Seven Questions to Ask Before Investing

We have all heard of the seven deadly sins, things that you should never do or you risk the harshest of punishments.  But many people don’t know about the seven deadly questions, involving your investments.  There are seven questions that one must answer before dropping a dime on investments, otherwise their money could be lost in the fiery pits of… well you know where.  Making investment decisions isn’t easy, especially if you are just entering the game.  There are a lot of details that many people don’t think about until it’s too late.  So, if you want to avoid the eternal pain of poor investment plans, ask yourself these seven questions.

1. “Why?”  It’s a simple question, but it’s often the hardest one to answer.  Why are you investing, and what do you hope to gain from it?  In other words, you must set specific goals.  Maybe you want to save for retirement, maybe you want to send your kids to college, or maybe you just want some breathing room from everyday expenses.  Whatever the reason, it’s important that you define why you are investing your money and what goals you wish to accomplish in doing so.
2. “What is my time frame?” When can you expect to earn your money back?  This all depends on what kind of investments you make.  Most of the forms of investments which you can cash out of at any time, such as stocks, bonds, and mutual funds, often leave you with the risk of not getting back all that you paid in.  Many other investment options will limit or restrict the opportunities that you have to sell your holdings.  Make sure you are aware of these before you enter the game.
3. “What am I going to get out of it?”  What can you realistically expect to earn on your investments?  Having an unrealistic idea of playing the stock market and striking it rich could leave you simply striking out.  Most earnings, as millions of people encountered in the past few years, are dependent upon the market, and can rise or drop based on market changes.  Other investments, such as bonds, have fixed returns that aren’t as susceptible to market changes. Another option that you might want to consider in the mix is Fixed Annuities that have that ability to protect your principle and provide some certainty on return.
4. “What kind of earnings will you make?”  Very few times when investing does a wad of cash appear in your mailbox if you’re successful.  Many times your success is paid to you in things like potential for earnings growth, as in real estate purchases. Other times it can come through interest or dividends.  Knowing the details of your payback can help you make better decisions when you are paying in.
5. “What’s my risk?”  And here comes the basic balance in investing, risk versus reward.  The higher the risk, the higher the potential reward and possible loss as well.  Overall there is no guarantee that you will get your money back or receive the earnings promised to you. Make sure that the risk you take is worth the reward that you expect to achieve.
6.  “Is my money diversified?”  We can all remember our mothers as some point or another saying, “Now, don’t put all your eggs in one basket.”  Well your mother’s wise words ring true in terms of investments as well.  Certain types of investments do better in certain situations, so by diversifying your investments, you are spreading your eggs across many baskets.  That way if a certain industry tanks or sector is struggling, you will have plenty of other baskets holding your money safe and sound. You also should consider being diversified in financial tools that provide principal protection as well.
7. “What is the effect of taxes on my investments?” It may seem like the nightmare of early April trying to sort out your taxes each year, but taxes are just as critical in making investment decisions.  What you pay into certain investments, such as a Roth IRA, is not tax deductible, but there is no tax on the earnings.  Other options, such as Traditional IRAs, work in the opposite way, in that your contributions are not taxed, but your earnings are.  Certain bonds are exempt from state and local taxes, such as U.S. Savings Bonds, while others, such as municipal bonds are exempt from federal income taxes and most state income taxes as well.  Fixed Annuities grow tax deferred and there are rules such as the 1035 exchange rule that allows the tax deferred growth to transfer to other like investments. Are you sure that you are using your investment’s ability to avoid taxes in the most efficient ways possible.

Now that you know the questions, it’s up to you to determine the answers.  The important thing to remember is that the best answer to each one is whatever works best for you and your goals.  Take the time to think through your decisions and all the alternatives.  There is no standard pathway to success on the road of investments, but if you take the time to ask yourself these seven questions, it will be a much smoother ride.

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5 Life Insurance Myths to Disabuse Yourself of Now

Life insurance may not sound all that exciting, but when you do stop to think about life insurance and you, it’s not uncommon to assume that since the concept of life insurance is simple enough, so too are the products. It’s also fairly easy to rationalize the things you really don’t understand about life insurance, and before you know it, you’re harboring potentially damaging life insurance myths.

