $1 million by age 65 if you began:

At age 20 $189.59 per month (at 8% annual returns)
At age 30 $435.94 per month (at 8% annual returns)
At age 40 $1,051.49 per month (at 8% annual returns)
At age 50 $2,889.85 per month (at 8% annual returns)
At age 60 $13,609.73 per month (at 8% annual returns)

Reasons to have an Estate Plan

1. Get a will. Dying without a will is referred to as "dying intestate," which means you gave up the opportunity to distribute your assets as you would have liked. Instead, the state (through probate court) gets to figure things out for you. It's quite possible all your assets may not pass to your spouse and children as you would have intended.

2. Name a guardian for your minor children. If you have young children, you need to consider who will care for them should something happen to you. Do you really want a judge-appointed stranger to make those decisions?

3. You also need a medical directive and a durable power of attorney. These documents apply if you become disabled and cannot make decisions on your own for basic expenses like your mortgage and other monthly bills. A power of attorney lets a friend or family member do that for you. Your medical directive allows another person of your choice to act on your behalf, honoring your preferences.

4. Think of your heirs. Without proper planning, your heirs will have to deal with probate court. If you own real estate in several states, your heirs will have to deal with probate in each state. The process involves long delays and high legal costs. It is also public information. Fortunately, you can avoid all this with a revocable living trust.

If you haven't done any estate planning, set up an appointment with an estate attorney soon.

How to View Volatility

5/25/2010

Volatility is back. There is no question that the volatility index “the VIX” has risen in the last few weeks much higher than it has been in the past six months. It appears due to the uncertainty on the political, social, and economic agendas worldwide that volatility will be around for a while. Therefore, we must recognize that volatility is back and to brace for it. 

Volatility is not the same thing as market declines. Just because prices are volatile doesn’t necessarily mean that prices are falling. Volatility is a yo-yo. You can’t have volatility unless prices also go up! A bear market is when prices go down. A bull market is when prices go up. A Volatile market is when prices do both. Volatility is a double-edged sword. Just need to recognize the environment we’re in. Brace ourselves and weather the storm.

If you don’t have the stomach for it, consider reducing risk now. Review your asset allocation. Speak to your financial advisor to see if your investments are properly allocated. This is not a recommendation to time the market. It is about knowing who you are, what your goals are, and what your stomach for risk is.

If you need the money in the next few years, you should not be in the stock market at all.

Volatility presents a fabulous opportunity to create long-term wealth. If you’re adding to your investments (or dollar-cost averaging) during periods of volatility, you set the stage for long-term profits. Treat market declines as long-term buying opportunities.

The dominant determinant of lifetime investment outcomes is. . . .

The dominant determinant of lifetime investment outcomes is not investment performance, but investor behavior.

Keep it Simple

Keep it Simple - This applies to your finances and your investments. Don't over-think it.

“Simplicity is the ultimate sophistication.” - Leonardo Da Vinci
"Things should be made as simple as possible, but not simpler." - Albert Einstein
“The spirit's foe in man has not been simplicity, but sophistication.” -  George Santayana

financial calculators

http://www.dinkytown.net/

How to Choose a Financial Planner

click on the link to read a short article in the Wall St. Journal on "How to Choose a Financial Planner."

It's Time In the Market, not Timing the Market that Creates Wealth over Long periods

This chart shows how a $10,000 investment would have been affected by missing the market's top-performing days over the 20-year period from January 1, 1989, to December 31, 2008. For example, an individual who remained invested for the entire time period would have accumulated $50,455, while an investor who missed just 10 of the top-performing days during that period would have accumulated only $26,006. This hypothetical example does not represent the performance of a specific investment.

Source: Standard & Poor's. Stocks are represented by Standard & Poor's Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Past performance is no guarantee of future results. Investors cannot directly invest in an index.

Take advantage of the Miracle of Compound Interest

How to Win at Gambling

"The greatest advantage from gambling comes from not playing at all." - Girolamo Cardano, 16th Century physician, mathematician, Renaissance Man

Belief in a mutual fund manager's "hot streaks" leads to the mistake of confusing luck and skill.

What is Long-term Care Insurance and Who needs it?

