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