In addition to your own edification, and frankly, for the safety of your loved ones’ financial futures, it’s important to understand exactly what life insurance is, what it does, and how — not to mention if — you should make a move either to purchase or upgrade your coverage. Read the myths below to see if you need to adjust your thinking when it comes to life insurance.

The coverage you get at work is enough.

While this may, in fact, be the case if you’re single, in good financial standing, have no dependents and aren’t worried about estate taxes, for most people, the term policy offered through their employer just won’t be enough to sustain their families’ needs. After all, your insurance payout must not only support your family financially, it must also pay off any debts, such as the mortgage or even the MasterCard, as well as settle up with Uncle Sam.

Only the working spouse needs life insurance.

This is a curious — and wildly inaccurate — belief, yet it somehow persists. Life insurance on the breadwinner is intended to fill in the gap left by the loss of a paycheck, but that discounts all the valuable work a stay-at-home partner contributes to the relationship. If you’re used to this arrangement, how would you pay for child care or the cleaning, or even manage the household without a little financial help in the event of such a loss? It can be easy to overlook the many contributions of the non-breadwinner, but to do so would be remiss.

The value of your life insurance coverage should equal two years’ salary.

Everyone’s financial circumstances are different, and so are their life insurance needs. You might require more coverage than two years’ salary if you incur medical bills or other debts, have a young family, a mortgage to pay, or any number of life obligations to meet. If your lifestyle is more modest and you’re not financially responsible for anyone, on the other hand, then two years’ salary may even be excessive.

Single people without dependents don’t need to own life insurance.

While it’s true you might not have a family to provide for, odds are you’ll still have to cover the cost of your funeral, pay off a few debts, and maybe leave a little bit behind for your parents. And as one MSNBC article on the topic suggests, using a life insurance policy to fund a gift to a favorite charity can be a wonderful legacy for a single person to leave behind.

You don’t need professional services to buy life insurance.

While this is, in fact true, as any consumer can go online and shop for, and even buy, term and permanent life policies, electing to go it on your own can be detrimental to your financial future. A professional life insurance agent advisor can help you identify the needs you have, what you must protect and how best to protect it. With the knowledge of myriad different policies, if you’re honest about your financial and life circumstances, a professional can not only help you determine how much coverage you need, but also help decide whether a term or permanent policy is right for you. They can even customize a plan to meet your unique needs.

Life insurance is an important product for most everybody to consider, but it helps if you have your facts straight. So whatever else you think you know about life insurance, you might consider running it past an agent or advisor.

Photo courtesy of: tippnews.com

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Roth vs. Traditional 401ks

By now, most Americans understand that at the very least, they should be participating in their employer’s defined contribution plan, most commonly offered in the form of a 401(k). But some companies offer two forms of these plans: the traditional 401(k) and the Roth 401(k). You thought deciding how much to allocate to your plan and then researching and electing the investment funds to support it was confusing enough, but here you are, faced with yet another option for safeguarding some retirement funds. Let’s break it down just a bit more.

What’s the difference?
The primary difference between a traditional and a Roth 401(k) is simple but significant. With a traditional 401(k) plan, your contributions grow tax free, and you pay taxes on the withdrawals; Roth 401(k)s, on the other hand, work in precisely the opposite way, as you pay taxes on your contributions but not on your withdrawals.

Additionally, Roth 401(k)s tend to be seen as more of an estate planning tool, since they do not necessitate that you to take required minimum withdrawals (RMDs) once you reach age 70 ½, as you must do with traditional 401(k)s. This allows you to leave your funds untouched for as long as you want after retirement, letting your investment grow tax free all the while.

Which is right for you?
This is a conversation best held with your financial advisor, as you must determine whether the back-end payoff of a Roth 401(k) outweighs the benefits of traditional tax deferral on the front end, but generally speaking, it depends largely on where you are in life and into which tax bracket you fall.

If you’re relatively young with an eye toward saving for retirement and you don’t earn a great deal of money, a Roth 401(k) may be worth exploring, as the upfront tax-savings benefits wouldn’t be as significant to you as a tax-free payout in retirement. Conversely, if you’re an established earner in a higher tax bracket, getting up-front tax-advantaged treatment is probably best, making the traditional 401(k) your most likely option. This is especially true for individuals who expect to be in a significantly lower tax bracket when they retire.

