It certainly isn’t a golf day as I write this early Sunday afternoon, and what it has done is give me a day or so to collect my thoughts as we come off a most volatile week, both politically and economically. If you were approaching or are ready to take a step onto “the ledge,” this communication, as all others, attempts to bring a bit of perspective and balance to all of these subjects.

I don’t know if I can say they actually “solved” the debt crisis last week, but what was done was to craft a piece of legislation which allows us to fulfill our financial obligations. I will let the commentators and op-ed writers chime in with their thoughtful opinions on what this means both short and long term. I can heartily recommend a piece in the August 6 edition of the New York Times entitled, “What Happened to Obama?”  The author is a psychology professor at Emory University named Drew Westen, and presents a balanced, thoughtful, and insightful commentary on this administration. No matter on what side of the political dais you may sit, this piece has something in it for you.

Jim Cramer is a name that most of you are familiar with. He is a commentator on CNBC and hosts their successful “Mad Money” program. He is a former hedge fund manager, and is hardly a shrinking violet. He is probably wrong more than he is right, but presents his subject matter skillfully and with an abundance of passion. He was asked on Friday morning, the day after the Dow was down by 512 points, how this resembled 2008. His answer was that there were some similarities, namely sovereign debt, but three years ago we were facing Lehman Bros, AIG, the virtual dismantling of Fannie Mae and Freddie Mac, the sale of Merrill Lynch to Bank of America, and the “fire sale” of Bear Stearns to JP Morgan/Chase. Those crises are all behind us.

Earnings continue to remain strong, with 80% of companies reporting earnings at or above their anticipated amount. (Source: WSJ) In general, markets do not like uncertainty, and this is partially the reason the S&P is only selling at 13 times earnings. Analysts would argue this number is “lower” than normal considering the earnings growth over the past two years. Many would also argue that the current volatility is already factored into stock prices.

Monday morning update: The markets are reacting to the downgrade of United States debt by S&P on Friday evening. Warren Buffett is quoted as saying, “…the United States debt is still  AAA and I’m not changing my mind.”  In addition, Mr. Buffett comments that almost all of his own personal holdings  in cash and equivalents are in T-bills. (Source: CNBC) I might add this is coming from a rating agency which rated mortgage backed securities AAA in 2008, and we all know how that story ended.

You have heard me lament for years that the most emotional thing in the world is dealing with other peoples children; the second most emotional thing is dealing with other peoples’ money. We would welcome any opportunity to discuss the current volatility and how it relates to your individual situation. In the interim, please “Google” a piece in Friday’s Wall Street Journal entitled, “Time to Panic? Just the Opposite,” by Dave Kansas. Again, this is a fair and balanced representation of the situation which reinforces basic principles which the majority of today’s press refuses to report.

We try to systematically contact all of our clients so they are informed about their own accounts, as well as the markets. We try to be proactive in taking profits off the table when the markets are up, especially for clients who receive monthly distributions. At the same time, when fear and emotion are prevalent, it’s equally important to take a deep breath and relax so that you do not make improper decisions which will hurt moving forward.

Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trend, plans or objectives.  Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

Indices are unmanaged measures of market conditions.  It is not possible to invest directly into an index.  Past performance is not a guarantee of future results

The use of the word annuity will conjure up as much passion in the financial services industry as a Yankee jersey will at Fenway Park anytime between April and October. Annuities are not the “be all and end all” as many advisors would have you believe. Nor are they worst thing that has ever been invented as some regulators would have you believe. If used properly (and that’s the key phrase), annuities can and will provide a guaranteed stream of income that maybe used to help supplement any Social Security, Pension, and systematic distribution from an investment portfolio. 

I recently came across an article

published in the Wall Street Journal on   March 8, 2011 written by Lavonne Kuykendall, entitled, “Making the Case to Buy an Annuity.” I was impressed with the article because it gave both positive and negative aspects of an annuity purchase, something which usually does not occur.  The article talks about the differences between immediate and variable annuities and how they can serve a place in a retirement portfolio.