Long-term Care refers to “custodial”care—personal, hands-on assistance to individuals who need help with the activities of daily living, or ADLs. ADLs are routine things that healthy people don’t give a second thought to: bathing, dressing, eating, using the toilet, getting into and out of bed or a chair. The need for long-term care may be due to physical limitations or disabilities resulting from injury, illness or the normal aging process. It can also be due to a cognitive impairment resulting from a stroke, for example, or Alzheimer’s disease.

While such care is provided in nursing facilities, assisted-living facilities, and adult day care centers, the majority of long-term care takes place in the recipient’s home. Usually, in fact, it is provided by unpaid family members or friends.

Nearly 41% of long-term care is provided to people under age 65 who need help taking care of themselves after an accident or stroke or as a result of chronic illness or debilitating diseases.

It’s clear that the longer you live, the more likely it is that you’ll need help at some point. Overall, at least 70% of people who live to age 65 will require some long-term care services at some point in their lives. That means that only three in ten of us will live out our lives without the need of such assistance.




Clearly the potential need for long-term care is a risk that all Americans face—and one that can take a heavy toll on your family and your bank account.

Study by John Hancock, 2008

Source: Kiplinger's

A free way to track your expenses and stay on top of your personal finances

Mint.com (http://www.mint.com) was purchased for $170 million by Intuit, the maker of Quicken and Quickbooks.  This is a free web site that allows you to track your investments, bank accounts, and expenses from credit cards or debit cards all under one interface. They look for ways to save you money and alert you if you are getting hit with fees and/or when bills are due. One way they earn money is by partnering with vendors such as the credit reporting agencies.

Reasons to Have Cash Reserves

Generally speaking it is a good idea to build and maintain cash reserves of at least 6 to 12 months of non-discretionary expenses if you're working and 2 years or more of cash reserves during retirement years. The more stable your income and the less you spend each month the less you need to have in reserves (and vice versa). Even if you have you have high job security, cash is king and access to liquidity is vital as witnessed in the financial panic of 2008. The cash reserves are there to help keep you from going into debt or dipping into your long-term investments if you run into unexpected emergencies such as medical expenses not covered by insurance, broken home appliances, leaky roof, car trouble,etc or if you lose your job and are having trouble finding another one.

Also, if you know you're going to incur major expenses such as paying for a wedding, buying a home, or buying a new car, save those amounts away in addition to your reserves.

The goal is to maintain a fully-funded cash reserve at all times.

Why You Need to Diversify

This chart (produced by Blackrock) shows annual returns by asset class (i.e. stocks, corporate bonds, Treasuries, real estate, International stocks, small company stocks, etc) from best performance to worst performance from 1988 through 2008. As you can see, there's no clear pattern in any given year. It is impossible to predict with accuracy which assets will have the greatest returns from year-to-year. As a result, many investors, including myself, invest with a strategy of diversification -- owning virtually everything (US and International stocks, US Govt/International and Corporate bonds, real estate, gold, natural resources, etc) and hold these investments for very long periods of time. The portfolio should be adjusted as needed as the investor's financial situation changes and when his/her portfolio shifts significantly from the target asset allocation.

College Savings Plans

Here's a site to read about 529 Plans
College Savings Plans Network
Some of the features of 529 college savings plans.

• ability to save huge amounts of money toward college. Maximum contribution allowed is over $300,000 in some states.
• minimum investment as low as $25
• earn market-based returns instead of inflation-based returns
• tax deferred growth and tax-free withdrawals as long as money is used for education expenses. 
• Money can be used for tuition and room & board (pre-paid tuition plans only cover tuition)
• 529 plans can be used for any school in the country. Pre-paid tuition plans are only good for state schools in that state)
• Money can be used for grad school.
• No age limit.
• If one child decides not to go to school, you can change the beneficiary for another child (or that child's child). Flexibility!
• 529 plans are considered to be owned by the person who establishes the account (not the children)
• a way for grandparents to help grandchildren with college savings (talk to a financial adviser to see if this is a good move for your situation)
• Any withdrawals not used for education are subject to income taxes and a 10% penalty.