You can even double-dip.
If your employer does offer both types of 401(k) plan, you can split your contributions between the two if you so choose, as long as your combined annual contributions do not exceed 2012’s annual limit of $17,000. If you’re 50 or older, that limit jumps to $22,500.

With so many options, there is a 401(k) plan, or a combination of the two, that is ideal for your current situation. But before you make your decisions, be sure to weigh these considerations carefully, especially if you don’t speak with a financial advisor regularly.

Photo courtesy of: sovereignman.com

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How To Dig Yourself Out From Debt

Debt: the deep hole that seems so effortless to dig but impossible to climb out from.  With every new credit plan comes a barrage of danger for consumers already drowning in bills.  It’s a problem that millions of Americans struggle through every day and for many it seems that there is no end in sight.  The pile of debt can get so high that it’s hard to find a place to start, which is often times the most difficult step.  It’s similar to the people on those “Hoarders” shows, when every room is piled high with junk the task can seem too daunting to even begin.  Hours and hours of work hardly make a dent and progress is difficult to achieve.  But for those looking at an uphill climb out of debt, there are ways to make those first few steps easier, and more productive.

The first main process on the road to recovery is to recognize and break your bad habits.  There is no point in doing the work to get out of debt if you will simply bury yourself back into it in a year.  You need to take the time to recognize the spending behaviors that have caused the problem in the first place and work to break them.  Take a look at your budget for each month, and make more of an effort to live within it. One way to do this: stop using credit cards.  Consumers find it increasingly easy to mindlessly swipe their plastic through every register they see.  By limiting yourself to cash or debit accounts you will be more aware of your spending and unable to add to your debt problem in the process.  Once you have curbed the problem you are ready to begin your journey.

Step 1:  Map it out.  It’s important to lay out your debt in front of you so you know what you are working with.  The options for these are your choice.  Use a spreadsheet or a chart or a series of pictograms or whatever works best for you to understand your debt.  Separate each account by balance, rate, minimum payment and the number of payments you have left.  This organization allows you to plan out the rest of your steps in order to meet your goals.

Step 2: Budget a payment plan.  Once you have all of your debt in front of you, determine how much you can put toward paying off your debt each month.  The goal for this amount should be more than all of the minimum payments on your accounts combined.  This may require some stricter budgeting throughout the month.  Limit your spending wherever you can.  Pack a lunch for work instead of eating out, avoid frivolous or impulse purchases, or turn down your heat at home by a few degrees.  Small changes can give you the boost you need to start to dig yourself free.

Step 3: Focus on a few accounts at a time. The first two steps have given you a plan on how to become debt free, but step three is where the work begins. Pick two or three debts and pay off as much as you can above the minimum on those each month.  This will allow you to begin your ascent.  The selection of these few targeted debt accounts shouldn’t be random.  There is an easy order to follow when attacking these balances.  Pay the one with the lowest balance first.  This decision is wise both financially and emotionally as crossing accounts off of your list can simplify your journey and feel super satisfying at the same time.  Second, go after the debts with the highest interest rates.  Paying these down early will help you nip the problem in the bud and keep your debt balance from rising.  Your last goal is to aim for your secured debt that has just a few payments remaining.  If you pay above the minimum you can cut out the final payment or last few payments altogether, giving you a lot more freedom in your monthly budget.

The final step is simple: once you have dug yourself out, don’t fall back in.  Often times, the freedom associated with people becoming debt free leads to the same habits and behaviors that caused the debt in the first place.  If you feel the need to reward yourself, do it with a deposit into a savings account or a contribution into your retirement plan.  Keeping yourself debt free and financially stable will be the greatest gift you can grant yourself.

Photo Courtesy of: pcbs.org

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How To Keep The Housing Crisis From Bursting Your Retirement Bubble

Everyone dreams of that perfect little retirement home in the relaxing tranquility of some quaint town on the shores of something beautiful.  Ahh, yes.  We can picture it now. The  feel of a cold drink in our hand and the sun beaming down on our face.  The birds are singing and the waves are lapping at the shore.   Then suddenly, “Pop!” What was that, you say. That was the sound of that dream bubble bursting for the 1.5 million older and retired Americans that have lost their homes to foreclosure along with much of the financial security that came with them.