According to the article, a 65 year old man has a 33% chance to live to age 90, women a 44% chance.

One of the greatest challenges in retirement planning is to make sure that people do not outlive their money. Annuities, while providing guaranteed streams of income, help to achieve that goal.  Immediate annuities provide an income stream in exchange for loss of control of a lump sum of money. Variable annuities with “withdrawal riders,” can provide income for life while retaining control of the corpus. Since immediate annuity payments are a combination of both principal and interest, they also pay a higher monthly amount.

This subject is complex.

 It should be done in conjunction with a qualified advisor who makes disclosures regarding expenses, fees, and surrender charge periods. It is not a “one size fits all” product.  The above referenced article can answer these and other questions, in greater detail.

Variable annuities are long-term investment vehicles designed for retirement purposes.  The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claim-paying ability of the issuing insurance company.  Riders are optional, come at an additional cost and are often subject to specific restrictions and limitations.  The investment subaccounts of a variable annuity are subject to market risk and loss of the principal amount invested.

One question we get asked frequently is what should be done with a bonus check, increase in pay, unusually large gift, etc. Should it be used to pay down debt, saved or invested, or just consumed? For starters, it would be highly unlikely that one who has a modicum of responsibility would consume it all. If that’s the way one chooses to live, have at it, but we do not feel it comes under the guidelines of proper financial management.

I am going to introduce the 10-50-50 strategy.

After saying, huh because 10-50-50 adds to 110 percent, please allow me to explain. All of these strategies are said in general and may work in SOME, but not ALL situations. Please make sure you have a consultation with your financial or tax adviser to make sure the choices made best suit your individual situation.

In this example,

we are going to assume that Saul received a $5,000 bonus, net after all income taxes. We will also assume that he is making reasonable contributions to his 401(k), is not swimming in debt, and his financial situation would be considered “normal. First, I would take 10% off the top and consume it. Spend it, blow it, drink it…whatever. Life is about balance, and realizing that we’re all going to be dead for a long time, part of the equation must account for fun and enjoyment. The key word is balance. In our business, we see much of it tilted toward debt and consumption…and not pragmatic planning.

The 50-50 piece refers to splitting the balance.

Using half to save or invest, and the other half to pay down (or off) debt. It can mean cleaning up a credit card (sometimes at 20% plus in interest) or sending an extra payment or two to an auto loan, mortgage, or student loan. I don’t want to hear the argument that if it is sent to a mortgage, you’ll lose the tax deduction on the interest. Puh—leese…The object may be to pay off a mortgage by retirement and be debt free so that streams of income can be used for enjoyment and not strictly to pay fixed expenses. Investing can mean adding to a Roth IRA, non qualified mutual fund or savings. The fact is, that increasing an asset or decreasing a liability (debt) has the same net effect on your bottom line.  There are always exceptions. For instance, if the first mortgage on your home is exceedingly high (say, greater than 7%)   I might recommend the majority (75%) of the money is used to pay down the mortgage and save the balance. This may be where speaking with an advisor would be helpful because they would help to see if there are situations where this “strategy” should be amended. In some situations, the 10-50-50 rule is one that may make decision making painless, pragmatic, and profitable.

Example used as illustration only, not indicative of any particular situation, actual results will vary.  Income from investments may fluctuate and the value of the investment may fall against the interest of the investor.  Investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.  This analysis is provided for informational purposes only and should not be construed as a recommendation.

Everywhere you look there are articles, blogs, etc about making the proper financial and investment decisions as we begin a new year. These get old, repetitive, and it’s the recycling of the same *excrement* which is published each year. I wish to take more of a macro look at the financial world which may help you to grow, learn, and prosper.