Key Documents for Estate Planning

Remember to revise and revisit your financial plan periodically

Financial Planning is a process, not a product.
Because your life will undergo frequent changes, and because your assumptions require constant updating, financial planning is a lifelong process, not a report you shove onto a shelf and ignore.
This means you need to revise your plan periodically. Your financial plan should be revised if:
1. One to three years have passed since you last updated it.
2. There have been any changes in your:
a. Goals
b. Health
c. Marital status
d. Occupation or employment
e. Income
f. Expenses
3. There has been a birth or death in the family.

Remember Why You are Investing

Remember that your plan is based on your goals, not on your market predictions. That’s a good thing because you’re in control of your goals, but you’re not in control of the market. So if you don’t need to chase higher returns, there’s no reason to do so.

Goal setting

1. State a positive goal. “I want to save for my son Sam’s college degree”
a. Negative words that cause people to fail:
i. Not
ii. Don’t, won’t shouldn’t can’t – Don’t tell me what you don’t do, won’t do, shouldn’t do or can’t do. Tell me instead what you want to do.
iii. Stop – you’ll stop when you’re dead. Until then, keep going.
iv. Avoid – your brain will focus on whatever it is you’ve told it to avoid.
v. Never or Impossible
b. Dangerous words:
i. Little – no such thing as succeeding a little bit
ii. Later – motto of procrastination
iii. Will – as in “I will quit smoking tomorrow.”
iv. Try – do you want to “try to save for a new car” or do you want to save for a new car?
v. Should – you know what you should be doing. More important to focus on what you “are” doing.
vi. Start – don’t “start” your journey. Be underway with it.
vii. Possible – meaningless.
c. Best words to describe yourself:
i. I am – I am saving to buy a new car
ii. I do – either you are working on your goal, or you’re not.
iii. Always
2. Set a date – a goal only becomes a goal when you put a date on it. “I want to save for my son Sam’s college expenses beginning September 1st, 2020”
a. Make an appointment.
b. Be specific.
c. Be realistic.
3. Write it down.
4. Stay focused
a. Turn your plan into action.
i. Research how much tuition costs at state schools, community schools, and private colleges. Learn about 529 savings plans vs. pre-paid tuition plans.
ii. If your goal is to take a trip to Italy, get a passport, contact a travel agent, find out how to get to the location. How long a trip will it be? Any medical or safety precautions to take? Where will you stay? What will be your itinerary? How much will it cost?
b. Make your plan a reality
i. Make your goal real, as though you were living it today. By doing this, your enthusiasm will rise, your focus will intensify, and you’ll be able to stick with your goal. Sure enough, one day, you will make it happen.
c. Keep your goal in front of you. Put pictures of your goal on the refrigerator door, on the bathroom mirror, on your PC monitor at the office, on the steering wheel of your car.

Retirement Investing

What do you do with your investments when you’re already in retirement?
It’s not about a “retirement date.” It’s about life expectancy. So even if you’re 65 years old, your life expectancy could be 85. So your time horizon is 20 years and stock market investments deserve a place in the asset allocation. Even if you’re 85 years old, the money could be a legacy for children and grandchildren. So the investments should be allocated with them in mind.

A financial check list

• Contribute the maximum you’re permitted to your retirement account at work, even if your employer does not match your contributions.
• Have cash reserves appropriate for your situation -- anywhere from three months to five years - talk to your financial adviser about the appropriate amount.
• Pay off all your credit card balances, pay all new credit card bills in full monthly.
• Consolidate your investments (both taxable and retirement accounts) into one diversified portfolio. This simplifies record keeping and tax reporting, helps you generate consistent monthly income when needed, lowers costs through economies of scale and makes life easier for your beneficiaries.
• Change your investment and bank account registrations to conform with the estate planning advice provided by your estate attorney and financial adviser.
• Tell your spouse and adult children where you keep your financial papers. Give them the business cards of your planner, attorney, and accountant.
• Obtain long-term care, disability, liability, and life insurance policies.
• Change your will, trust, IRA, retirement plan, annuity and life insurance policies so that the correct beneficiary designations have been made.
• Obtain a will, power of attorney, medical directives and trusts.
• If you’ve put off any of these items, tend to them now. If you have any questions about how to best accomplish these tasks, contact your planner. He or she should be delighted to help you fully implement your financial plan.