The reality is that, for many older Americans, their dream scenario has turned into a living nightmare.  Instead of visions of beach houses or lakeside homes, many retirees find themselves clinging for dear life to the homes they have inhabited for years.  The housing crisis knows no boundaries, and it has certainly proved that by inhabiting the lives of many retired and soon-to-be retired individuals.  Unfortunately, the tidal wave of foreclosures continues to splash through the 50+ age group.

The AARP released a report outlining the foreclosure climate in the lives of older Americans and the results were a little frightening.  Over 1.5 million of them have already lost their homes.  Currently, about 600,000 people in the 50+ age group are in foreclosure, while another 625,000 are over 3 months behind on their mortgage payments.  16% of all 50+ Americans currently owe more than their homes are worth.
These numbers are not what many Americans are accustomed to.  The proportion of seriously delinquent loans held by older Americans has risen over 450 percent over the last five years.  Many of these people have gone their whole lives with nearly perfect credit, but have now hit a solid wall of debt that doesn’t seem to be budging.  Things aren’t getting any easier with age.  Among Americans 75 and older, one in every 30 homeowners are in foreclosure.  Five years ago, that proportion was just one out of every 300.  The numbers are hurtling downward at an alarmingly fast rate, and they don’t seem to be slowing.

These statistics are more than just ink on paper.  They are seriously altering the lives of many retirees, forcing some to re-enter the workforce or drastically change the budgets they had planned out years earlier.   Their retirement dreams have disappeared and they are simply trying to stay afloat.

The report showed that younger Americans are struggling as well, but the number of older Americans entering the dreaded foreclosure zone is increasing at a much faster rate.  One of the main questions is simply, “Why?”  Why are so many older Americans falling into trouble?   What’s the problem?

The problem is that many of these people set their budgets and their retirement plans before the economy, well, you know.   Most of them are living on a fixed income and quickly find themselves plowing through their retirement savings.  The income from their investments has been drastically cut, but their house payments have not.  Picture this: the faucet of their main source of income has slowed to a drizzle, but the drain of payments remains wide open.  It doesn’t take a financial expert to realize that it’s only a matter of time before the pool of funds will be completely dried up.

That can be a pretty disheartening image, but the bursting of the housing bubble doesn’t have to burst your bubble of retirement dreams, you simply might have to alter your path to get there.  Planning for these difficulties ahead of time can drastically reduce the struggles you could face.  Many people approaching retirement can analyze their investments based on earnings and interest rates of the current market and forecast their plans more accurately.  It might not be as pretty, but it’s a more realistic picture of what things will look like.

The most important thing is to not be blinded by your dreams, but use them as your vision to create a plan that works for you and your future.  With some planning and a little creativity, you could find yourself livin’ the dream in no time!

Photo courtesy of propertyqwest.com

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The Ricks Report – July 23, 2012

The Ricks Report

July 23, 2012

The Markets

The man with his finger on the pulse says the U.S. economy faces two main risks. We have no control over one of those risks and the other, well, we do have some control, but whether our politicians will appropriately exercise that control is a big question.

Federal Reserve Chairman Ben Bernanke faced Congress last week and he delivered a rather subdued outlook in his semi-annual monetary policy report. He said our economy faces two major headwinds:

1. The Euro-area fiscal and banking crisis and its potential spillover effects on our economy.
2. The unsustainable path of the U.S. fiscal situation (e.g., the “fiscal cliff”).

Source: Federal Reserve

The U.S. has little control over the euro-area situation so we’re at the mercy of European leaders to make bold and tough decisions to get their houses in order. The second item, though, is clearly within our control.

The so-called fiscal cliff, in which a series of tax hikes and spending cuts will take effect in 2013 if Congress takes no further action, could throw the economy back into a recession. The Congressional Budget Office estimates if no policy changes are made, then our 2013 federal budget deficit will decline by about $600 billion. On the surface, that sounds great. However, such a huge shock to our system in a short period of time could be problematic.

So, will Congress agree to adjust the legislation for the benefit of the economy? We’ll see.

For his part, Bernanke said the Federal Reserve “is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” It’s good to know that the Fed is ready to help if needed.