1. What did we learn from 2010? In retrospect we learned that if we didn’t panic, a sense of normalcy came back to the markets and the economy.  I don’t need to re-visit all of the economic and political items which happened last year, but several things did improve…slowly. The performance of the markets reflected that. Lesson learned is that the use or overuse of emotion in planning can only serve to be a negative influence. The time to tweak is when things are going well. Plan NOW for the bad times, don’t wait for them to occur.
2. Read more, listen less, and take a step back.The internet isn’t going away. There’s an amazing amount of information available. Problem is, there is not an internet clearing house which passes judgment on a piece’s truth or fiction. Try to find an author(s) or columnist(s) that is easy to read and doesn’t talk down to their audience. Try and become more educated about the ways of the financial world so that you can make more informed decisions. Just remember that planning isn’t done in a thirty second sound bite. Read an article, digest it, and speak with you advisor to see how it pertains to your individual situation. Articles are typically written in a general nature. Planning is typically very personal. I, usually, enjoy Brett Arends and Jeff Opdyke of the Wall Street Journal and Ron Lieber of the New York Times. I may not agree with all of their writings, but they do provide competent and informative advice.
3. As a more practical matter, I am attaching a link to a recent article written in the New York Times. It is more practical and less cerebral, but contains two simple formulas to see if your finances are in reasonable condition. Combined with our prior discussions, all of this will allow you to become more informed which leads to better judgment, and hopefully, greater financial prosperity.

http://bucks.blogs.nytimes.com/2011/01/06/resolved-aim-to-improve-2-numbers/?emc=eta1

This article is provided for informational purposes only and should not be construed as a recommendation and is not indicative of any particular investment, actual results will vary.  Income from investments may fluctuate and the value of the investment may fall against the interest of the investor.  Investment decisions should be based on an individuals goals, time horizon, and tolerance for risk.

Please note:  The information being provided is strictly as a courtesy.  When you link to any of the web sites provided herewith, you are leaving this site.  We make no representations as to the completeness or accuracy of the information provided at these sites.  Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third party technology, sites, information and programs made available through this site.  By clicking on the link above you will leave our web site and assume total responsibility and risk for your use of the site you are linking to.

In another life, when teaching and coaching sales people in another aspect of the financial services industry, I had a saying which I used continually and it was “know the difference between being busy and being productive.” During the course of a day, people can do many appointed tasks to fill the time, but how many were revenue producing or problem solving? I use this as a lead in to talking about CD rates and maturities versus time spent learning about the markets, investing and making proper long term decisions.

Throughout the years,

I cannot begin to tell you how many people would remark that they would be on the phone for hours at a time trying to find an extra .25% on a maturing Certificate of Deposit. Let’s break this down and see what we’re actually talking about. On a $50,000 CD, the annual difference on .25% is $125, annually…and that’s before income taxes which will reduce your overall return! Now, I fully realize that nobody wants to throw away $125, but that isn’t the point of this exercise. If a person would use the same amount of time to learn about, for instance, the psychology of investing, re balancing, diversification, active vs. passively managed funds, then the other parts of their portfolio, over time, should accumulate by much more than the .25% they’re receiving on the CD.

Maybe it’s a bit of a callous way of approaching things,

but I rarely concern myself with what my personal cash is earning. Any interest received is a bonus. Cash is kept for peace of mind and emergencies. I am much more attentive to the other portions of my portfolio as mentioned above. Over a long investing life, taking the extra time to read and learn about proper investing principles will most likely be much more productive than searching an extra $100 out of a maturing CD.

“It’s also important to remember that you have zero control over what the market does and at least some control over what you do”

This quote is from an article you may find worth reading from the New York Times by Carl Richards.  Please follow the link below

 http://bucks.blogs.nytimes.com/2010/11/29/a-few-financial-matters-you-can-control/?emc=eta1

CD’sare FDIC insured and offer a fixed rate of return, whereas both principal and yield of investment securities do have risk and may fluctuate with changes in market conditions.  Diversification cannot ensure a profit or protect against a loss.