Following Your Emotions is a Sure Path to Financial Failure

There are many well-documented psychological biases which adversely affect our financial decision-making and which we are all occasionally subject to.  If you know what they are, you are probably less likely to be adversely affected by them.  Here's a list of several of them:  

	Catastrophizing - Looking to the future and anticipating all the things that are going to go wrong. Because we believe something will go wrong, we make it go wrong. Mental Accounting.  This is the tendency to value some dollars less than others.  One example of this is the "House Money" effect: if you are gambling at a casino and you have been fortunate enough to win, you might tend to be more risk-seeking with your earnings than you would be with your principal.
	Loss Aversion.  This is the tendency to feel more pain by losing money than you would feel satisfaction in gaining an equal amount of money.
	Myopic Loss Aversion.  This is the tendency to focus on avoiding short-term losses, even at the expense of long-term gains.  For example, this explains why people tend to buy insurance policies with low deductibles and low limits, despite it being opposite to what is clearly in their long-term best interests (i.e., most people would be best served with high deductibles and high coverage limits).
	Sunk Cost Fallacy.  This is the tendency to "throw good money after bad."  It is related to Regret Aversion and Loss Aversion.
	Status Quo Bias.  This is the tendency to want to keep things the way they are.
	Endowment Effect.  This is the tendency to consider something you own to be worth more than it would be if you didn't own it.
	Regret Aversion.  This is the tendency to avoid taking an action due to a fear that in hindsight it will turn out to have been less than optimal.
	Money Illusion.  This is a confusion between "real" and actual changes in money (i.e., time value of money and inflation effects).
	Bigness Bias.  This is the tendency to pay more attention to big numbers than small numbers (e.g., we are more impressed by the fact that a particular mutual fund had a 50% return last year than we are discouraged by the fact that the same fund has an expense ratio of 3% and a sales load of 5%).
	The Law of Small Numbers.  This is the tendency to exaggerate the degree to which a small sample resembles the population from which it is drawn.  This is related to the Recency bias.
	Recency Bias.  We tend to associate more importance to recent events than we do to less recent events (e.g., during the great bull market of '95-'99, many people implicitly presumed that the market would continue its enormous gains forever, forgetting the fact that bear markets have tended to occasionally happen in the more distant past).  This is related to the Law of Small Numbers.
	Anchoring.  This is clinging to a fact or figure that should have no bearing on your decision.  Often, we use an initial value as a "starting point" in decision making.  Even if the initial value was a totally random uneducated guess, we tend to be biased towards it.
	Confirmation Bias.  This is the tendency to look for, favor, and be overly persuaded by information that confirms your initial impressions.  Conversely, we tend to ignore and dismiss information which tends to disprove our initial impressions.
	Overconfidence.  This is the tendency to overestimate our own abilities (i.e., we aren't as smart as we think we are).  People tend to think that they are much better forecasters and estimators than they actually are.
	Optimism.  People tend to be optimistic about the future.  This might also be termed, "wishful thinking."
	Information Cascades.  This is the tendency to ignore our own objective information and instead focus on emulating the actions of others (e.g., the tendency to sell a stock solely because others are bidding the price down, or buying a stock solely because others are bidding the price up).
	False Consensus.  This is the tendency to think that others are just like us.
	Weakness of Will.  This is the tendency to consciously do things which we sincerely know are wrong.  A non-financial example includes smoking cigarettes (we know we shouldn't do it but many do it anyway).  A financial example includes living within our means (we know we should do it, but we often don't).
	Credulity.  While we might like to believe that we are all perfectly rational, reality is far different.  Unfortunately, we tend to be susceptible to the manipulative messages that the financial industry and the popular press put out.  Specifically, mutual fund companies tend to conspicuously advertise positive information, while suppressing negative information.  The popular press encourages conventional wisdom on investing issues because it helps them sell magazines (despite being provably wrong).

Financial Planning Limits 2010

useful reference on things like annual limits on IRA and 401k contributions, estate & gift tax exclusions, standard deduction for taxes,etc.: http://www.cffp.edu/_Rainbow/Documents/2010_AnnualLimits.pdf