Data as of 7/20/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.4%	8.4%	2.8%	12.7%	-2.3%	5.2%
DJ Global ex US (Foreign Stocks)	0.6	0.5	-16.9	3.3	-7.8	5.6
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.6	5.0	4.6
Gold (per ounce)	-1.2	0.1	-0.6	18.3	18.3	17.2
DJ-UBS Commodity Index	4.2	3.9	-11.1	6.3	-3.4	3.8
DJ Equity All REIT TR Index	-1.1	16.0	9.5	31.4	2.7	12.1

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

IT’S BEEN ALMOST A YEAR since August 5, 2011, the day the U.S. lost its coveted AAA credit rating from Standard and Poor’s. So, how have the financial markets responded in the year since? Quite well, actually.

It may not feel like it, but the broad U.S. stock market, as measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and last Friday, according to data from Yahoo! Finance. Despite all the angst from the credit downgrade, the threat of a double-dip recession and the turmoil in Europe, the stock market has hung in there.

The returns in the bond market are perhaps even more startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last Friday, the yield had dropped to 1.46 percent, according to Yahoo! Finance. Normally, you might expect interest rates to rise after a credit downgrade since the ratings agency is essentially saying your bonds are riskier than previously thought.

The U.S., though, is perhaps a “special” case. The day after the credit downgrade, none other than Warren Buffett went on Bloomberg television and said he thought the U.S. should be a “quadruple A” rating. And, to this day, the U.S. dollar remains the world’s leading reserve currency as more than 60 percent of the world’s foreign currency reserves are held in U.S. dollars, according to BusinessWeek.

We shouldn’t get overconfident, though. While the U.S. has tremendous assets, it might only take a few bad decisions from our leaders to undo what took decades to build.

Weekly Focus – Think About It…

“There is nothing wrong with America that the faith, love of freedom, intelligence, and energy of her citizens cannot cure.”

—Dwight D. Eisenhower, 34th president of the United States

Best regards,

Gregory Ricks

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The Why, When and How of Consolidating Your Retirement Accounts

Consolidate: to combine separate items or scattered material into a single whole or mass.  The definition makes consolidation seem tidy, productive and even a bit powerful.  With all those good vibes, it’s a wonder why more people hesitate to use consolidation tactics in their lives, especially in terms of their retirement.  Many people have multiple retirement accounts through multiple different custodians with multiple different terms.  That is a lot of “separate items or scattered material” that can be combined into the “single whole or mass” that consolidation affords its users.

So if you are one of those people, it’s time you look into simplifying your retirement plans and consolidating those accounts. But you might ask yourself, why consolidate?  Or when is the best time to consolidate?  Or how do you actually go about consolidating?  Well, since you asked…

Why: The essential of why you should consolidate is best described by a demonstration.  Take a piece of paper at your desk, and now rip it in half (make sure it’s not your paycheck before you start the ripping stage).   Now grab a stack of 15-20 papers and try to tear that in half.  More difficult, right?  Materials are stronger when grouped together, we know that.  What most people don’t know is that when it comes to retirement accounts, grouping them works in essentially the same way.  Your financial position is much stronger when each investment isn’t standing individually.  Having multiple accounts leaves you at the risk of portfolio duplications in which similar investments have similar objectives and they overlap, wasting your assets with unnecessary risk.  Fees can be avoided and paperwork is simplified.  Also, by combining into one account, you are better able to adjust your investments in reaction to market changes by simply accessing one account.

When: The question of when is less about timing, and more about in what situations it should be used.  Consolidation is an advantage to almost anyone who is looking for a simple and productive retirement plan, but there are certain instances in which it is a good strategy to apply.  For example, when many people leave a company, they leave their retirement funds in that company’s 401(k) or pension plan.  This is a great opportunity for consolidation as you can roll those funds into your IRA to increase your existing investment selection while also minimizing the number of accounts you have to manage.  It’s also important to understand the investment options available for different types of investments.  For example, Rollover IRAs have nearly unlimited investment choices, while 401(k) plans are limited to usually a maximum of 25 choices.  The more options you have, the more flexible your plans are, and the better off you are.  You also must understand which accounts are available for consolidation.  All traditional IRA’s can be combined, both deductible and non-deductible, but a Roth IRA cannot be combined with a traditional IRA.  Make sure you understand these stipulations before you make your decisions.