The views expressed in this article are of Carl Richards, not the named representative nor Broker/Dealer, and should not be construed as investment advice.  Investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.  Carl Richards is not a representative of NCP.  Please consult your Financial Professional for more information.

One of the great stories of this never-ending economic recovery is the story of Ford Motor Co.  To put this in some type of historical retrospective, Ford, unlike G (overnment) M, did not have to take any TARP money from the Federal Government. Their Chairman, Allan Mulally, had secured enough credit before the system went into a virtual “freeze” so that he didn’t have to go to Congress “hat in hand” and ask for a bridge loan, bankruptcy protection, or other forms of assistance. The only assistance they received was concessions from the UAW, which turned around a “bad deal” and made it a bit more win-win.

First, Ford from a product perspective is not your grandfather’s or even your father’s automobile company.

Their products are stylish, bordering on hip, and can compete with any manufacturer. Their market share is up to 16% and they are the main focus of why Toyota’s market share has diminished over the past year or so. As an example, sit in a new Taurus and I would challenge anyone to think that it was anything other than a Ford.  Needless to say, the perception of Toyota’s lack of quality control has something to do with it.

Ford recently reported quarterly earnings and had a revenue increase of over one billion dollars from the previous quarter.

The growth is primarily domestic, but wait until the full flavor of the world market takes effect. They paid down over three billion dollars in debt and they expect to be debt free by the end of 2010, fully one year ahead of schedule. (Source: www.ford.com)

How does this relate to today’s consumer?

In our practice, we have always maintained that people can increase their net worth two different ways, by increasing an asset or decreasing a liability. Making a deposit to your 401(k)(increasing an asset) has the same net effect to your bottom line as making a mortgage payment (decreasing a liability.) Paying off debt increases cash flow whether you are Ford or a “typical” family. I believe Ford is on the verge of an historic turn around because they paid attention to both the top and bottom line of the balance sheet. Consumers would be well advised to learn from this and practice many of the same principles.

The opinions expressed within are not endorsed by, or an endorsement of Ford Motor Company.

Some have said that investor psychology costs the average investor one to two percent per year in total return. (source:Wall Street Journal) This subject has been studied for years, and the objective of this piece is not to necessarily explain what investor psychology is, but how to help our subscribers make better investment decisions given the “fickle” psychological nature of the investment industry.

BE CAREFUL OF YOUR EMOTIONS

Think back to the fall of 2008 going into early 2009. We could also go back to 2000 (internet bust) and even further back, but most people have the fall of 2008 easily transfixed in their memories. Did the media play a part in the hysterical nature of consumer reaction? Absolutely. Did any consumers make any investment moves as members of the media were “fanning the flames?” No question. Think back to any emotional (rather than pragmatic) decision you have made. I would submit that some emotional decisions turn out to be incorrect.  Stock Market cycles may cause investors to do the wrong thing at the wrong time.  Historically, during periods when equity returns have been relatively high, people have flocked to the market.  When equity returns have been low, many have left at a time when stock values have been most attractive.

TRY TO KEEP A LONG-TERM PERSPECTIVE

The easiest way to describe how investor psychology impacts decision-making is to follow the clock diagram. We refer to this as the “Circle of Emotion.” Think of this circle as a clock, and as the “time” goes from noon to six, the market is declining in value and investors’ emotions are frothing at an ever increasing level. As the markets decline, people end up selling (selling low). When markets turn and recover investors end up getting back in as prices increase (buying high.) I ask you…What is the goal of the investment business, to sell low and buy high…or is it the other way around? I suspect that buying low and selling high is the objective for ALL of our clients and subscribers. By allowing emotion to cloud your decision making process, you may have made one of the biggest mistakes possible.   Even those who are aware of the market’s historical cycles may sometimes feel torn between their emotions and knowledge.