How: Here is the meat of the issue, how to go about this consolidation process.  With this there is good news, and better news.  The good news is that most of work involves information you already have.  The better news is that all you have to do is take that information and follow these simple, step by step directions and you will be well on your way. The first step is to make a list of each of your individual accounts that you hold currently.  In this list, include details on each account such as the type of account it is, the current balance, its recent and long-term performance, as well as any fees associated with it.  Next you need to think about and plan your retirement goals and investment philosophy.  The third step is to determine the plan or institution that best fits those goals.  After that, you start to combine your accounts into the institution and plan that you chose.  This should begin with you smaller accounts, followed by the non-performing accounts and accounts with high fees.  Continue this until all your accounts have been rolled into one.  Then take all of your funds and determine the specific investments needed to reach the goals that you set earlier in the process, all in one tidy account.  Then bake at 375 degrees until golden brown.  Just kidding, but in all seriousness if you follow these steps, consolidating your retirement accounts can be as easy as baking a cake, probably easier for most of you.

When it comes to your retirement, it’s important to find ways to work smarter, not harder.  Consolidating your accounts is one of the simplest ways to do that.  Combine your accounts, limit your paperwork and strengthen your investments.  Aristotle once said, “The whole is greater than the sum of its parts.”  It’s pretty unlikely he was speaking specifically about your retirement accounts, but you get where he was going.

 

Photo courtesy of prlog.org.

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The Ricks Report – July 9, 2012

The Ricks Report

July 9, 2012

The Markets

Where is the recovery in jobs?

In the 10 recessions between World War II and 2001, the jobs lost during the recession were fully recovered within 4 years of the previous peak in employment, according to the blog, Calculated Risk. In fact, with the exception of the 2001 recession, the previous 9 recessions had recovered all their lost jobs within a relatively short 2½ years.

The 2007 recession, however, is a different story.

At its nadir in February 2010, the U.S. economy had shed nearly 9 million jobs from its prior peak, according to the Bureau of Labor Statistics (BLS). As of last week’s June employment report, the U.S. economy had recovered less than half of those lost jobs – and we’re more than 4 years removed from the peak employment level of late 2007, according to the BLS.

Why has the jobs recovery from this recession been so painfully slow? Here are several reasons:

(1)   Recoveries from recessions caused by financial crises – like this one – are notoriously slow.

(2)   Extremely high economic policy uncertainty emanating from Washington made corporations cautious in hiring.

(3)   The extension of unemployment benefits to 99 weeks reduced some people’s desire to find new work.

(4)   Uncertainty from events related to the euro crisis dampened business demand and the need for more workers.

Sources: Gary Becker, Nobel Prize Winner and Richard Posner blog; The Wall Street Journal

There is some good news, though, that could eventually provide a spark for new hiring.

Corporate profits as a percentage of gross domestic product (the value of all goods and services produced in the U.S.) recently hit an all-time high, according to Business Insider. This means corporate profits are at record levels. On top of that, corporate cash levels have reached historic highs which suggest corporations have plenty of money to reinvest for growth, according to Yahoo! Finance. With corporate profits and balance sheets looking solid, all we have to do is get these companies to start spending some of that cash on new hires. If that happens on a large scale, it could be a huge boost to the economy and the financial markets.

Data as of 7/6/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	-0.6%	7.7%	0.8%	14.7%	-2.4%	3.3%
DJ Global ex US (Foreign Stocks)	-0.1	1.0	-17.8	5.4	-7.4	4.6
10-year Treasury Note (Yield Only)	1.5	N/A	3.1	3.5	5.2	4.8
Gold (per ounce)	-0.7	0.8	3.9	19.7	19.6	17.7
DJ-UBS Commodity Index	1.1	-2.7	-13.8	5.0	-4.4	3.4
DJ Equity All REIT TR Index	1.2	16.3	10.2	33.2	2.0	10.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

INVESTORS HAVE GROWN VERY FICKLE in recent years as measured by how long they hold on to a stock. There was a time when investors were really investors and bought a stock for the long run. In fact, between 1940 and 1975, the average length of time a New York Stock Exchange stock was held before it was sold was almost 7 years, according to data from the New York Stock Exchange as reported by a September 2010 Top Foreign Stocks blog post. By 1987, it had dropped to less than 2 years. And, in the highly volatile year of 2008, the average holding period was less than 9 months, according to The New York Stock Exchange.

So, does this fast trading result in better returns?

A highly quoted study by Brad Barber and Terrance Odean of University of California-Davis published in April 2000 analyzed the results of nearly 2 million trades from a discount brokerage firm between 1991 and 1996. The study concluded that the 20 percent of investors who traded the most frequently underperformed the 20 percent of investors who traded the least frequently by a whopping 7.1 percentage points on an annualized basis after expenses.

The main conclusion of the study was, “Trading is hazardous to your wealth.”

One very interesting tidbit from the study was the gross returns between the frequent and infrequent traders were basically the same. In other words, stock selection was not a problem for the fast traders; rather, it was the expenses of the frequent trading that caused their net returns to lag far behind the infrequent traders.

From a practical standpoint, selling a stock is necessary from time to time. The study simply drives home the point that keeping trading costs as low as possible is critical to having net returns come close to gross returns.

Weekly Focus – Think About It…

“Learn every day, but especially from the experiences of others. It’s cheaper!”

—John Bogle, founder of The Vanguard Group

Best regards,

Gregory Ricks

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Emergency Funds Are Like Spare Tires…

Emergency funds are like spare tires: you never think about them until you need one.  This is an unfortunate truth for many people who don’t have a rainy day fund saved up for themselves.  Some people fail to see the advantage in creating a fund, while others want to create one, but don’t know how.  Creating an emergency fund is more important, and more simple, than many people believe.

The first thing to cover is why you need an emergency fund.  This question can be answered easily by anyone who has ever needed one.  Life is unpredictable.  The situations that could arise causing a need for extra money are almost endless:  divorce, healthcare, car troubles, emergency travel, or, as many people in recent years have encountered, job loss.  Things come up, things that you can’t see coming, and it’s much easier to roll with these punches if you have prepared for them in advance

The amount needed in this fund varies according to your situation and lifestyle.  Contingency plans are most successful when you plan for the worst case scenario, which in this case, is job loss.  You need to create a monthly budget of your expenses in that case that you suddenly find yourself with no income.  This means your rent, food, utilities, insurance, debt payments, prescription medications, cellphone bill and so on.  The bare minimum amount in your emergency fund should be equal to three months-worth of these expenses.  The overall goal is to have six months of your expenses available to you in the fund.  This may seem intimidating at first, but every little bit helps, so put in what you can over time, and aim for that target number.

Many people think that these emergency funds are best located in a box buried in the back yard or stuffed between their mattresses, but, believe it or not, there are better options.  The main requirement of the fund or account is that is must be easily accessible.  Most emergencies don’t allow for the months or years needed to access money in some investment accounts.  You should be able to access your funds within one business day.  This is the case with traditional savings accounts or money market accounts.  The drawback of these is the lack of growth in those accounts.  There are other accounts that allow moderately quick access, less than 30 days, while still allowing you to earn money from the investments.

One of these options is a bond mutual fund with either a short or immediate duration.  These don’t offer the protection of other accounts, but can bring about modest growth without locking your money away.  Investors must understand that their funds are vulnerable and can expect the value to fluctuate a bit.  Many mutual funds also offer more flexible payouts directly to checking accounts, as well.

Another suggestion in creating an emergency account is to cut into your long term investment contributions.  401(k)’s and IRA’s are critical to your future, in the long term, but if you are walking around with a great long term, and nothing for the short term, you could find yourself in some trouble.  This doesn’t mean you need to take thousands from your retirement contributions, but forty to fifty bucks a month until you have yourself protected isn’t going to drastically affect your plans 30 years from now, but it could be lifesaving in just a few.

One of the easiest ways to protect yourself in an emergency such as a job loss is to take care of what expenses you can eliminate ahead of time.  This means paying off debt.  The debt on high interest credit cards can get a lot more painful if you don’t have an income.  This not only cuts down on your expenses, but if you’re paid up to date, you allow yourself some room if you need to use those credit cards as a source of financing in an emergency.

The two most important aspects of creating an emergency fund is having the foresight to know you might need one and having the discipline to be able to create one.  If you have those two things, the rest is easy.  Just account for your monthly expenses, plan an account to funnel money into, and budget your income to allow that account to grow.