TALK TO YOUR INVESTMENT ADVISOR

Try to determine who you are. If you don’t like to take an inordinate amount of risk, then have your allocation be somewhat moderate, and retain more cash. Cash in the bank may allow you to sleep better at night and provide a comfort level which may be necessary to take you through this and all future bear markets.   This is a good time to talk things over with your financial advisor who can help you keep your emotions from interfering with your long-term investment strategy.

What are you waiting for…?? With so much of today’s news focused on issues such as the faltering economy, mid term elections, the historic rescue of the Chilean miners, and historically low interest rates, one area that does not appear to be “catching on” is refinancing of current mortgages. I suspect that a number of things might be at play. One, the credit markets are still tight, not as bad as two years ago, but still not normal. Two, the ease in which people received mortgage money a few years ago has gone away. It used to be that you could “fog a mirror” and walk with a no-doc $400,000 loan. No longer. Banks are requiring everything,

including, in some instances, a letter stating how long you are going to be living in the proposed residence. We’ve gone from the ridiculous to the more ridiculous. Kind of reminds me of the scene from “The Sopranos” a few years ago, when two of the characters were facing each other, stomach to stomach, and one wise guy remarked,  there’s the before, and the way before! The fact remains, for the majority of you who have FICO scores over 720, and have at least an 80% loan to value ratio on your home, I believe you may want to consider refinancing. As we author this in the fall of 2010, a 30 year fixed rate is about 4.25% and a 15-year rate can be had for under 4.0%. (referenced from bankrate.com)Typically, closing costs need to be paid, and you should do the math to see how long it would take to amortize these costs. In addition, you may be able to use the re-financing process to  lower the number of years on your mortgage. If your rate is currently, 5.5% and you have 26 years left, see how much it would be to refinance with a 15 or 20 year fixed. Even if the cost were a bit more on a monthly basis, saving ten plus of payments, and having each payment pay down more principle may be beneficial for you. Having an interest write off is fine, but having no debt earlier may be even better. It costs you nothing to go thru the process of investigating. As we said earlier…What are you waiting for?

Note: All mortgage amortization charts are located in the Mortgage Case Study article on this website. Mix and match to see how this may benefit you. 

Provided for informational purposes only and should not be considered as financial advise.  Jim Silver does not provide mortgage services.

Over the years, even though my entire career has been in financial services, it has not  absolved me from mistakes. Being human, I’ve made them, dealt with them, learned from them and moved on. I’d like to share one of these lessons with you in the hope that you, also will learn from it, and derive a valuable teachable moment.

1. It involves buying individual stocks. There are many people who buy and sell individual equities with a great deal of success. I, frankly, am not one of them. Any security I’ve built up for my family has been as a result of strict dollar cost averaging definitionusing mutual funds, and making sure that emotion plays little, if any role in any investing decision.  I can think of three instances where I let a reasonable amount of money slip through my fingers, because I tried being somebody who I wasn’t. A friend of my father’s, back in the early 70’s told me to buy a certain stock. I remember buying a small amount at 7…it began to increase and got to about 13 ½. I was told that when it reached  14,  to sell half of my holdings and get back my original investment, and continue to hold the rest. Problem was, it never reached 14, and I ended up selling all of my shares for about $5.00 per share. This same situation happened when I owned a couple of other stocks.  However, if you don’t wish to see a grown man cry, you’ll allow me to keep the gory details of the previous two transactions to myself!!   Lesson learned:  Tomorrow may never come, and have an exit strategy before you begin.

What are some of the strategies that one can use when trying to profit from owning individual stocks?

There are two main areas to consider. The first, as said earlier, is to have an exit strategy built in from the time you place the investment. What does that mean? It means that if the stock increases by a particular percentage (say 10%), then place a market order and sell the stock. Nobody is ever going to chastise you for taking a profit. Same thing can also be said on the downside. If the stock goes down a particular percentage, you have two choices. First is to sell it and move on…second, is to “average down” and buy more. If you are convinced the stock is a winner, this is an acceptable strategy. One of the issues for the average consumer to think about , is that most people become somewhat emotional about their purchases. If the stock is going higher, they may think they’ll leave money on the table if they sell too soon. Conversely, if the stock “tanks,” they don’t want to admit a mistake, and may hold it too long. It continues to amaze me how much of a role emotion plays in investing and money management decisions.