 

Photo courtesy of: http://www.financialpage.com

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The ABC’s of Mutual Fund Costs

The ABC’s of Mutual Fund Costs

Financial Advisor Gregory Ricks breaks down the ABC’s of mutual fund costs.

Metairie, LA – It’s always good to know what you are paying for and when it comes to mutual fund cost analysis that is easier said then done. Gregory Ricks advises about how to determine how much you are paying to have your money managed for you.  In an age of high tech gadgets, you’d assume tracking this would be easier but it’s not.

So here’s a quick tutorial on how mutual fund costs add up and how you can do some homework for yourself.

In the link below, you’ll see three versions of the same mutual fund: the Alliance Bernstein 2030 Retirement fund.  You’ll see there are three different purchase options.

 

A,B,C Choices 

 

Let’s take a look at the costs associated with owning the Alliance Bernstein 2030 A share version.

There is an initial load of 4.25% which means if you buy this fund there is a built in cost of $425 per $10,000 purchased – so on a twenty thousand dollar fund purchase you’d pay a commission of $850 – so, your initial $20,000 on day one would put $19,150 to work for you.  Larger investments often get “discounted” through breakpoint discounts; so the larger the investment the smaller percentage fee.  There is also an on-going cost in the .65% management fee and the .30% 12b-1 marketing fee – so when you add it up, it’s a little less than 1% on-going (actually, .95%).

So, is B better?  Well, you’ll see there is still a sales charge. It is just deferred, and if you wait long enough it’ll go away – so, in B share funds the fee is more of an early redemption fee or a “back-out” fee.  These are often marketed as no-load funds but that is an inappropriate description plus you’ll see the on-going management fee is significantly higher at 1.72% which is a .77% higher annual cost.  After the deferred sales charge period the B share converts into an A share and the costs reduce to the A share management fee schedule.

So, is C the right choice?  Again, you’ll see the higher expense ratio and a redemption fee of 1%.  These are often marketed as “advisors shares” as the advisor typically has a “trail” commission coming from the fund for acting as the advisor.  C shares were designed for a shorter duration investment.

How to choose the right fund?  “Well there’s more to it than share class – a lot more,” said Gregory Ricks, Founder and CEO of Gregory Ricks & Associates. “Mutual funds struggle with the strain of forced diversification and the drain of redemption both of which makes tax management difficult.  A fund manager’s decision to sell for diversification purposes or to get money together for investors cashing out affects your tax bill – in 2000, the tax bill to American Investors during the “hot market” was $19.8 BILLION Dollars” (http://www.sec.gov/news/speech/spch491.htm.).

The decision to invest and where to invest is a difficult one, and, all too often, retirees and those seeking retirement make purchases for all the wrong reasons – like: past performance, a “hot” tip or advice from an unreliable source (like the internet).

An ideal situation is when you find an advisor you can trust; who’ll tell you straight what a reasonable expectation is, and, who speaks enough about safety that you are comfortable not just with the return on your money but the actual future return of your money. Slow and steady seems a logical way to win the race to a secure retirement.

For more information on how Gregory Ricks can help, please visit www.gregoryricks.com. 

For media inquiries only, please contact Jenn Horner at Jennifer@dnagency.com.

About Gregory Ricks:

Gregory Ricks is the Founder and CEO of Gregory Ricks & Associates, Inc. and is the Radio Talk Show Host of “Winning at Life with Gregory Ricks,” on Rush Radio 99.5 WRNO on Saturday mornings.  He is Louisiana’s 401k and Retirement Authority and author of the upcoming book, Winning at Life in Retirement, in which the emphasis is to avoid losing money to Wall Street, to avoid losing money to Uncle Sam and to protect assets from runaway health care costs late in life. He is a nationally sought after Wealth Manager, Tax Reduction Strategist and an Ed Slott Elite IRA Advisor who has been educating, advising and guiding clients for 28 years.  He has a unique vision and ability to look forward and help retirees see the financial road ahead so they know with certainty where they are, where they’re headed and where they’ll end up at any given point in time up to 10, 15 or 20 years out including changes in direction.  He does the math to ensure their monies are using the right tools and doing the right jobs for the right period of time so they win at life in retirement by enjoying the lifestyle they’re accustomed to without fear of running out of money.

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