The second, and it is a bit more sophisticated, is to use an investing term called a stop loss.  For example, let’s assume you purchased a stock for $2.00 per share. The stock increases and it’s now at $6.00. You can place a “stop loss” sell order at $5.75, stating that if the stock ever  declines to $5.75, then your holding would automatically be sold. This transaction could occur at any time throughout the investing day. If, in this example, the stock continues to increase, you can always increase your “stop-loss” price.   Utilizing a “stop-loss” strategy takes much of the emotion out of investing, and will allow you to “lock in” either a sizable gain or only a moderate loss. Most importantly, however, it takes emotion out of the mix, and that is the consumer’s best friend.

The object of this lesson was NOT to discourage consumers from buying individual stocks. It is strictly to make people aware of some of the pitfalls from trading individual stocks. Make sure that  when trading stocks you follow many of the same principles.

The economic downturn of 2008 and 2009 has caused John and Mary some economic uncertainty. John lost his business of over 20 years, and Mary has had to struggle with an uneven cash flow stream due to the economic environment. Given their fixed expenses (mortgage, auto leases, etc) this has put an excessive strain on their finances. They have not (and will not have to) file for bankruptcy. Their largest issue is the relationship between their income and fixed expenses. Obviously, discretionary spending is one agenda but if fixed expenses are too large for income being generated it creates an entirely different set of problems.

In speaking with Mary, she was focused on her car payments and not on their overall financial picture. They have little in liquid savings, using an equity line on their home for any liquidity issues and have a moderate amount in retirement savings. Mary was also concerned about the instability of their incomes and how it related to their expenses. In speaking with her, I attempted to inject more thinking about the larger picture and about the planning process rather than just focusing on car payments.

John and Mary had never taken a big picture approach to their financial situation. Before they make any decisions, I told them to do a number of things. The first was to complete an income statement showing both fixed and variable expenses. This is in conjunction with assuming their incomes remain at 2009 levels, and doing a pro-forma definitionfor incomes being both 25% higher and lower. The largest relationship is regarding their income and mortgage payment. Typically, if housing costs are greater than 25-28% of gross income, people are set up to fail. Given today’s costs, it is a rare occurrence where consumers can spend more than 28% of their income on housing and not be swimming in additional debt. John and Mary have a 15 year fixed rate mortgage at about 5%. Problem is, given their incomes, in order to pay for all expenses, they need to use their equity line monthly to settle their obligations. On the one hand they are paying down their mortgage, and on the other, they are increasing their debt by activating the credit line. Normally, I am a huge believer in the 15-year mortgage. In this instance, they may want to consider refinancing to a 30 year which, would bring their fixed costs down, while also giving them the opportunity to make additional payments should cash flows warrant. I asked Mary if she knew how much cash they needed monthly in order to settle their obligations and live a reasonable lifestyle. She did not know. That became another homework assignment and the completion of the income statement would provide this information for her.

The moral of this case study is in a number of different areas.  One, the only way you can make your financial situation more favorable is to have a complete understanding of how much cash is needed each month. Complete an income statement to find out where your money is going. (see below for printable statement)Look at the relationship between your income and housing costs. To reiterate, if you are spending more than 28% of your income (many Personal Finance experts recommend not spending more than 28% of your gross income on your monthly cost of housing) you are likely to fail. Make sure you have an entry for savings (pay yourself first) and do not forget about our magnanimous friends at the IRS.  Reasonably smart decisions should trickle down from using this big picture approach. In addition, watch spending on impulse. Usually, nothing positive emanates from that.

Monthly Personal Income and Expense Statement  PDF format